
[Federal Register Volume 78, Number 187 (Thursday, September 26, 2013)]
[Notices]
[Pages 59401-59402]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-23423]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70464; File No. SR-ICEEU-2013-11]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Related To Enhanced Margin and Guaranty 
Fund Methodology

September 20, 2013.

I. Introduction

    On August 14, 2013, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-ICEEU-2013-11 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 August 20, 2013.\3\ The Commission did not 
receive any comments on the proposed rule change. This order approves 
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. 34-70201 (Aug. 14, 
2013), 78 FR 51248 (Aug. 20, 2013) (SR-ICEEU-2013-11).
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II. Description of the Proposed Rule Change

    ICE Clear Europe proposes to adopt changes to its enhanced margin 
and guaranty fund methodology (``Decomp Model'') for cleared credit 
default swaps (``CDS') that address the additional risk arising from 
the fact that certain cleared index CDS contracts include as reference 
entities Clearing Members or affiliates of Clearing Members (``self-
referencing CDS'') (such additional risk is hereinafter referred to as 
``Specific Wrong-Way Risk''). ICE Clear Europe also proposes to adopt 
changes to the liquidation period used in determining the initial 
margin requirement for customer CDS positions. ICE Clear Europe has 
developed its Decomp Model, as previously approved by the 
Commission,\4\ 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.
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    \4\ See Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, Relating to Enhanced Margin Methodology, 
Securities Exchange Act Release No. 34-68955 (Feb. 20, 2013), 78 FR 
13130 (Feb. 26, 2013) (SR-ICEEU-2012-11).
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    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 Specific Wrong-Way Risk. 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-Way Risk, up to a defined 
threshold. The additional guaranty fund contribution amount is 
calculated based on the highest uncollateralized loss-given-default 
exposure arising from any of the 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 the 
defined threshold.
    The proposed amendments also would enhance the CDS Guaranty Fund 
calculation methodology to cover the uncollateralized losses that would 
result from up to five single names--including two Clearing Members and 
three other single names--that would cause the greatest losses upon 
default. Consequently, the proposed amendments to the guaranty fund 
calculation account for the potential increased amount of 
uncollateralized loss in cases where the Clearing Members are reference 
entities in cleared index CDS contracts.
    Additionally, ICE Clear Europe 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

[[Page 59402]]

positions and contemplates that porting would take up to 2 days 
following the default of a Clearing Member. After taking into account 
the porting period, 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 of the model.
    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 
enhancements described above.
    ICE Clear Europe believes that the amendments are consistent with 
the requirements of Section 17A of the Act \5\ and the regulations 
thereunder applicable to it, including the standards under Rule 17Ad-
22.\6\ In particular, ICE Clear Europe believes 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. ICE Clear Europe further believes that the amendments 
will 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.\7\ Furthermore, ICE Clear Europe believes the 
revisions will enhance ICE Clear Europe's financial resources, 
consistent with the requirements of Rule 17Ad-22(b),\8\ by requiring 
additional initial margin and CDS Guaranty Fund contributions to 
address Specific Wrong-Way Risk.
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    \5\ 15 U.S.C. 78q-1.
    \6\ 17 CFR 240.17Ad-22.
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 17 CFR 240.17Ad-22(b).
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \9\ 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 \10\ 
requires, among other things, that the rules of a clearing agency are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions and, to the extent applicable, derivative 
agreements, contracts, and transactions, to assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible, and in general, to 
protect investors and the public interest.
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    \9\ 15 U.S.C. 78s(b)(2)(C).
    \10\ 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 Section 17A the Act \11\ and the rules 
thereunder applicable to ICE Clear Europe. The Commission believes the 
proposed enhancements to ICE Clear Europe's margin and guaranty fund 
methodologies are designed to promote the prompt and accurate clearance 
and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions, to 
assure the safeguarding of securities and funds which are in the 
custody or control of ICE Clear Europe or for which it is responsible, 
and in general, to protect investors and the public interest, in 
furtherance of Section 17A(b)(3)(F) of the Act.\12\ In particular, the 
proposed rules more accurately address Specific Wrong-Way risk 
presented by the index CDS positions of ICE Clear Europe's Clearing 
Members by requiring additional CDS Guaranty Fund contributions from 
those Clearing Members that present Specific Wrong-Way Risk, up to a 
defined threshold, and additional initial margin charges to 
collateralize any Specific Wrong-Way Risk presented in excess of this 
defined threshold. The proposed amendments also enhance the CDS 
Guaranty Fund calculation methodology to cover the uncollateralized 
losses that would result from up to five single names--including two 
Clearing Members and three other single names--that would cause the 
greatest losses upon default. Additionally, the proposed rule change 
would increase the liquidation period from 5 to 7 days for calculation 
of the spread response, basis, and interest rate risk components of 
initial margin for customer CDS positions to account for situations 
where porting of customer positions should fail during the 2-day period 
following the default of a Clearing Member.
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    \11\ 15 U.S.C. 78q-1.
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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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 \13\ and the 
rules and regulations thereunder.
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    \13\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-ICEEU-2013-11) be, and 
hereby is, approved.\15\
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ 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).
    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-23423 Filed 9-25-13; 8:45 am]
BILLING CODE 8011-01-P


