
[Federal Register Volume 79, Number 218 (Wednesday, November 12, 2014)]
[Notices]
[Pages 67213-67215]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26692]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73534; File No. SR-ICC-2014-14]


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

November 5, 2014.

I. Introduction

    On August 25, 2014, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change SR-ICC-2014-14 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 September 4, 2014.\3\ The Commission did not receive comments on the 
proposed rule change. On October 17, 2014, the Commission extended the 
time period in which to either approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule change 
to December 3, 2014.\4\ For the reasons discussed below, the Commission 
is approving 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. 34-72941 (Aug. 28, 
2014), 79 FR 52794 (Sep. 4, 2014) (SR-ICC-2014-14).
    \4\ Securities Exchange Act Release No. 34-73384 (Oct. 17, 
2014), 79 FR 63453 (Oct. 23, 2014) (SR-ICC-2014-14).
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II. Description of the Proposed Rule Change

    ICC proposes to amend Chapter 26 of the ICC Clearing Rules 
(``Rules'') to add Subchapter 26I and to amend the ICC Risk Management 
Framework to provide for the clearance of Standard Western European 
Sovereign (``SWES'') credit default swap (``CDS'') contracts, 
specifically the Republic of Ireland, the Italian Republic, the 
Portuguese Republic, and the Kingdom of Spain (collectively, the ``SWES 
Contracts'').

[[Page 67214]]

    ICC states that the proposed rule change is dependent on the 
approval and implementation of the proposed rule change contained in 
ICC rule filing SR-ICC-2014-11,\5\ amending the ICC Rules, 
Restructuring Procedures, and Risk Management Framework to incorporate 
references to the revised Credit Derivatives Definitions, as published 
by the International Swaps and Derivatives Association, Inc. (``ISDA'') 
on February 21, 2014 (the ``2014 ISDA Definitions'') and that SWES 
Contracts will only be offered on the 2014 ISDA Definitions.\6\
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    \5\ See Securities Exchange Act Release No. 34-72701 (Jul. 29, 
2014); 79 FR 45565 (Aug. 5, 2014) (SR-ICC-2014-11).
    \6\ ICC rule filing SR-ICC-2014-11 was approved by the 
Commission on September 5, 2014. See Securities Exchange Act Release 
No. 34-73007 (Sep. 5, 2014), 79 FR 54331 (Sep. 11, 2014) (SR-ICC-
2014-11).
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    ICC represents that the 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 Name CDS 
contracts (``SDEC Contracts'') currently cleared at ICC and governed by 
Subchapter 26G of the ICC Rules. Accordingly, ICC states that 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.\7\ SWES Contracts will be denominated in 
United States Dollars.
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    \7\ The proposed changes to the ICC Rules are described in 
further detail in the notice of filing of the proposed rule change. 
See supra note 3.
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    ICC represents that 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 the 
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 would be revised to incorporate 
additional model features designed to generalize the currently 
established Specific Wrong Way Risk (``SWWR'') Initial Margin 
requirement. ICC states that the proposed changes to the ICC Risk 
Management Framework would generalize the SWWR relative to General 
Wrong Way Risk (``GWWR''), and that 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. ICC states that, accordingly, the offering 
of SWES Contracts introduces potential GWWR in the form of country/
region of domicile WWR. ICC notes that examples of GWWR related to SWES 
include but are not limited to a Clearing Participant selling 
protection on its country of domicile, or a European domiciled Clearing 
Participant selling protection on European sovereign reference 
entities. To address such risks, ICC proposes to establish an 
additional Jump To Default Risk (``JTDR'') requirement.
    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. ICC represents that these proposed revisions would 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 would be required when Clearing Participants sell 
protection on SWES reference entities exhibiting a high degree of 
association with itself (based on a quantitative approach established 
by ICC to determine the degree of correlation) or by virtue of selling 
protection on its country of domicile (based on a qualitative approach 
established by ICC to determine a Clearing Participant's country of 
domicile).
    For the qualitative case (i.e., a Clearing Participant selling 
protection on its own country of domicile), ICC would require full 
collateralization of the additional Jump To Default (``JTD'') loss. In 
determining a Clearing Participants' country of domicile, ICC refers to 
the International Organization for Standardization (``ISO'') country 
code for the issuer's ultimate parent country of risk. ICC states that 
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 quantitative threshold amounts, additional GWWR 
collateralization would 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) would be 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. ICC states that the new GWWR methodology will apply 
to all sovereign contracts cleared by ICC, including SES contracts.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \8\ 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 \9\ 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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    \8\ 15 U.S.C. 78s(b)(2)(C).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds that the proposed revisions to the ICC Rules 
and Risk Management Framework are consistent with the requirements of

[[Page 67215]]

Section 17A of the Act \10\ and the rules and regulations thereunder 
applicable to ICC. Specifically, the Commission believes that the 
proposed rules in Subchapter 26I to allow for the clearance of SWES 
Contracts, in conjunction with existing ICC Rules and procedures 
applicable to the clearing of CDS contracts, are designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions, consistent with Section 17A(b)(3)(F) of the Act.\11\
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    \10\ 15 U.S.C. 78q-1.
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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    Additionally, the Commission believes that the proposed revisions 
to ICC's Risk Management Framework to address the wrong way risk 
associated with clearing SWES Contracts are designed to promote the 
prompt and accurate clearance and settlement of securities 
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, consistent with Section 17A(b)(3)(F) of the Act.\12\ 
Specifically, the proposed changes to the ICC Risk Management Framework 
would require additional collateralization in the form of initial 
margin from Clearing Participants that sell protection on SWES 
reference entities exhibiting a high degree of association with itself 
or that sell protection on its country of domicile. These proposed 
margin model enhancements will provide additional resources to ICC to 
address the credit risks associated with the correlation between the 
risk of default of an underlying sovereign and the risk of default of a 
Clearing Participant that has written credit protection through SWES 
Contracts on such sovereign. Accordingly, the Commission believes that 
the proposed changes to the Risk Management Framework, in combination 
with ICC's existing rules and procedures related to margin and guaranty 
fund, are reasonably designed to meet the requirements of Rules 17Ad-
22(b)(1)-(3) \13\ related to the measurement and management of credit 
exposures, margin requirements, and the maintenance of sufficient 
financial resources required for a registered clearing agency acting as 
a central counterparty for security-based swaps.
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    \12\ Id.
    \13\ 17 CFR 240.17Ad-22(b)(1)-(3).
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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 \14\ and the 
rules and regulations thereunder.
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    \14\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-ICC-2014-14) be, and hereby 
is, approved.\16\
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 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.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26692 Filed 11-10-14; 8:45 am]
BILLING CODE 8011-01-P


