
[Federal Register Volume 80, Number 15 (Friday, January 23, 2015)]
[Notices]
[Pages 3699-3701]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-01071]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74085; File No. SR-ICEEU-2014-20]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Granting Approval of Proposed Rule Change Relating to CDS Pricing 
Policy

January 16, 2015.

I. Introduction

    On November 24, 2014, ICE Clear Europe Limited (``ICE Clear 
Europe'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change SR-ICEEU-2014-20 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 December 9, 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. 34-73731 (Dec. 3, 2014), 
79 FR 73126 (Dec. 9, 2014) (SR-ICEEU-2014-20).
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II. Description of the Proposed Rule Change

    ICE Clear Europe is proposing this change to revise the ICE Clear 
Europe CDS End-of-Day Price Discovery Policy (``CDS Pricing Policy'') 
to incorporate enhancements to its price discovery process. The 
revisions do not require any changes to ICE Clear Europe's Clearing 
Rules or Procedures.
    According to ICE Clear Europe, it currently uses a ``cross and 
lock'' algorithm as part of its price discovery process for CDS 
Contracts. As described by ICE Clear Europe, under this algorithm, bids 
and offers derived from Clearing Member submissions are matched by 
sorting them from highest to lowest and lowest to highest levels, 
respectively. This sorting process pairs the Clearing Member submitting 
the highest bid price with the Clearing Member submitting the lowest 
offer price, the Clearing Member submitting the second highest bid 
price with the Clearing Member submitting the second-lowest offer 
price, and so on. The algorithm then identifies crossed and/or locked 
pairs (or ``markets''). Crossed markets are the Clearing Member pairs 
generated by the sorting process for which the bid price of one 
Clearing Member is above the offer price of the matched Clearing 
Member. Locked

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markets are the Clearing Member pairs where the bid and the offer are 
equal. The mid-point of the bid and offer of the first non-crossed, 
non-locked matched market is the final end-of-day level (with 
additional steps taken to remove off-market submissions from 
influencing the final level). As stated by ICE Clear Europe, this 
process captures the market dynamics of trading; however, final pricing 
levels are ultimately determined by a single bid and a single offer, 
which results in the ability for one submission to influence the 
outcome.
    ICE Clear Europe proposes enhancements to this methodology to 
improve the consistency of prices and reduce the sensitivity of the 
final end-of-day level to a single Clearing Member's submission. ICE 
Clear Europe proposes that, under the new ``cross and lock'' 
methodology, the average of the mid-points of all non-crossed, non-
locked matched markets for which the difference between the matched 
market bid and matched market offer is less than or equal to one bid-
offer width is used as the final level (with additional steps taken to 
remove off-market submissions from influencing the final level). 
According to ICE Clear Europe, this approach would make end-of-day 
price determinations less sensitive to outlying submissions.
    In addition, ICE Clear Europe proposes a clarification to the 
calculation of a Clearing Member's open interest for purposes of the 
end-of-day price submission process to take into account the aggregate 
of both house and client positions carried by the Clearing Member. ICE 
Clear Europe also proposes revisions to the CDS Pricing Policy to 
correct the minimum number of Clearing Members that need to have open 
interest in a particular instrument; this change, as stated by ICE 
Clear Europe, conforms to current practice by the Clearing House.
    ICE Clear Europe further proposes revisions to clarify that 
notional limits for firm trades that may be assigned to Clearing 
Members as a result of the end-of-day price submission process will be 
established at risk sub-factor and sector levels, and to clarify the 
sequencing of firm trades for determining breaches of those limits, 
including accounting for the applicable risk sub-factor and addressing 
sequencing within a particular instrument that is part of a particular 
risk sub-factor, if necessary.
    Additionally, ICE Clear Europe proposes amendments to certain 
requirements applicable to the unwinding of firm trades entered into by 
Clearing Members. ICE Clear Europe states that its current policy does 
not require firm trades to be maintained for any particular period of 
time, but it requires Clearing Members that elect to unwind a firm 
trade to do so at the then-current market price. ICE Clear Europe 
contends that there are practical difficulties with objectively 
determining whether an unwind transaction was executed at the then-
current market price and therefore this requirement can be difficult to 
enforce. ICE Clear Europe proposes revising the policy to replace the 
requirement that unwinds be executed at the then-current market price 
with the requirement that any unwind be executed in a competitive 
manner. Further, ICE Clear Europe proposes adding the requirement that, 
upon request, Clearing Members be able to demonstrate to the Clearing 
House's reasonable satisfaction that such unwind transaction was 
executed in a competitive manner. ICE Clear Europe proposes adding a 
non-exclusive list of examples of how Clearing Members may be able to 
demonstrate competitive execution of unwind transactions. Such examples 
would include: (i) Execution on an available trading venue; (ii) 
multiple dealer quotes received and execution of the unwind transaction 
at the best quoted price; or (iii) placement of the unwind transaction 
with an interdealer broker with price terms and instructions 
commensurate with a competitive execution.
    In addition, ICE Clear Europe proposes amendments to make certain 
clarifications with respect to permissible reversing transactions with 
respect to firm trades and the manner in which the Clearing House 
designates that actively traded benchmark instruments are not eligible 
for reversing transactions.
    Furthermore, ICE Clear Europe proposes certain other conforming 
changes to the CDS Pricing Policy as a consequence of a prior rule 
change.\4\ Specifically, ICE Clear Europe proposes adding references to 
risk sub-factors (as that term is described in the CDS Risk Policy) 
throughout the CDS Pricing Policy, as well as conforming changes to 
various references to risk factors. Finally, ICE Clear Europe proposes 
various non-substantive drafting clarifications throughout the CDS 
Pricing Policy.
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    \4\ See Exchange Act Release No. 34-73156 (Sept. 19, 2014), 79 
FR 57629 (Sept. 25, 2014) (SR-ICEEU-2014-13).
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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.
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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. The proposed revisions to the ``cross and lock'' 
methodology are expected to reduce the sensitivity of the final price 
level to a single Clearing Member's submission, resulting in more 
consistent day-over-day end-of-day levels. Furthermore, the proposed 
revisions that would require Clearing Members to execute unwinds in a 
competitive manner and, upon request, demonstrate to ICE Clear Europe's 
reasonable satisfaction that the Clearing Member complied with this 
requirement, are expected to make the CDS Pricing Policy more readily 
enforceable, while maintaining the incentive for Clearing Members to 
provide accurate price submissions.
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    \7\ 15 U.S.C. 78q-1.
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    ICE Clear Europe's clarifications concerning (1) the referencing of 
risk sub-factors, including the clarifications concerning the notional 
limits applicable to firm trades, (2) permissible reversing 
transactions and (3) calculations of a Clearing Member's open interest 
each clarify or conform the text of the CDS Pricing Policy in 
accordance with ICE Clear Europe's existing practice. All other 
revisions proposed by ICE Clear Europe as a result of this proposed 
rule change are conforming changes to other rule changes previously 
filed by ICE Clear Europe. The proposed rule change is therefore 
reasonably expected to provide a pricing methodology that more 
accurately reflects the market level and existing practice. The 
proposed rule change is also reasonably expected to be more readily 
enforceable and to enhance incentives for Clearing Members to provide 
accurate pricing information. As such, the Commission believes that the 
changes are designed to promote the prompt and accurate settlement of 
securities and derivatives transactions, and, therefore, are consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to

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ICE Clear Europe, in particular, Section 17(A)(b)(3)(F).\8\
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    \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-2014-20) 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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Brent J. Fields,
Secretary.
[FR Doc. 2015-01071 Filed 1-22-15; 8:45 am]
BILLING CODE 8011-01-P


