
[Federal Register Volume 80, Number 61 (Tuesday, March 31, 2015)]
[Notices]
[Pages 17132-17135]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-07259]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74579; File No. SR-ICEEU-2015-007]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change Relating to Collateral and Haircut 
Policy

March 25, 2015.
    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 March 13, 2015, ICE Clear Europe Limited (``ICE Clear Europe'' or 
``Clearing House'')

[[Page 17133]]

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 ICE Clear Europe. 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 principal purpose of the proposed rule change is to implement a 
new collateral and haircut policy (the ``Haircut Policy''), which is 
applicable to Permitted Cover posted by Clearing Members to meet the 
Clearing House's Margin and Guaranty Fund requirements.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, ICE Clear Europe included 
statements concerning the purpose of and basis for the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. ICE Clear Europe has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Haircut Policy codifies and consolidates certain existing 
practices of the Clearing House with respect to Permitted Cover. 
Specifically, the policy is designed (i) to set out overall principles 
with respect to the assets accepted by the Clearing House as Permitted 
Cover; (ii) to establish a framework for determining absolute and 
relative limits, as applicable, on the value of the collateral that may 
be posted by a Clearing Member as Permitted Cover; (iii) to establish a 
value-at-risk (``VaR'') based methodology for determining haircuts for 
all Permitted Cover; (iv) to mitigate wrong-way risk from Permitted 
Cover; (v) to address sources for pricing Permitted Cover; and (vi) to 
set out certain related monitoring, reviewing and reporting procedures. 
The Haircut Policy applies to Permitted Cover provided for all product 
classes (F&O, CDS and FX).\3\ Following implementation, the Clearing 
House will from time to time adjust the haircuts applicable to 
Permitted Cover under the methodology set forth in the policy.
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    \3\ Although the Haircut Policy generally also applies to 
Permitted Cover posted with respect to Guaranty Fund requirements, 
certain additional requirements apply to Guaranty Fund contributions 
under the Rules and Finance Procedures. Those additional 
requirements are not proposed to be changed in connection with the 
Haircut Policy.
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    The general aims of the Haircut Policy are to ensure that the 
Clearing House can efficiently liquidate all forms of Permitted Cover, 
that appropriate prices are used for valuation of Permitted Cover and 
that appropriate haircuts (including, as applicable, cross-currency 
haircuts) are used. The Haircut Policy also codifies certain general 
principles considered by the Clearing House in accepting assets as 
Permitted Cover, including availability of pricing information, the 
existence of liquid and active markets for buyers and sellers of those 
assets, the existence of sufficient price history, the ability to 
liquidate Permitted Cover without causing a market disruption, 
compliance with legal and regulatory requirements and sufficient 
operational and technological framework to handle deposit, liquidation 
and return of such assets as Permitted Cover. Cash collateral must be 
in one of several specified currencies underlying contracts cleared by 
the Clearing House. Additional general requirements apply to financial 
instruments, including prohibitions on acceptance of instruments that 
have non-``vanilla'' features such as embedded options, instruments 
issued by a Clearing Member or its affiliate, instruments issued by a 
CCP or by entities that provide critical services to the Clearing House 
(other than central banks) and certain credit-based limits. Such limits 
require that the issuer is rated at least ``BBB-'' by S&P (or its 
equivalent), the average yield on the asset over the previous three 
months is not greater than 8%, and the 5-year CDS spread of the issuer 
has not exceeded 500 basis points over the previous three months. The 
Haircut Policy provides that where market conditions warrant, or where 
the Clearing House's sovereign risk model indicates deteriorating 
credit below a certain threshold (i.e., ``BBB-'' by S&P), the Clearing 
House may remove securities from the list of Permitted Cover and/or 
vary applicable haircuts. The Clearing House will notify Clearing 
Members and other market participants of such actions by Circular. The 
Clearing House maintains the current List of Permitted Cover (along 
with haircut rates, limits and restrictions) on its Web site, https://www.theice.com/publicdocs/clear_europe/list-of-permitted-covers.pdf.
    The Haircut Policy contains a methodology for setting absolute 
limits on the value of non-cash Permitted Cover that can be posted by a 
Clearing Member. (The Clearing House does not, however, impose absolute 
or relative limits on the use of US Treasury securities as Permitted 
Cover.) Absolute collateral limits apply across a group of affiliated 
Clearing Members and apply across all product categories cleared by 
that group. Collateral provided by Sponsored Principals with the same 
sponsoring member will be included in all collateral limit calculations 
as part of the sponsoring member's client account. The policy also sets 
out relative, or concentration, limits for Permitted Cover provided by 
a Clearing Member. The Clearing House publishes on its Web site the 
current absolute and relative limits on government bonds provided as 
Permitted Cover. For government bonds, the absolute limit generally is 
calculated pursuant to a formula based on data from the repo market for 
the relevant government bond, taking into account both the overall size 
of that market and the percentage of that market consisting of repos 
with a one day maturity. The policy also specifies relevant sources of 
repo market data for particular types of government securities 
(including most European government bonds and Japanese government bonds 
accepted by the Clearing House) and gold market data for gold Permitted 
Cover. The policy also sets out alternative approaches for determining 
the limit for certain government bonds, including for UK, Swiss and 
Canadian government bonds. The policy sets out procedures for 
monitoring of limits on a daily basis and for remediation of breach of 
a limit by a Clearing Member. The risk management department monitors 
all collateral limits on a daily basis using a collateral breakdown 
report which flags limit breaches. Breaches will be reviewed internally 
and the relevant Clearing Member will be contacted. Breaches can be 
remediated by posting additional collateral, removal of collateral that 
is in breach of a limit, or both of the above.
    The policy also provides for a risk-based reduction in absolute 
limits for government bonds based on the credit default swap (CDS) 
spread for the relevant issuer. Once the spread exceeds a specified 
level for a particular issuer, the absolute limit for Permitted 
Collateral of that issuer is reduced pursuant to a defined formula. If 
the spread exceeds a second level, the absolute limit is reduced to 5% 
of the

[[Page 17134]]

otherwise applicable original limit. Spread levels are determined using 
a five-day average to avoid excessive volatility. This reduction is 
intended to mitigate wrong-way risk from government bond Permitted 
Cover. The specified parameters will be reviewed on a quarterly basis.
    Specific wrong-way risk arising in connection with clearing of 
Western European sovereign CDS is addressed through a requirement that 
US dollar denominated collateral be provided for initial margin and 
that a portion of the CDS Guaranty Fund be US dollar-based (determined 
based on the ratio between the dollar-denominated and Euro-denominated 
initial margin requirements for CDS). In addition, where the member's 
aggregate short position in sovereign CDS with respect to a sovereign 
exceeds a specified threshold, the Clearing House may decline to accept 
government bonds of that sovereign or any other sovereign bonds that 
exhibit certain correlations with such government bonds.
    The Haircut Policy also addresses potential wrong-way risk arising 
from Permitted Cover more generally. The Clearing House monitors 
collateral on a daily basis. Where the Clearing House considers there 
to be strong general wrong-way risk between a Clearing Member and the 
asset it is posting, the Clearing House will ask the member to change 
the composition of collateral to mitigate that risk.
    The Haircut Policy establishes a VaR-based methodology for 
determining haircuts for Permitted Cover. The Clearing House calculates 
six different estimations of VaR for each applicable risk factor. Two 
estimations are based on a historical simulation approach (using a 
1,000-business day (approximately 4 year) lookback period), and a one-
day or two-day liquidation period assumption. Four estimations are 
based on a parametric methodology: Two using a 1,000-business day 
lookback period and a one-day or two-day liquidation period assumption, 
and two using a 60-business day (approximately 3 month) lookback period 
and a one-day or two-day liquidation period assumption. Each estimation 
is calculated using a 99.9% confidence interval (applicable to 
Permitted Cover posted with respect to all product categories). The 
proposed haircut will be based on the largest VaR of the 6 estimations. 
Fixed income assets are divided into separate maturity buckets for each 
issuer, with a separate haircut established for each bucket. The policy 
specifies relevant price sources that will be used for the calculation 
of haircuts for each type of Permitted Cover. Haircuts are determined 
using the bid prices of Permitted Cover assets, in order to account for 
higher liquidation costs in stressed markets. The model output is 
rounded up to the nearest 0.25%, in order to limit unnecessary 
variation in haircut levels. The applicable haircuts will be reviewed 
on a monthly basis, or more frequently where the risk management 
department deems it necessary.
    The risk management department may further adjust the haircut 
determined under the model as it determines prudent in light of 
additional qualitative and quantitative factors. These include the 
Clearing House's credit assessment of the issuer, current market 
conditions and volatility, expected future volatility, the liquidity of 
the underlying market for the asset, including bid/ask spread, wrong 
way risk considerations, VaR estimates determined for a period of 
stressed market conditions, and other factors that might affect the 
liquidity or value of an asset in stressed market conditions. The 
Clearing House anticipates that such adjustments to the value 
calculated under the model would be used only in exceptional 
circumstances and would expect to use such adjustments to increase 
haircuts in stressed market circumstances. The Clearing House will make 
judicious use of current market information to override the model but 
anticipates exercising this ability in less than 5% of haircut rates.
    The Haircut Policy also sets a minimum haircut level of 3%, in 
order to avoid pro-cyclical variation in haircuts. (The minimum level 
will be reviewed annually under the Haircut Policy.) In addition, a 
haircut add-on of up to 1% will be applied during the period until the 
next monthly review to issuers presenting increased credit risk. The 
add-on is applied once the issuer's CDS spread exceeds a specified 
level, and increases in steps of 0.25% up to a maximum of 1% where the 
CDS spread exceeds higher thresholds. The add-on is generally designed 
to anticipate potential haircut increases as part of the next monthly 
review cycle.
    The Clearing House also imposes cross-currency haircuts, which 
address the exchange rate risk faced by the Clearing House where the 
Permitted Cover is denominated in a different currency from the 
currency of the applicable margin requirement. Under the Haircut 
Policy, cross-currency haircuts are determined using the same 
methodology described above for other haircuts, but are subject to a 
minimum haircut of 4.5%. Cross-currency haircuts are applied in 
addition to any applicable haircut for the relevant form of Permitted 
Cover.
    Haircuts are reviewed under the policy on at least a monthly basis, 
although the risk department may do so more frequently in exceptional 
circumstances. The Clearing House monitors Permitted Cover on a daily 
and intraday basis. The Clearing House may, under its existing Rules 
and the Haircut Policy, take action to mitigate any change in risk, 
including by increasing haircuts, calling for additional collateral, 
reducing concentration limits and removing an asset from eligibility as 
Permitted Cover. The Clearing House monitors the value of Permitted 
Cover deposited with it on a real time basis. Any change in a member's 
intra-day cover value that is greater than 3% is flagged immediately by 
the Risk Management intraday monitoring system that is monitored by the 
Risk Management team throughout the business day. Any breach is 
investigated and appropriate action taken where necessary. The Clearing 
House also will backtest haircuts based on price moves observed in the 
markets on a daily basis, and review haircut levels if a price move 
breaches an existing haircut. The Clearing House prepares daily reports 
with respect to Permitted Cover for purposes of internal monitoring and 
provides monthly reports to the relevant Risk Committees and Board Risk 
Committee. The Clearing House will review the Haircut Policy on an 
annual basis (which will include review by the Board Risk Committee) or 
where there is a material change to the risk exposure of the Clearing 
House. The Haircut Policy will also be independently reviewed annually 
under the Clearing House's model governance framework.
2. Statutory Basis
    ICE Clear Europe believes that the proposed rule change is 
consistent with the requirements of section 17A of the Act \4\ and the 
regulations thereunder applicable to it.\5\ 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, the safeguarding of 
securities and funds in the custody or control of the clearing agency, 
and the protection of investors and the public interest. ICE Clear 
Europe is adopting the Haircut Policy to codify and consolidate its 
procedures

[[Page 17135]]

and practices concerning the determination of haircuts and certain 
other limitations applicable to Permitted Cover provided in respect of 
initial and original margin requirements. These limitations include 
establishment of general principles for the assets accepted as 
Permitted Cover, valuation of Permitted Cover, absolute and relative 
concentration limits on the amount of a particular bond a Clearing 
Member (including any affiliated Clearing Members) may provide as 
Permitted Cover as well as further measures designed to mitigate wrong-
way-risk. ICE Clear Europe believes that the policy provides a 
conservative set of haircuts intended to protect the Clearing House 
from a decline in collateral value or a change in exchange rates in 
circumstances where it is required to liquidate Permitted Cover 
following a Clearing Member default. In addition, the policy permits 
the Clearing House to respond promptly and appropriately to changes in 
market conditions by modifying haircuts or other limits on Permitted 
Cover. ICE Clear Europe thus believes that the Haircut Policy will 
enhance the stability of the clearing system and the Clearing House's 
ability to manage a Clearing Member default and to continue to fulfill 
its obligations in a Clearing Member default scenario. As a result, in 
ICE Clear Europe's view, the proposed changes will facilitate the 
prompt and accurate settlement of such transactions, assure the 
safeguarding of securities and funds which are in the custody or 
control of ICE Clear Europe or for which it is responsible, and promote 
the public interest and the protection of investors, within the meaning 
of section 17A(b)(3)(F).\7\
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    \4\ 15 U.S.C. 78q-1.
    \5\ 17 CFR 240.17Ad-22.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    ICE Clear Europe does not believe the amendments would have any 
impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The Haircut 
Policy will be applicable to all Clearing Members with respect to 
assets provided by those members as Permitted Cover. ICE Clear Europe 
does not believe the adoption of the policy will adversely affect 
competition among Clearing Members. Furthermore, ICE Clear Europe does 
not anticipate that the changes will adversely affect the ability of 
market participants to clear contracts generally, reduce access to 
clearing generally, or limit market participants' choices for clearing 
such contracts. Although it is possible that the application of the 
Haircut Policy will result in higher haircuts or lower limitations for 
certain categories of Permitted Cover, ICE Clear Europe believes that 
the policy appropriately tailors the haircuts and limitations to the 
particular market, liquidity and credit risks presented by particular 
assets as Permitted Cover. As a result, in ICE Clear Europe's view, any 
incremental increase in cost of using certain types of Permitted Cover 
is warranted in light of the risks presented to the Clearing House. ICE 
Clear Europe thus believes that any impact on competition from the new 
model is appropriate 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. ICE Clear Europe will notify the Commission of 
any written comments received by ICE Clear Europe.

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-ICEEU-2015-007 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-ICEEU-2015-007. 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 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 will also be available 
for inspection and copying at the principal office of ICE Clear Europe 
and on ICE Clear Europe's Web site at https://www.theice.com/clear-europe/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-ICEEU-2015-007 
and should be submitted on or before April 21, 2015.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Brent J. Fields,
Secretary.
[FR Doc. 2015-07259 Filed 3-30-15; 8:45 am]
BILLING CODE 8011-01-P


