
[Federal Register Volume 79, Number 132 (Thursday, July 10, 2014)]
[Notices]
[Pages 39421-39424]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-16102]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72544; File No. SR-ICEEU-2014-10]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change to CDS Policies Relating to EMIR

July 3, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 39422]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 30, 2014, ICE Clear Europe Limited (``ICE Clear Europe'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change 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 rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The principal purpose of the proposed change is to amend certain of 
the ICE Clear Europe credit default swaps (CDS) risk policies (``Risk 
Policy Amendments'') in order to facilitate compliance with 
requirements under the European Market Infrastructure Regulation 
(including regulations thereunder, ``EMIR'') \3\ that will apply to ICE 
Clear Europe as an authorized central counterparty.
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    \3\ Regulation (EU) No 648/2012 of the European Parliament and 
of the Council of 4 July 2012 on OTC derivatives, central 
counterparties and trade repositories.
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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 the proposed rule 
change and discussed any comments it received on the proposed rule 
change. 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

    ICE Clear Europe submitted proposed amendments to its risk policies 
relating to the CDS business to facilitate compliance with requirements 
under EMIR, which will apply to ICE Clear Europe as an authorized 
central counterparty. ICE Clear Europe will be required to be in 
compliance with EMIR as of the time it receives authorization from the 
European Securities and Markets Authority. The relevant policies being 
modified are (i) the CDS Risk Policy (``Risk Policy''); (ii) the Risk 
Model Description (``Model Description''); (iii) the CDS Clearing Back-
Testing Framework (``Back-Testing Framework''); (iv) the CDS Clearing 
Stress-Testing Framework (``Stress-Testing Framework''); and (v) the 
CDS Default Management Framework (``Default Management Framework'').
    The changes to the Risk Policy amend the calculation of CDS initial 
margin requirements to comply with margin requirements under EMIR 
Article 41 and Article 24 of the implementing Regulatory Technical 
Standards.\4\ As revised, the initial margin methodology is designed to 
provide portfolio risk coverage against at least 5-day market 
realizations that would occur with probability 99.5% (previously 
99.0%). In other words, the estimated requirements provide risk 
protection equivalent to, at least, a 5-day 99.5% Value-at-Risk 
measure. In addition, in order to address requirements under EMIR 
related to procyclicality (Article 28 of the Regulatory Technical 
Standards) changes were made to the maximum scale used for the initial 
margin approach by adding a volatility scale that assigns a 25% weight 
to stressed period observations during the lookback period from April 
2007 to the present (consistent with Article 28(b) of the Regulatory 
Technical Standards). The revised initial margin requirement, including 
certain portfolio benefit assumptions, is expected to result in more 
conservative initial margin requirements than under the previous 
approach.
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    \4\ Commission Delegated Regulation (EU) No. 153/2013 of 19 
December 2012 Supplementing Regulation (EU) No. 648/2012 of the 
European Parliament and of the Council with regard to Regulatory 
Technical Standards on Requirements for Central Counterparties (the 
``Regulatory Technical Standards'').
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    Similar amendments to those described above were also made to the 
Model Description. Under the revised Model Description, the overall 
initial margin methodology, post portfolio benefits and other risk 
components (e.g. jump-to-default and wrong way risk), are intended to 
provide portfolio risk coverage against at least 5-day market 
realizations that would occur with probability 99.5% or higher. 
Conforming changes with respect to the 99.5% confidence interval were 
also made in the Model Description. The revised Model Description also 
reflects the use of stressed observations described above to limit 
procyclicality. The Model Description has also been revised to include 
the clearing house's Monte Carlo Approach for Risk Management (``MC''), 
which has previously been applied to Western European sovereign CDS and 
is proposed to be extended to all CDS.
    The CDS MC approach aims to model the spread risk component of 
initial margin by combining individual risk factors (``RFs''), i.e., 
single name or index family of instruments, into a copula. Marginal 
distributions for individual RFs are joined together under a Student-t 
copula. In this way, the model preserves historical behavior of RFS and 
their dependencies. The value-at risk (VaR) for the profit and loss 
distribution can be estimated by sampling from this copula.
    The MC method offers a number of advantages over the existing 
scenario-based spread response method (the ``Decomp SR''). The 
dependence structure of RFs is encoded into the copula, as opposed to 
the long-short offsets algorithm used to determine portfolio benefits 
under the Decomp SR. The copula can also capture tail dependence, such 
that various extreme scenarios can be easily simulated.
    The scenario-based approach of the spread risk component with its 
portfolio benefit assumptions is generally expected to result in a more 
conservative requirement when compared to the MC VaR approach for the 
same coverage level. In order to ensure compliance with the 99.5 
confidence interval requirement for OTC derivatives under EMIR, the 
final spread response charge will be determined as the more 
conservative of the Decomp SR and the MC VaR calculated at a 99.5% 
confidence interval.
    The CDS pricing model, used by ICE Clear Europe since the inception 
of clearing, has also been attached to the Risk Model Description as an 
annex for completeness.
    With respect to the Back-Testing Framework, changes were made to 
implement the 99.5% confidence interval. The historical volatility 
calculation uses data from at the minimum the most recent year (or, if 
shorter, the period in which the relevant contract has been cleared). 
In addition, per the amendments, on at least a monthly basis, the CDS 
Risk Department will report the CDS back testing results and analysis 
to the CDS Risk Committee in order to seek their review and, if needed, 
their recommendations of the CDS margin model. In addition, CDS back 
testing results and analyses are made available to all CDS Clearing 
Members and clients (where known to ICE Clear Europe) for their own 
portfolios. Disclosed information is aggregated in a form that does not 
breach confidentiality. The policy also provides a framework for 
monitoring

[[Page 39423]]

and remediating breaches that arise during back-testing, based on the 
so-called ``Basel Traffic Light System'', depending on the number and 
magnitude of the exceedances. The Back-Testing Framework is reviewed 
and approved by the CDS Risk Committee and ICE Clear Europe Board at 
least annually.
    The Stress-Testing Framework is amended to provide further detail 
as to its use of daily stress testing, which allows ICE Clear Europe to 
discover any potential weaknesses in the risk methodologies as well as 
to exercise short-term measures if the tests reveal that any 
counterparties are inadequately collateralized. A detailed analysis of 
the stress testing and sensitivity testing results is performed by the 
CDS Risk Department at least on a monthly basis, or more frequently in 
stressed market conditions, to ensure the adequacy of the existing 
stress test scenarios and framework. The Stress-Testing Framework 
amendments would also add pure historical scenarios, as required under 
EMIR. Pure historical scenarios are applied at the single name level, 
using the same date across all instruments. Single-name specific stress 
scenarios are based on the same 5-day period when the on-the-run 
indices had the greatest observed related spread increases or 
decreases. The guaranty fund stress scenario has also been clarified, 
and is designed to account for: (i) The occurrence of credit events for 
two clearing members and three reference entities on which the 
defaulted clearing members sold protection, (ii) adverse contracting or 
widening credit spread scenarios, (iii) adverse widening of Index-
single name ``basis'', and (iv) adverse changes of the default-free 
discount terms structure. CDS stress testing results and analyses are 
made available to all CDS Clearing Members and clients (where known to 
ICE Clear Europe) for their own portfolios. Disclosed information is 
aggregated in a form that does not breach confidentiality. The CDS 
Stress Testing framework is reviewed and approved by the CDS Risk 
Committee and ICE Clear Europe Board at least annually.
    Minor improvements have been made to the Default Management 
Framework. First, ICE Clear Europe will conduct a quarterly (rather 
than annual) review of its Default Management Framework. Also, ICE 
Clear Europe will perform a mock clearing member default test at least 
annually.
    ICE Clear Europe believes that the proposed rule change is 
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\ Section 17A(b)(3)(F) of the Act \7\ 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. The proposed rule change, which is 
intended to ensure compliance by the clearing house with the margin and 
risk management requirements of EMIR, principally enhance relevant risk 
policies and impose more conservative initial margin requirements. As a 
result, ICE Clear Europe believes that the proposed rule change will 
contribute to the safeguarding of funds and securities associated with 
derivative transactions that are in the custody or control of the 
clearing house, as well as more generally facilitate the prompt and 
accurate settlement of such transactions, within the meaning of Section 
17(A)(b)(3)(F).\8\ ICE Clear Europe further believes that the proposed 
rule change will enhance the stability of the clearing system, by 
reducing the risk to market participants of a default by a clearing 
member or other customer. In addition, the proposed change to the Risk 
Policy Amendments is consistent with the relevant requirements of Rule 
17Ad-22.\9\ In particular, the amendments to the Risk Policy and Model 
Description will enhance the financial resources available to the 
clearing house by imposing more conservative initial margin 
requirements for CDS, as required by EMIR and consistent with the 
requirements of Rule 17Ad-22(b)(2-3).\10\ The changes in the Default 
Management Policy are intended to improve on default management 
procedures and therefore are consistent with Rule 17Ad-22(d)(11).\11\
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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\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22.
    \10\ 17 CFR 240.17Ad-22(b)(2-3).
    \11\ 17 CFR 240.17Ad-22(d)(11).
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    For the reasons noted above, ICE Clear Europe believes that the 
proposed Risk Policy Amendments are consistent with the requirements of 
Section 17A of the Act and regulations thereunder applicable to it.

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

    ICE Clear Europe does not believe the Risk Policy Amendments would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purposes of the Act. Although the 
Risk Policy Amendments may increase the costs of clearing CDS for 
clearing members and their customers, as a result of more conservative 
initial margin requirements, this change is required in order to comply 
with Article 41 of EMIR and implementing regulations. In addition, ICE 
Clear Europe believes that the revisions to the model strengthen its 
risk management capability and financial resources, and are therefore 
appropriate in furtherance of the purposes of the Act. Because these 
changes will apply to all clearing members that clear CDS, ICE Clear 
Europe does not believe the amendments will adversely affect 
competition among clearing members. Furthermore, since the EMIR 
requirements will apply to European clearing houses generally, ICE 
Clear Europe does not anticipate that the changes will adversely affect 
the ability of market participants to clear CDS transactions generally, 
reduce access to clearing generally, or limit market participants' 
choices for clearing derivatives. As a result, ICE Clear Europe 
believes that any impact on competition is appropriate in furtherance 
of the purposes of the Act.

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

    Written comments relating to the proposed change to the rules have 
not been solicited or received. ICE Clear Europe will notify the 
Commission of any written comments received by ICE Clear Europe.

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 39424]]

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-2014-10 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1060.

All submissions should refer to File Number SR-ICEEU-2014-10. 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 will also 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/notices/Notices.shtml?regulatoryFilings.
    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-2014-10 
and should be submitted on or before July 31, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-16102 Filed 7-9-14; 8:45 am]
BILLING CODE 8011-01-P


