
[Federal Register Volume 80, Number 106 (Wednesday, June 3, 2015)]
[Notices]
[Pages 31632-31634]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-13451]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75065; File No. SR-ICEEU-2015-005]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to CDS Procedures for CDX North 
America Index CDS Contracts

May 28, 2015.

I. Introduction

    On February 12, 2015, ICE Clear Europe Limited (``ICE Clear 
Europe'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to revise ICE Clear Europe's CDS 
Procedures, CDS Risk Model Description and CDS End-of-Day Price 
Discovery Policy to provide the basis for ICE Clear Europe to clear CDX 
North America Index CDS Contracts (``CDX.NA Contracts''). The proposed 
rule change also includes revisions to the CDS Procedures that relate 
to iTraxx Contracts and single name CDS Contracts. The proposed rule 
change was published for comment in the Federal Register on March 2, 
2015.\3\ On April 16, 2015, 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 May 31, 
2015.\4\ The Commission did not receive 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. 34-74362 (Feb. 24, 
2015), 80 FR 11246 (Mar. 2, 2015) (File No. SR-ICEEU-2015-005).
    \4\ Securities Exchange Act Release No. 34-74741 (Apr. 16, 
2015), 80 FR 22593 (Apr. 22, 2015) (File No. SR-ICEEU-2015-005).
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II. Description of the Proposed Rule Change

    ICE Clear Europe has submitted proposed amendments to its CDS 
Procedures to (i) revise the CDS Procedures to add a new section 
containing contract terms applicable to the CDX.NA Contracts that ICE 
Clear Europe proposes to accept for clearing; (ii) make conforming 
changes throughout the CDS Procedures to reference the CDX.NA 
Contracts; and (iii) make certain other clarifications, corrections and 
updates to the CDS Procedures (including for iTraxx Contracts and 
Single Name Contracts), as discussed in more detail herein. ICE Clear 
Europe has also proposed to make certain modifications to its CDS Risk 
Model Description and CDS End-of-Day Price Discovery Policy (the ``CDS 
Pricing Policy'') to accommodate clearing of CDX.NA Contracts, as 
described herein.
    ICE Clear Europe has proposed to amend Paragraphs 1, 4, 6, 9, 10 
and 11 of the CDS Procedures, described below. All capitalized terms 
not defined herein are defined in the ICE Clear Europe Clearing Rules 
(the ``Rules'').
    In paragraph 1 of the CDS Procedures, references will be added to 
the defined terms ``iTraxx Contract'' and ``CDX.NA Contract,'' as such 
terms are set out in revised paragraphs 9 and 10 of the CDS Procedures, 
respectively. The definition of ``Original Annex Date'' will be 
modified to apply to CDX.NA Contracts in substantially the same manner 
it applies to iTraxx Contracts. In addition, the definition of 
``Protocol Excluded Reference Entity'' in former paragraph 10.3 will be 
changed to ``Protocol Excluded Corporate Reference Entity'' and moved 
to paragraph 1, to reflect that such term is only used in the context 
of corporate reference entities. Accordingly, the definition will be 
revised to mean an Eligible Single Name Reference Entity that is a 
Standard European Corporate (as specified in the List of Eligible 
Single Name Reference Entities) and is an Excluded Reference Entity (as 
defined in the 2014 CDD Protocol). (Conforming changes will be made to 
references to that definition throughout the CDS Procedures.) In 
addition, a correction will be made to the cross-reference in 
definition of ``New Trade'' to properly refer to the definition set out 
in the applicable Contract Terms for the relevant contract.
    In addition, amendments will be made to use the defined terms 
``Component Transaction'' and ``Clearing'' throughout the Procedures in 
lieu of the undefined terms. Finally, various conforming references to 
the new or revised defined terms will be made throughout the CDS 
Procedures, various provisions of the CDS Procedures will be 
renumbered, and certain cross-references to prior paragraph 1.71 will 
be corrected.
    Various clarifications will be made in Paragraph 9 of the CDS 
Procedures, which sets out the contract terms for iTraxx Contracts. 
Specifically, paragraph 9.1 will be modified to clarify that it 
specifies the additional Contract Terms applicable to all iTraxx 
Contracts cleared by the Clearing House. Paragraph 9.2(c)(i), which 
applies to iTraxx Contracts which are governed by the Standard iTraxx 
2014 CDS Supplement, will be modified to make certain additional 
clarifications relating to initial payments and spun-out trades. 
Paragraph 9.2(c)(i)(B) will be added to reflect current clearing house 
(and market) practice that initial payments under cleared iTraxx 
Contracts (other than those for which a bilateral transaction is 
already recorded in Deriv/SERV) are made on the business day following 
the trade date (or, if later, the business day following the date of 
acceptance for clearing). New paragraph 9.2(c)(i)(D), which will 
address the reference obligation for a spun-out trade following a 
restructuring credit event, is substantially the same as the 
corresponding language in paragraph 9.3(c)(i)(D) for contracts subject 
to the Standard iTraxx Legacy CDS Supplement and was inadvertently 
omitted from prior amendments. A cross-reference in paragraph 
9.2(c)(i)(E) will be updated. New paragraph 9.2(c)(i)(F) will provide 
that paragraph 5.7 of the Standard iTraxx 2014 CDS Supplement, which 
contains restrictions on delivery of Credit Event Notices and Successor 
Notices, does not apply to iTraxx Contracts (as the appropriate 
restrictions in the context of a cleared transaction are already 
addressed in the Rules and CDS Procedures, including Rule 1505).
    As set forth in paragraph 9.2(c)(ii), changes will also be made to 
the terms of the iTraxx 2014 Confirmation with respect to iTraxx 
Contracts that are governed by the Standard iTraxx 2014 CDS Supplement. 
These amendments will include a clarification that references to the 
2014 Credit Derivatives Definitions in the standard supplement and 
confirmation will be interpreted for cleared contracts as though they 
have the meaning ascribed to that term in the Rules and Procedures. In 
addition, a provision that there are no ``Omitted Reference Entities'' 
for purposes of the standard confirmation will be removed as that term 
is not used in the standard supplement and confirmation and is 
therefore unnecessary.
    Similar clarifications will be made in paragraph 9.3, which relates 
to iTraxx Contracts which are governed by the

[[Page 31633]]

Standard iTraxx Legacy CDS Supplement. Specifically, new paragraph 
9.3(c)(i)(B) will contain the same clarification discussed above with 
respect to the initial payment date for a contract. Paragraph 
9.3(c)(i)(D) will contain a correction that the treatment therein of 
reference obligations for spun-out trades applies for reference 
entities subject to both Sections A and B of the Standard iTraxx Legacy 
CDS Supplement (that is, both protocol-excluded and non-excluded 
entities). Subparagraph (F) will provide that restrictions under the 
standard supplement as to delivery of Credit Event Notices and 
Succession Event Notices do not apply, as the issue is otherwise 
addressed under the Rules and CDS Procedures, as discussed above. In 
paragraph 9.3(c)(ii)(E), a reference to there being no ``Omitted 
Reference Entities'' will also be removed for the reasons noted above.
    New paragraph 10 of the CDS Procedures will be added to set out the 
contract terms for CDX.NA Contracts. Paragraph 10.1 will provide that 
different sub-provisions of paragraph 10 will apply to CDX.NA Contracts 
depending on whether the Original Annex Date for the relevant index 
series falls before or after the Protocol Effective Date.
    New paragraph 10.2 will apply to CDX.NA Contracts with an Original 
Annex Date on or after the Protocol Effective Date (i.e., for 
transactions in the September 2014 or later versions of the index). New 
definitions will be added to subparagraph (a), including definitions 
for ``CDX.NA Contract'', ``CDX.NA Publisher'', ``CDX.NA Terms 
Supplement'', ``Eligible CDX.NA Index'', ``List of Eligible CDX.NA 
Indices'', and ``Relevant CDX.NA Terms Supplement'', which largely 
track the analogous definitions in paragraph 9 with respect to iTraxx 
Europe Contracts. Paragraph 10.2(b) will incorporate defined terms from 
the Relevant CDX.NA Terms Supplement and also will contain an 
inconsistency provision which provides that paragraph 10.2 governs over 
the CDX.NA 2014 CDS Supplement and CDX.NA 2014 Confirmation. Paragraph 
10.2(c) will contain certain amendments to the Standard CDX.NA 2014 CDS 
Supplement and CDX.NA 2014 Confirmation, which are generally consistent 
with the amendments to the iTraxx 2014 Terms Supplement and iTraxx 2014 
Confirmation in paragraph 9.2(c) and are generally designed to 
accommodate the requirements of clearing and make the standard contract 
terms consistent with the Rules and Procedures. In addition, paragraph 
10.2(c)(i)(E) will address the application of the defined term ``Index 
Party'' in the standard supplement in the context of a cleared 
transaction, and paragraphs 10.2(c)(ii)(E)-(F) will be added to refer 
to certain transaction terms specified in the List of Eligible CDX.NA 
Indices for the relevant index and tenor. Paragraph 10.2(c)(i)(G) will 
clarify that as with iTraxx Contracts, de minimis cash settlement under 
the standard supplement does not apply. Paragraph 10.2(c) will also 
indicate the transaction terms that must be specified in the submission 
of a trade for clearing.
    New paragraph 10.3 will apply to CDX.NA Contracts with an Original 
Annex Date before the Protocol Effective Date (i.e., for transactions 
in older versions of the index). Paragraph 10.3 will contain 
definitions and provisions generally similar to those in paragraph 
10.2, and make comparable amendments to the Standard CDX.NA Legacy CDS 
Supplement and the CDX.NA Legacy Confirmation.
    New paragraph 10.4 will contain procedures for updating the CDX.NA 
index version following a Credit Event or Succession Event. These 
provisions will be generally consistent with the comparable provisions 
for iTraxx contracts in paragraph 9.8. New paragraph 10.4(b) will add a 
similar procedure for implementing a new version of the CDX.NA standard 
terms supplement, if and when published, where contracts referencing 
the old and new versions of the supplement are determined by the 
Clearing House to be fungible.
    Existing paragraph 10, which contains contract terms for Single 
Name Contracts, will be renumbered as paragraph 11 and cross references 
will be updated accordingly. In addition, various clarifying amendments 
will be made to this paragraph. The definitions of ``STEC Contract'' 
and ``Non-STEC Single Name Contract'' will be amended to clarify that 
the relevant Reference Entity type will be specified in the List of 
Eligible Single Name Reference Entities. The definition of ``Single 
Name Contract Reference Obligations'' will be amended to clarify that 
the applicable reference obligation will be specified in the List of 
Eligible Single Name Reference Entities and may differ between 2003-
type CDS Contracts and 2014-type CDS Contracts. For 2014-type CDS 
Contracts, the reference obligation may be designated as the Senior 
Level Standard Reference Obligation that is specified from time to time 
on the SRO List published under the 2014 ISDA Definitions.
    Paragraph 11.6(a)(i)(C) will be amended by adding a subsection (2) 
that will make a clarification as to the initial payment date for 
Single Name Contracts that corresponds to the change in payment date 
discussed above for iTraxx Contracts. A change will be made in 
paragraph 11.6(a)(ii) to conform to the changes made to the definition 
of Single Name Contract Reference Obligation discussed above.
    In general, under ICE Clear Europe's proposal, the existing risk 
methodology that applies to index CDS will also apply to the CDX.NA 
Contracts. However, ICE Clear Europe proposes to make certain 
amendments to its CDS Risk Model Description and CDS Pricing Policy to 
address CDX.NA Contracts.
    In the CDS Risk Model Description, the index decomposition offset 
methodology, which is used to determine portfolio margin benefits from 
correlated long and short positions, is proposed to be modified to 
address multi-region risk factors. Under the revised methodology, 
portfolio margin benefits are provided first for risk factors within 
the same region. After the same-region risk analysis is completed, any 
cross-region benefits for index risk factors are determined. Cross-
region benefits apply only to index risk factors. The revised 
description thus addresses scenarios in which margin offsets may be 
provided between appropriately correlated positions in iTraxx Contracts 
and positions in CDX.NA Contracts. The revisions also provide that 
where risk factor profits and losses are calculated in different 
currencies, they will be converted into the same base currency (Euro) 
for purposes of calculation of portfolio margin benefits.
    ICE Clear Europe also proposes to amend its CDS Pricing Policy to 
cover the CDX.NA Contracts. The amendments include submission 
requirements with respect to CDX.NA Contracts and changes to reflect 
that certain determinations with respect to firm trades for CDX.NA 
Contracts are made as of the North American end-of-day.

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

[[Page 31634]]

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 and, in general, to protect investors and the public 
interest.
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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 rule change will provide for clearing of 
the CDX.NA Contracts, which are similar to the index CDS Contracts 
currently cleared by ICE Clear Europe, in accordance with existing 
rules and procedures. Specifically, the Commission believes that ICE 
Clear Europe's proposal to clear the CDX.NA Contracts pursuant to its 
risk management framework, operational procedures, end-of-day pricing 
policies, settlement procedures and default management policies (as 
modified by the proposed rule change) is designed to promote the prompt 
and accurate clearance and settlement of securities transactions, 
derivative agreements, contracts, and transactions, and in general, to 
protect investors and the public interest, consistent with Section 
17A(b)(3)(F) of the Act.\8\ The Commission further believes that the 
clearing of CDX.NA Contracts in accordance with ICE Clear Europe's 
existing CDS risk policies (including margin and guaranty fund), as 
modified by the proposed rule change, is reasonably designed to meet 
the requirements of Rules 17Ad-22(b)(1)-(3) \9\ 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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    \7\ 15 U.S.C. 78q-1.
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22(b)(1)-(3).
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    Additionally, the Commission believes that the proposed rule 
change, as it relates to various clarifying and conforming changes with 
respect to iTraxx Contracts and single name CDS Contracts, is designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions and in general, to protect investors and the 
public interest, consistent with Section 17A(b)(3)(F) of the Act.\10\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission therefore finds that the proposed rule change is 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions and, to the extent applicable, derivative 
agreements, contracts, and transactions and, in general, to protect 
investors and the public interest in accordance with Section 
17A(b)(3)(F) of the Act.\11\
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    \11\ 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 \12\ and the 
rules and regulations thereunder.
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    \12\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-ICEEU-2015-005) be, 
and hereby is, approved.\14\
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ 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.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-13451 Filed 6-2-15; 8:45 am]
BILLING CODE 8011-01-P


