
[Federal Register Volume 79, Number 134 (Monday, July 14, 2014)]
[Notices]
[Pages 40805-40807]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-16361]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72551; File No. SR-ICEEU-2014-06]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Regarding Investment Losses and Non-
Default Losses

July 8, 2014.

I. Introduction

    On May 30, 2014, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-ICEEU-2014-06 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 June 6, 2014.\3\ The Commission received no 
comment letters regarding the proposed change. 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. 34-72297 (June 2, 2014), 
79 FR 32792 (June 6, 2014) (SR-ICEEU-2014-06).
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II. Description

    ICE Clear Europe is proposing to update its Rules to address 
certain investment losses on margin and guaranty fund contributions 
provided by clearing members (as defined more fully below, ``Investment 
Losses'') as well as other losses to the clearing house arising other 
than from a clearing member default (as defined more fully below, 
``Non-Default Losses''), including losses from general business risk 
and operational risk. According to ICE Clear Europe, the change to its 
Rules would (i) require ICE Clear Europe to apply a specified amount of 
its own assets to cover non-default losses and investment losses 
(``Loss Assets'') and (ii) require clearing members in all product 
categories to make contributions (referred to as ``Collateral Offset 
Obligations'') to cover Investment Losses (but not other Non-Default 
Losses) that exceed the available clearing house Loss Assets. ICE Clear 
Europe has also stated that the proposed change would also limit its 
liability for losses arising from a failure of a bank or similar 
custodian.
    United Kingdom law requires ICE Clear Europe to have rules 
addressing the allocation of non-default losses that threaten the 
clearing house's solvency and to have plans to maintain continuity of 
services if such continuity is threatened as a result of such losses. 
Plans to address losses from general business risk are also an element 
of the CPSS-IOSCO Principles for Financial Market Infrastructures.\4\
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    \4\ ICE Clear Europe has also noted that the Commodity Futures 
Trading Commission has adopted a similar requirement for 
systemically important derivatives clearing organizations and 
``subpart C'' derivatives clearing organizations in CFTC Rule 
39.33(b)(2), and that the Commission has proposed a similar 
requirement for certain ``covered clearing agencies'' in proposed 
Rule 17Ad-22(e)(15). See Standards for Covered Clearing Agencies, 
Proposed rule, Securities Exchange Act Release No. 34-71699 (Mar. 
12, 2014), 79 FR 29507 (May 22, 2014).
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    According to ICE Clear Europe, Part 1 of its Rules has been 
provisionally revised to include new definitions for ``Investment 
Losses'' and ``Non-Default Losses,'' which form the basis of the new 
loss allocation provisions. ICE Clear Europe has proposed creating a 
new definition of ``Investment Losses'' to mean losses incurred or 
suffered by the clearing house arising in connection with the default 
of the issuer of any instrument and/or counterparty to any repurchase 
or reverse repurchase contract or similar transaction in respect of 
investment or reinvestment by the clearing house of margin (other than 
variation margin) or guaranty fund contributions other than a loss 
resulting from the clearing house's failure to follow its own 
investment policies or a loss resulting from custodial losses. ICE 
Clear Europe has stated that Investment Losses will be allocated 
separately from losses arising from a default. ICE Clear Europe has 
also stated that an investment loss relating to margin or guaranty fund 
contributions provided by a defaulting clearing member will be included 
in the calculation of Investment Losses, and that the amount of 
Investment Losses will thus not be reduced by any amounts ICE Clear 
Europe may use from its default resources under Parts 9 and 11 of its 
Rules (including guaranty fund contributions or assessments) to address 
losses from a default.
    ICE Clear Europe has also proposed to add a definition of ``Non-
Default Losses'' to mean losses suffered by the clearing house (other 
than Investment Losses) arising in connection with any event other than 
an event of default and which threaten the solvency of the clearing 
house. In addition, ICE Clear Europe has proposed a new definition for 
``Collateral Offset Obligations,'' which refers to obligations of a 
clearing member arising pursuant to new Rule 919, as discussed below, 
to make payments to the clearing house in respect of Investment Losses, 
which offset obligations of the clearing house to pay the clearing 
member or return assets in respect of margin provided to the clearing 
house by the clearing member. ICE Clear Europe has stated that it has 
also proposed to add new definitions for ``Custodian'' (which is used 
in new Rule 919), and ``Loss Assets,'' meaning assets of the clearing 
house itself that are intended to be applied to Investment Losses and 
Non-Default Losses under Rule 919 as described below.
    ICE Clear Europe also proposes changes in Rules 111 and 905 to 
conform and clarify the description of various types of losses or 
liabilities that may be borne by the clearing house, through addition 
of references to ``claims'' and ``shortfalls,'' in order to provide for 
consistent use of language throughout its Rules where other references 
are made to losses.
    ICE Clear Europe has stated that the proposed change would also 
adopt new Rule 919, which includes the allocation

[[Page 40806]]

rules for Investment Losses and Non-Default Losses and procedures for 
applying Collateral Offset Obligations. ICE Clear Europe has also 
stated that pursuant to proposed Rule 919(b), Non-Default Losses will 
be satisfied by applying the available Loss Assets designated by the 
clearing house and then other available capital or assets of the 
clearing house, whereas Investment Losses will first be satisfied by 
applying the available Loss Assets provided by the clearing house, and 
thereafter by Collateral Offset Obligations as discussed herein. ICE 
Clear Europe has stated that proposed Rule 919(p) would provide that 
the amount of Loss Assets provided by ICE Clear Europe will initially 
be USD 90 million and subject to adjustment by the clearing house by 
circular from time to time. ICE Clear Europe has also stated that it 
will not have an obligation to replenish the amount of Loss Assets, if 
applied to Non-Default Losses or Investment Losses under the proposed 
change.
    According to ICE Clear Europe, pursuant to proposed Rule 919(c), if 
there is an Investment Loss in an amount greater than the then-
available Loss Assets, all clearing members will be required to 
indemnify the clearing house and pay Collateral Offset Obligations to 
the clearing house in accordance with Rule 919(d). ICE Clear Europe has 
stated that it will publish a circular including certain required 
details of any Investment Loss and the amount of Collateral Offset 
Obligations due, determined in accordance with the terms of proposed 
Rule 919(d), based on the proportion of a clearing member's aggregate 
initial margin and guaranty fund contributions (for all product 
categories) to the aggregate initial margin and guaranty fund 
contributions of all clearing members (for all product categories) (in 
any case other than margin and contributions of defaulting clearing 
members that are applied or included in the net sum calculation under 
the Rules as a result of the default). ICE Clear Europe has also stated 
that pursuant to proposed Rule 919(e), the Collateral Offset Obligation 
of a clearing member shall not exceed the total of all initial margin 
and guaranty fund contributions (across all accounts and product 
categories) that it has deposited with the clearing house at the time 
of the event giving rise to the Investment Loss and that to the extent 
the Investment Losses exceed the amount of available Loss Assets and 
the capped Collateral Offset Obligations of clearing members, clearing 
members would not have further obligations to make payments to the 
clearing house in respect thereof.
    ICE Clear Europe has stated that Collateral Offset Obligations are 
due at the time specified by the clearing house, under proposed Rule 
919(f), and will be payable in accordance with the procedures for 
collection of margin under Rule 302 and its Finance Procedures. 
Furthermore, ICE Clear Europe has stated that Collateral Offset 
Obligations may, at the election of the clearing house, be offset 
against the obligation of the clearing house to return initial margin 
or guaranty fund contributions, and will be collected pursuant to a 
call for margin from a proprietary account of the clearing member. ICE 
Clear Europe has also stated that in the case of a defaulting clearing 
member, the clearing house may include the Collateral Offset Obligation 
in any net sum (to reduce any net sum otherwise payable to the 
defaulting clearing member) or offset it against any other obligation 
of the clearing house to return any remaining margin or guaranty fund 
contributions after application in respect of the default. ICE Clear 
Europe has also stated that collection of the Collateral Offset 
Obligation from the proprietary account of a clearing member is not 
intended to preclude a clearing member from passing the cost of the 
Collateral Offset Obligation to its customer(s), to the extent the 
obligation relates to customer account margin or otherwise to a 
customer and to the extent permitted by applicable law.
    According to ICE Clear Europe, if the clearing house subsequently 
recovers amounts in respect of an Investment Loss, proposed Rule 919(h) 
provides for allocating the recovery to clearing members on a pro rata 
basis in proportion to their Collateral Offset Obligations satisfied 
(after repaying the clearing house for any of its own assets applied in 
excess of the Loss Assets or any other persons for their assets 
applied).
    ICE Clear Europe has stated that pursuant to proposed Rule 919(i), 
the obligation of a clearing member to make Collateral Offset 
Obligations is separate from, and does not reduce, its obligation to 
provide margin and to make guaranty fund contributions or guaranty fund 
assessment contributions under the existing rules and pursuant to 
proposed Rule 919(j), if the clearing house calls for Collateral Offset 
Obligations in excess of that actually required, it will credit the 
excess to the relevant clearing members' proprietary accounts, from 
which it may be withdrawn in accordance with the usual procedure for 
withdrawal of excess margin under Part 3 of the Rules.
    ICE Clear Europe has stated that proposed Rule 919(k) provides that 
the obligation to provide Collateral Offset Obligations under Rule 919 
applies independently from the powers of assessment following clearing 
member defaults in other parts of the Rules and clarifies that the 
limits on assessment in Rules 917 and 918 for the F&O and FX product 
categories do not affect the liability of clearing members for 
Collateral Offset Obligations. ICE Clear Europe has also stated that 
proposed Rule 919(l) clarifies that the exercise of rights under Rule 
919 does not constitute a Clearing House Event (i.e., a payment default 
or insolvency of the clearing house). ICE Clear Europe has also stated 
that proposed Rule 919(m) provides for payments of Collateral Offset 
Obligations to be made in accordance with the general procedures for 
payments under Part 3 of the Rules and the Finance Procedures, subject 
to the clearing house's setoff and netting rights under the Rules.
    ICE Clear Europe has stated that under proposed Rule 919(n), the 
clearing house is not required to pursue any litigation or other action 
against any person in respect of unpaid amounts (including those 
representing an Investment Loss or Non-Default Loss). Furthermore, ICE 
Clear Europe has stated that, as discussed above, to the extent the 
clearing house recovers amounts in respect of an Investment Loss, 
proposed Rule 919(h) provides for allocating such recovery to clearing 
members that have paid Collateral Offset Obligations. ICE Clear Europe 
has also stated that proposed Rule 919(o) allows the clearing house to 
make currency conversions in making determinations under Rule 919.
    ICE Clear Europe has stated that pursuant to proposed Rule 919(q), 
it must notify clearing members of the amount of Loss Assets used from 
time to time. ICE Clear Europe is not required to replenish the amount 
of Loss Assets if used, although it may elect to do so. ICE Clear 
Europe has also stated that proposed Rule 919(q) provides that the 
clearing house may replenish any regulatory capital as required to 
bring it in compliance with applicable laws at any time, including 
following an Investment Loss or other Non-Default Loss, and no such 
recapitalization will result in a reduction of any obligation of any 
clearing member to pay Collateral Offset Obligations, or the size of 
any Investment Loss. ICE Clear Europe has also stated that the 
replenishment of required regulatory capital does not in

[[Page 40807]]

itself require, or result in, a replenishment of Loss Assets.
    ICE Clear Europe has stated that under proposed Rule 919(r), the 
clearing house is not liable to any clearing member, customer or any 
other person for losses arising from a failure of a payment or security 
services provider, including a Custodian such as a payment or custody 
bank, securities depository or securities settlement system.
    ICE Clear Europe has stated that it has proposed other related 
changes to Parts 11, 12 and 16 of its Rules. First, ICE Clear Europe 
has proposed a change to Rule 1103(e) to allow the Loss Assets to be 
held together with other clearing house contributions to the guaranty 
fund (without affecting the limitations in the existing rules and Rule 
919 on the use of such assets) and that as a result of this change, 
each clearing house contribution is no longer required to be held in a 
separate account, although the three clearing house guaranty fund 
contributions and the Loss Assets are required to be held separately 
from other clearing house assets. Second, ICE Clear Europe has proposed 
conforming changes to definitions relating to custodians in Rule 1201.
    ICE Clear Europe has proposed new Rule 1606(b) to address certain 
matters relating to the investment of customer collateral in the form 
of cash provided by FCM/BD Clearing Members under applicable CFTC 
regulations. ICE Clear Europe has stated that the revised rule confirms 
that such cash can only be invested in U.S. treasury securities in 
accordance with applicable law and further provides that FCM/BD 
Clearing Members must direct the clearing house whether to so invest 
such cash or to leave it uninvested (and deems the clearing member to 
have instructed the clearing house to invest such collateral if it does 
not provide direction).

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \5\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if the 
Commission finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such self-regulatory organization. Section 17A(b)(3)(F) 
of the Act \6\ 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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    \5\ 15 U.S.C. 78s(b)(2)(C).
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds that the proposed rule change is consistent 
with Section 17A of the Act \7\ and the rules thereunder applicable to 
ICE Clear Europe. Because the proposed rule change specifies the 
procedures for allocation and payment of Investment Losses and Non-
Default Losses, and provide for pre-funded Loss Assets to address 
Investment Losses and Non-Default Losses and the ability to call 
Collateral Offset Obligations from clearing members to address 
Investment Losses exceeding the Loss Assets, the Commission finds that 
the proposed rule change will enhance ICE Clear Europe's ability to 
promptly bear such losses, replenish its financial resources and 
continue clearing operations following an Investment Loss or Non-
Default Loss, thus promoting the prompt and accurate clearance and 
settlement of securities transactions and, to the extent applicable, 
derivative agreements, contracts and transactions and contribute to the 
safeguarding of securities and funds which are in the custody or 
control of ICE Clear Europe or for which it is responsible in a manner 
consistent with the Act and the regulations thereunder applicable to 
ICE Clear Europe, in particular, Section 17(A)(b)(3)(F).\8\
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    \7\ 15 U.S.C. 78q-1.
    \8\ 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 \9\ and the 
rules and regulations thereunder.
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    \9\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (File No. SR-ICEEU-2014-06) be, 
and hereby is, approved.\11\
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 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).

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-16361 Filed 7-11-14; 8:45 am]
BILLING CODE 8011-01-P


