
[Federal Register Volume 79, Number 176 (Thursday, September 11, 2014)]
[Notices]
[Pages 54331-54333]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-21646]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73007; File No. SR-ICC-2014-11]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change, As Modified by Amendment No. 2 Thereto, 
To Revise Rules To Provide for the 2014 ISDA Definitions

September 5, 2014.

I. Introduction

    On July 24, 2014, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change SR-ICC-2014-11 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 5, 2014.\3\ The Commission did not receive comments on the 
proposed rule change. On September 2, 2014, ICC filed Amendment No. 2 
to the proposed rule change to correct a factual inaccuracy in a 
statement made in its filing.\4\ For the reasons described below, the 
Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78(s)(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-72701 (Jul. 29, 
2014); 79 FR 45565 (Aug. 5, 2014) (SR-ICC-2014-11).
    \4\ On August 28, 2014, ICC filed Amendment No. 1 to the 
proposed rule change. ICC withdrew Amendment No. 1 on September 2, 
2014. ICC subsequently filed Amendment No. 2 on September 2, 2014. 
In Amendment No. 2, ICC clarified that CDS contracts on sovereigns 
cleared at ICC will be Converting Contracts (as discussed herein). 
ICC stated that its implementation of the 2014 ISDA definitions is 
intended to be fully consistent with the planned ISDA protocol 
implementation. ICC noted that, on August 15, 2014, ISDA published a 
memorandum and FAQ that, in relevant part, explains that based on 
industry feedback related to the draft protocol, the protocol would 
be amended to include certain emerging market sovereign single 
names. Following the protocol amendment, all sovereign single names 
cleared at ICC will now be included in the protocol. Amendment No. 2 
corrects a factual inaccuracy in a statement made in ICC's filing, 
and because it does not materially affect the substance of the 
proposed rule change, the Commission is not publishing it for 
comment.

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[[Page 54332]]

II. Description of the Proposed Rule Change

    ICC has stated that the principal purpose of the proposed rule 
change is to amend ICC rules to 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 stated that, as described by ISDA, 
the 2014 ISDA Definitions make a number of changes from the ISDA Credit 
Derivatives Definitions published previously in 2003 (as amended in 
2009, the ``2003 ISDA Definitions'') to the standard terms for CDS 
Contracts, including (i) introduction of new terms applicable to credit 
events involving financial reference entities and settlement of such 
credit events, (ii) introduction of new terms applicable to credit 
events involving sovereign reference entities and settlement of such 
credit events, (iii) implementation of standard reference obligations 
applicable to certain reference entities, and (iv) various other 
improvements and drafting updates that reflect market experience and 
developments since the 2009 amendments to the 2003 ISDA Definitions. 
The 2014 ISDA Definitions will become effective on the industry 
implementation date of September 22, 2014.
    ICC has proposed that, consistent with the approach being taken 
throughout the CDS market, the 2014 ISDA Definitions will be applicable 
to certain products cleared by ICC beginning on September 22, 2014. In 
addition, the proposed amendments will provide for the conversion of 
certain existing contracts (so-called ``Converting Contracts''), 
currently based on the 2003 ISDA Definitions, into contracts based on 
the 2014 ISDA Definitions. ICC asserts that this approach is consistent 
with expected industry practice for similar contracts not cleared by 
ICC, which will be subject to a multilateral amendment ``protocol'' 
sponsored by ISDA, and that ICC Participants plan to adhere to the ISDA 
protocol and would desire ICC to convert certain contracts cleared at 
ICC into contracts based on the 2014 ISDA Definitions, consistent with 
the ISDA protocol. For contracts that are not Converting Contracts, ICC 
expects to continue to accept for clearing both new transactions 
referencing the 2014 ISDA Definitions and new transactions referencing 
the 2003 ISDA Definitions (and such contracts based on different 
definitions will not be fungible). ICC proposes to publish on its Web 
site a list of Converting Contracts, which is expected to be the same 
as the list of contracts subject to the ISDA protocol. ICC anticipates 
that most ICC Contracts will be Converting Contracts with certain 
exceptions including certain financial reference entities.
    To this end, ICC has proposed to (i) revise the ICC Clearing Rules 
(``Rules'') to make proper distinctions between the 2014 ISDA 
Definitions and the 2003 ISDA Definitions and related documentation and 
(ii) make conforming changes throughout the ICC Rules to reference 
provisions from the proper ISDA Definitions. ICC has proposed changes 
to Chapters 20, 21, 22 and 26 of the ICC Rules. ICC has also submitted 
revisions to the ICC Restructuring Procedures, which ICC states reflect 
proper distinctions between the 2003 ISDA Definitions and the 2014 ISDA 
Definitions.\5\
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    \5\ A more detailed description of the proposed changes to the 
ICC Rules, ICC Restructuring Procedures, and Risk Management 
Framework is set forth in the notice of filing of the proposed rule 
change. See supra note 3.
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    Finally, ICC has proposed revisions to the Risk Management 
Framework to reflect appropriate portfolio treatment between CDS 
Contracts cleared under the 2003 and 2014 ISDA Definitions. The 
revisions to the ICC Risk Management Framework would introduce a ``Risk 
Sub-Factor'' as a specific single name and any unique combination of 
instrument attributes (e.g., restructuring clause, 2003 or 2014 ISDA 
Definitions, debt tier, etc.). The union of all Risk Sub-Factors that 
share the same underlying single name would form a single name Risk 
Factor. The portfolio treatment at the Risk Sub-Factor level would be 
provided for in the Risk Management Framework, as appropriate. 
Additionally, the ICC Risk Management Framework would be revised to 
include long and short positions of Risk Sub-Factors for a single name 
Risk Factor in the Jump-to-Default requirement. The ICC Risk Management 
Framework also would be revised to include other cleanup and 
clarification changes (e.g., to address the difference in risk time 
horizon between North American and European instruments).

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \6\ 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 \7\ 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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    \6\ 15 U.S.C. 78s(b)(2)(C).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds that the proposed revisions to the ICC Rules, 
Restructuring Procedures and Risk Management Framework are consistent 
with the requirements of Section 17A of the Act \8\ and the rules and 
regulations thereunder applicable to ICC. The proposed rule change, 
which is principally designed to incorporate and implement the 2014 
ISDA Definitions, will permit clearing of contracts, both new and 
existing, referencing the new definitions, while distinguishing, where 
applicable, contracts cleared by ICC between those referencing the 2014 
ISDA Definitions and those referencing the 2003 ISDA Definitions for 
purposes of risk management and clearing operations. Additionally, ICC 
states that the proposed rule change is necessary to provide the market 
with the assurances that ICC plans to implement the standard credit 
derivatives definitions consistent with industry practice, thereby 
facilitating prompt and accurate clearance and settlement. The 
Commission therefore believes that the proposed rule change is 
reasonably 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 assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible, 
consistent with Section 17A(b)(3)(F) of the Act.\9\
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    \8\ 15 U.S.C. 78q-1.
    \9\ 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 \10\ and the 
rules and regulations thereunder.
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    \10\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the

[[Page 54333]]

proposed rule change (SR-ICC-2014-11) as modified by Amendment No. 2 
thereto be, and hereby is, approved.\12\
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 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.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-21646 Filed 9-10-14; 8:45 am]
BILLING CODE 8011-01-P


