
[Federal Register Volume 79, Number 171 (Thursday, September 4, 2014)]
[Notices]
[Pages 52794-52797]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-20997]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72941; File No. SR-ICC-2014-14]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change to Add Rules Related to the Clearing of 
Standard Western European Sovereign CDS Contracts

August 28, 2014.
    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 25, 2014, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared primarily by ICC. 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 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. Specifically, ICC is proposing to amend Chapter 26 of its 
rules to add Subchapter 26I and to amend the ICC Risk Management 
Framework to provide for the clearance of Standard Western European 
Sovereign CDS contracts, specifically the Republic of Ireland, the 
Italian Republic, the Portuguese Republic, and the Kingdom of Spain 
(collectively, the ``SWES Contracts''). The proposed change is 
dependent on the approval and implementation of the proposed rule 
change contained in ICC-2014-11 and therefore, the text of the proposed 
rule change in Exhibit 5 should be read in conjunction with the text of 
the proposed rule change in Exhibit 5 to ICC-2014-11.\3\
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    \3\ See Securities Exchange Act Release No. 34-72701 (Jul. 29, 
2014), 79 FR 45565 (Aug. 5, 2014) (SR-ICC-2014-11). The text of the 
proposed rule change for rule filing SR-ICC-2014-11 can also be 
found on ICC's Web site at https://www.theice.com/clear-credit/regulation.
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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, ICC 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. ICC 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

1. Purpose
    ICC has identified SWES Contracts as products that have become 
increasingly important for market participants to utilize for risk 
management. ICC believes that clearance of SWES Contracts will 
facilitate the prompt and accurate clearance and settlement of 
securities transactions and derivative agreements, contracts, and 
transactions for which it is responsible.
    SWES Contracts have similar terms to the Standard North American 
Corporate Single Name CDS contracts (``SNAC Contracts'') currently 
cleared by ICC and governed by Subchapter 26B of the ICC Rules, the 
Standard Emerging Sovereign CDS contracts (``SES Contracts'') currently 
cleared by ICC and governed by Subchapter 26D of the ICC Rules, and the 
Standard European Corporate Single

[[Page 52795]]

Name CDS contracts (``SDEC Contracts'') currently cleared at ICC and 
governed by Subchapter 26G of the ICC Rules. Accordingly, the proposed 
rules found in Subchapter 26I largely mirror the ICC Rules for SNAC 
Contracts in Subchapter 26B, SES Contracts in Subchapter 26D, and SDEC 
Contracts in Subchapter 26G, with certain modifications that reflect 
differences in terms and market conventions between those contracts and 
SWES Contracts. SWES Contracts will be denominated in United States 
Dollars.
    The proposed rules set forth in Subchapter 26I incorporate 
references to revised Credit Derivatives Definitions, as published by 
the International Swaps and Derivatives Association, Inc. (``ISDA'') on 
February 21, 2014 (the ``2014 ISDA Definitions''). ICC has a rule 
filing currently pending with the Commission consisting of proposed 
amendments to the ICC Rules to incorporate references to the 2014 ISDA 
Definitions (ICC-2014-11).\4\ This filing has a planned effective date, 
consistent with the industry implementation date of the 2014 ISDA 
Definitions, on September 22, 2014. The 2014 ISDA Definitions will be 
applicable to SWES Contracts cleared by ICC, and, as such, references 
to the 2014 ISDA Definitions are utilized throughout the SWES 
Contracts-related rules found in Subchapter 26I. Thus, approval and 
implementation of clearing SWES Contracts is dependent on the approval 
and implementation of the proposed rule change contained in ICC-2014-11 
and therefore, the text of the proposed rule change in Exhibit 5 should 
be read in conjunction with the text of the proposed rule change in 
Exhibit 5 to ICC-2014-11.\5\ ICC will not implement the 2014 ISDA 
Definitions-related rule changes until regulatory approval is received 
and until the industry implementation date of September 22, 2014. 
Similarly, ICC will not begin clearing SWES Contracts until the later 
of receipt of regulatory approval or the industry implementation date 
of September 22, 2014. SWES Contracts will only be offered on the 2014 
ISDA Definitions.
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    \4\ Id.
    \5\ Id.
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    Rule 26I-102 (Definitions) sets forth the definitions used for the 
SWES Contracts. An ``Eligible SWES Reference Entity'' is defined as 
``each particular Reference Entity included in the List of Eligible 
SWES Reference Entities,'' which is a list maintained, updated and 
published from time to time by ICC containing certain specified 
information with respect to each reference entity. If ICC determines to 
add or remove additional SWES Contracts from the List of Eligible SWES 
Reference Entities, it will seek approval from the Commission for such 
contracts (or for a class of product including such contracts) by a 
subsequent filing. The remaining definitions are substantially the same 
as the definitions found in Subchapters 26B, 26D, and 26G of the ICC 
Rules, other than certain conforming changes.
    ICC Rules 26I-203 (Restriction on Activity), 26I-206 (Notices 
Required of Participants with respect to SWES Contracts), 26I-303 (SWES 
Contract Adjustments), 26I-309 (Acceptance of SWES Contracts by ICE 
Clear Credit), 26I-315 (Terms of the Cleared SWES Contract), 26I-316 
(Relevant Physical Settlement Matrix Updates), 26I-502 (Specified 
Actions), and 26I-616 (Contract Modification) reflect or incorporate 
the basic contract specifications for SWES Contracts and are 
substantially the same as under Subchapters 26B, 26D, and 26G of the 
ICC Rulebook.
    Clearing SWES Contracts will not require any changes to ICC's 
operational procedures, as the SWES Contracts operate similarly to the 
Standard Emerging European and Middle Eastern Sovereign Single Names, 
currently cleared by ICC. The addition of SWES Contracts to ICC's 
product offering requires risk specific changes to the ICC Risk 
Management Framework, which are described below.
    ICC's Risk Management Framework has been revised to incorporate 
additional model features designed to generalize the currently 
established Specific Wrong Way Risk (``SWWR'') Initial Margin (``IM'') 
requirement. The proposed changes to the ICC Risk Management Framework 
generalize the SWWR relative to General Wrong Way Risk (``GWWR''). This 
generalization of Wrong Way Risk (``WWR'') is introduced to account for 
additional risk present in CDS instruments whose reference entities 
exhibit a high level of correlation with those Clearing Participants 
clearing the relevant name, or with an entity that is guaranteed by, or 
affiliated with, those Clearing Participants. To this effect, the 
offering of SWES Contracts introduces potential GWWR in the form of 
country/region of domicile WWR. Examples of GWWR related to SWES 
include but are not limited to a CP selling protection on its country 
of domicile, or a European domiciled Clearing Participant selling 
protection on European sovereign reference entities. To address such 
risks, an additional Jump To Default Risk (``JTDR'') requirement is 
established.
    Accordingly, the Risk Management Framework contains revisions to 
the calculation of the portfolio JTDR requirement. Specifically, the 
calculations have been updated to incorporate the concept of WWR as 
described below in reference to the quantitative and qualitative 
approaches. These revisions will have no material impact on the size of 
the Guaranty Fund.
    ICC's proposed changes adopt a combination of qualitative and 
quantitative approaches to capture GWWR. Under the revised ICC Risk 
Management Framework, an additional contribution to the JTDR 
requirement will be required when Clearing Participants sell protection 
on SWES reference entities exhibiting a high degree of association with 
itself (quantitative approach) or by virtue of selling protection on 
its country of domicile (qualitative approach). For the qualitative 
case, ICC will require full collateralization of the additional Jump To 
Default (``JTD'') loss. In determining a Clearing Participants' country 
of domicile for purposes of the qualitative determination, ICC refers 
to the International Organization for Standardization (``ISO'') country 
code for the issuer's ultimate parent country of risk. The ISO 
methodology considers management location, country of primary listing, 
country of revenue and reporting currency of the issuer.
    The quantitative approach applies to the additional risk arising 
from Clearing Participants selling protection on SWES reference 
entities, other than the Clearing Participant's country of domicile, on 
which the Clearing Participant's domicile has a high degree of 
correlation. If the additional SWES JTD losses and the dependence 
levels breach specific threshold amounts, additional GWWR 
collateralization will be required. The additional collateralization is 
a function of the level of correlation between the Clearing 
Participants and the SWES reference entities and will become more 
conservative as the level of correlation increases.
    As a result of these enhancements to the ICC Risk Management 
Framework, Rule 26D-309 (Acceptance of SES Contracts by ICE Clear 
Credit), part (c) has been revised to remove language which prohibits 
the acceptance of Trades for clearance and settlement if at the time of 
submission or acceptance of the Trade or at the time of novation the 
Participant submitting the Trade is domiciled in the country of the 
Eligible Standard Emerging Sovereign (``SES'') Reference Entity for 
such SES contract. The new GWWR methodology will

[[Page 52796]]

apply to all sovereign contracts cleared by ICC, including SES 
contracts.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act \6\ 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 and to comply with the provisions of the Act and the rules 
and regulations thereunder. These contracts are similar to the SNAC, 
SES, and SDEC Contracts currently cleared by ICC, and the SWES 
Contracts will be cleared pursuant to ICC's existing clearing 
arrangements and related financial safeguards, protections and risk 
management procedures, except as described herein. The addition of SWES 
Contracts will allow market participants an increased ability to manage 
risk. ICC believes that acceptance of the new contracts, on the terms 
and conditions set out in the ICC Rules, is consistent with the prompt 
and accurate clearance of and settlement of securities transactions and 
derivative agreements, contracts and transactions cleared by ICC, the 
safeguarding of securities and funds in the custody or control of ICC, 
and the protection of investors and the public interest, within the 
meaning of Section 17A(b)(3)(F) of the Act.\7\ ICC performed a 
comprehensive risk analysis related to the clearing of SWES Contracts 
and identified the introduction of GWWR as a new risk and accommodated 
for this risk in the ICC Risk Management Framework, as discussed 
herein. ICC identified no additional risk or systemic risk concerns 
introduced by clearing SWES Contracts, not accounted for by ICC's 
existing risk management procedures. As such, clearing the new SWES 
Contracts is consistent with the requirement of promoting and 
protecting the public interest in Section 17A(b)(3)(F).\8\
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ Id.
    \8\ Id.
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    Clearing of the additional SWES Contracts will also satisfy the 
requirements of Rule 17Ad-22.\9\ In particular, in terms of financial 
resources, ICC will apply its existing margin methodology to the 
additional contracts, with enhancements to address General Wrong Way 
Risk discussed above. ICC believes that this model will provide 
sufficient margin to cover its credit exposure to its clearing members 
from clearing such contracts, consistent with the requirements of Rule 
17Ad-22(b)(2).\10\ In addition, ICC believes its Guaranty Fund, under 
its existing methodology, will, together with the required margin, 
provide sufficient financial resources to support the clearing of the 
additional contracts consistent with the requirements of Rule 17Ad-
22(b)(3).\11\ ICC also believes that its existing operational and 
managerial resources will be sufficient for clearing of the additional 
contracts, consistent with the requirements of Rule 17Ad-22(d)(4),\12\ 
as the new contracts are substantially the same from an operational 
perspective as existing contracts. Similarly, ICC will use its existing 
settlement procedures and account structures for the new contracts, 
consistent with the requirements of Rule 17Ad-22(d)(5), (12) and (15) 
\13\ as to the finality and accuracy of its daily settlement process 
and avoidance of the risk to ICC of settlement failures. ICC determined 
to accept the SWES contracts for clearing in accordance with its 
governance process, which included review of the contracts and related 
risk management considerations (and the enhancements to the margin 
methodology for General Wrong Way Risk discussed herein) by the ICC 
Risk Committee and approval by its Board. These governance arrangements 
are consistent with the requirements of Rule 17Ad-22(d)(8).\14\ 
Finally, ICC will apply its existing default management policies and 
procedures for the SWES contracts. ICC believes that these procedures 
allow for it to take timely action to contain losses and liquidity 
pressures and to continue meeting its obligations in the event of 
clearing member insolvencies or defaults in respect of the additional 
single names, in accordance with Rule 17Ad-22(d)(11).\15\
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    \9\ 17 CFR 240.17Ad-22.
    \10\ 17 CFR 240.17Ad-22(b)(2).
    \11\ 17 CFR 240.17Ad-22(b)(3).
    \12\ 17 CFR 240.17Ad-22(d)(4).
    \13\ 17 CFR 240.17Ad-22(d)(5), (12) and (15).
    \14\ 17 CFR 240.17Ad-22(d)(8).
    \15\ 17 CFR 240.17Ad-22(d)(11).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    ICC does not believe the proposed rule change would have any 
impact, or impose any burden, on competition. The proposed GWWR 
methodology and the additional JTDR will apply uniformly to all ICC 
Clearing Participants, as applicable. The SWES Contracts will be 
available for clearing to all ICC Clearing Participants. The clearing 
of SWES Contracts by ICC does not preclude the offering of this product 
for clearing by other market participants. Therefore, ICC does not 
believe the proposed rule change imposes any burden on competition that 
is inappropriate 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 rule change have not been 
solicited or received. ICC will notify the Commission of any written 
comments received by ICC.

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. 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-ICC-2014-14 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ICC-2014-14. 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

[[Page 52797]]

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 Credit and on ICE 
Clear Credit's Web site at https://www.theice.com/clear-credit/regulation.
    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-ICC-2014-14 
and should be submitted on or before September 25, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-20997 Filed 9-3-14; 8:45 am]
BILLING CODE 8011-01-P


