
[Federal Register Volume 80, Number 136 (Thursday, July 16, 2015)]
[Notices]
[Pages 42146-42149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-17399]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75426; File No. SR-ICEEU-2015-010]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change Relating to Credit Default Swap Risk 
Policies

July 10, 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 June 25, 2015, ICE Clear Europe Limited (``ICE Clear Europe'' or the 
``Clearing House'') 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 primarily prepared by ICE Clear 
Europe. The Commission is publishing this notice to solicit comments on 
the proposed changes to the rules 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

    ICE Clear Europe proposes to amend certain of its credit default 
swap (``CDS'') risk policies (the ``Risk Policy Amendments'') in order 
to enhance its current risk model.

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 principal purpose of the proposed rule change is to amend 
certain ICE Clear Europe risk policies relating to the CDS product 
category to incorporate enhancements to the existing CDS risk model. 
The relevant policies being modified are the CDS Risk Policy (``CDS 
Risk Policy'') and the CDS Risk Model Description (``Risk Model 
Description''). ICE Clear Europe does not propose to make any changes 
to its Clearing Rules or Procedures in connection with these 
amendments.
    The proposed rule change would, among other matters, (i) modify the 
credit spread response component of the risk model to devolatilize 
returns, (ii) enhance the portfolio spread response component of the 
risk model to limit procyclicality, (iii) establish a new framework for 
recovery rate sensitivity requirement (``RRSR'') parameters, (iv) 
modify the CDS Guaranty Fund allocation methodology, (v) modify index 
liquidity and concentration charges and (vi) revise procedures for 
intraday margin calls. The Risk Policy Amendments also include certain 
other clarifications and conforming changes.
    The following is a summary of the principal changes in the Risk 
Policy Amendments:
    Devolatilization of Credit Spread Response. Under the revised Risk 
Model Description, the credit spread response component of the margin 
model would be revised to provide that the tail estimation of the 
relevant fitted returns distribution is based on devolatilized returns. 
The use of devolatilized returns in this manner facilitates the 
comparison of returns for periods with different volatilities.
    Procyclicality of Portfolio Spread Response. In order to limit 
procyclicality of the spread response component of the model, ICE Clear 
Europe proposes to modify the CDS Risk Policy and Risk Model 
Description to use an additional portfolio analysis that features price 
changes observed during and immediately after the Lehman Brothers 
default. The analysis considers price scenarios derived from the 
greatest price decrease and increase during and immediately after the 
Lehman Brothers default. These scenarios are designed to capture the 
default of a major participant in the credit market and the market 
response to the event. The introduced scenarios are defined in price 
terms to maintain the stress severity during periods of low credit 
spread levels (high price) when the spread response requirements, 
computed under the current framework, are expected to be lower. 
Furthermore, the Lehman default price scenarios are also incorporated 
into the calculation of CDS Guaranty Fund requirements.\3\
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    \3\ This enhancement also addresses a regulatory requirement in 
Article 30 of the Regulatory Technical Standards implementing the 
European Market Infrastructure Regulations (``EMIR''). Commission 
Delegated Regulation (EU) No. 153/2013 of 19 December 2012 
Supplementing Regulation (EU) No. 648/2012 of the European 
Parliament and of the Council with regard to Regulatory Technical 
Standards on Requirements for Central Counterparties (the 
``Regulatory Technical Standards'').
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Recovery Rate Sensitivity Requirements
    ICE Clear Europe proposes to revise the Risk Model Description to 
incorporate a more sensitive parameter estimation approach for the RRSR 
computation. The RRSR factor is designed to capture the risk of 
fluctuations in market expected recovery rates under CDS transactions. 
Under the current model, the RRSR is determined using fixed minimum and 
maximum recovery rate stress scenarios based on sector levels. In 
calculating the RRSR, all instruments belonging to a risk factor 
(``RF'') or risk sub-factor (``RSF'') are subjected to recovery rate 
stress scenarios to obtain resulting profit/loss responses, and the 
worst scenario response is chosen for the estimation of the RRSR. (In 
addition, these same recovery rate stress scenarios

[[Page 42147]]

are used in determination of jump-to-default requirements.)
    ICE Clear Europe proposes separating the recovery rate stress 
levels for these two computations in order to introduce more dynamic 
and appropriate estimations of the recovery rate stress levels for RRSR 
purposes. Under the revised framework, the recovery rate levels for 
RRSR purposes will be determined using a 5-day, 99% confidence interval 
expected shortfall risk measure assuming a distribution of recovery 
rate fluctuations. The proposal will also eliminate index RRSR, as 
index recovery rates are assumed under relevant market convention and 
are thus not subject to market uncertainty. The dynamic feature of the 
revised stress level estimations is achieved by analyzing historical 
time series of recovery rates in order to calibrate a statistical model 
with a time varying volatility. In ICE Clear Europe's view, the 
proposed enhancements provide a robust and quantitative driven approach 
for establishing the recovery rate stress scenarios.
    Modifications to Guaranty Fund Methodology. ICE Clear Europe 
proposes certain clarifications and enhancements to its CDS Guaranty 
Fund methodology. The Risk Model Description has been revised to 
clarify that the CDS Guaranty Fund size is calculated to cover losses 
associated with the default of the two Clearing Members and their 
affiliates that create the greatest cumulative uncollateralized loss 
under extreme but plausible scenarios. Certain other clarifications 
have been made in the calculation of the various components of the 
overall CDs Guaranty Fund requirement.
    ICE Clear Europe also proposes to modify the procedure for 
allocating CDS Guaranty Fund requirements among the CDS Clearing 
Members. Under the existing model, CDS Guaranty Fund allocations 
reflect a risk ``silo'' approach, in which a Clearing Member's 
contribution reflects its uncollateralized exposure for each CDS 
Guaranty Fund component or ``silo''. Under the current approach, 
allocations can significantly fluctuate in response to position changes 
in the portfolios of the Clearing Members that drive the CDS Guaranty 
Fund size, and in response to the distribution of the total CDS 
Guaranty Fund size across all ``silos''. The Clearing House proposes 
modifying the methodology, so that the allocations are based on the 
Clearing Members' total unconditional uncollateralized losses in the 
CDS product category.\4\ Under the proposed approach, the allocations 
are independent of the distribution of the uncollateralized losses 
across the ``silos''. In ICE Clear Europe's view, the new allocation 
methodology reflects an improved and more stable approach which allows 
for easier attributions of contributions to individual CDS Clearing 
Member or client portfolios.
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    \4\ The existing specific wrong way risk component of the CDS 
Guaranty Fund calculation is maintained.
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    The CDS Risk Policy's discussion of the ICE Clear Europe's initial 
CDS Guaranty Fund contribution has been revised to be consistent with 
the requirements of the Finance Procedures.
Index Liquidity and Concentration Charges
    ICE Clear Europe proposes to modify the liquidity charge 
calculation in the margin model as it applies to index CDS positions. 
(The existing liquidity charge calculation for single-name CDS will 
remain unchanged.) The revised approach will address calculation of 
liquidity charges where index CDS is traded under either price or 
spread terms, and will calculate a separate liquidity charge for 
positions in each series of the relevant index. The revised approach 
also limits the reduction in liquidity charge for offsetting positions 
across different series of the same index family, by applying the 
greater of the liquidity charge applicable to the long and short 
positions in the relevant portfolio in the same index family. Under the 
revised methodology, the reduction in liquidity charge is greatest 
across positions in the ``on-the-run'' (current) index and first (most 
recent) ``off-the-run'' indices, with a higher reduction during the 
period immediately following the index roll (when the two indices are 
treated as effectively the same index) and a lower reduction over time 
as the liquidity of contracts in the two series diverge.
    Similarly, ICE Clear Europe proposes to modify the concentration 
charge calculation for index CDS positions. (Again, the existing 
approach for single-name CDS will not change.) The revised framework 
provides for calculation of series-specific concentration charges, 
based on the direction of the 5-year equivalent notional amount or the 
net notional amount of positions in the particular series and a series 
threshold limit (above which the concentration charge is imposed). 
Series threshold limits are expected to be higher for the on-the-run 
and the first off-the-run index series, and are determined based on a 
formula comparing the open interest in the series to the on-the-run 
open interest.
Intraday Margin Calls
    Certain amendments are proposed to the intra-day risk monitoring 
and special margin call processes. Intra-day margin calls will be made 
based on an ``Intraday Risk Limit.'' The Intraday Risk Limit is set at 
the Clearing Member level and is calculated based on 40% of the total 
initial margin requirements (across all account classes), with a 
minimum amount of EUR 15 million and a maximum of EUR 100 million. 
Intra-day margin calls will be made on the following basis: (i) Where 
there has been a 50% erosion of the Intraday Risk Limit, the Risk 
Department will investigate what is driving the shortfall and monitor 
the CDS Clearing Member, (ii) where the erosion of the Intraday Risk 
Limit exceeds 50%, the Risk Department will inform the CDS Clearing 
Member that its initial margin may cease to be sufficient and that it 
may be subject to an intraday margin call, and (iii) where there has 
been a 100% erosion of the Intraday Risk Limit, the Risk Department 
will issue an intraday margin call to the CDS Clearing Member (and will 
also contact it by telephone and/or email) for a sum sufficient to 
reduce the level of Intraday Risk Limit erosion back to 0%. The member 
intraday shortfall is the sum of intraday shortfalls at account level 
(i.e. house and client accounts), and the account level shortfall 
represents the unrealized profit and loss from the aggregate change in 
the Mark-to-Market Margin and Initial Margin.
    Governance. The CDS Risk Policy has been revised to address in 
further detail management and governance oversight in a new Management 
and Governance Oversight section. The new section provides that the CDS 
Director of Risk is responsible for ensuring that the CDS Risk Policy 
remains up-to-date and is reviewed in accordance with certain 
guidelines. The Risk Working Group (``RWG'') and Trading Advisory 
Committee (``TAC'') will provide on-going consultation and support with 
respect to the CDS Risk Policy. The composition of the RWG and the TAC 
include both ICE Clear Europe Management and Clearing Member 
representatives, mainly from risk, trading and compliance areas.
    Changes to the CDS Risk Policy are subject to initial approval by 
the Director of Risk and may be determined in consultation with the RWG 
and/or the TAC. Any changes that affect the risk profile of ICE Clear 
Europe are subject to Board approval on the advice and support of the 
CDS Risk Committee

[[Page 42148]]

and the Board Risk Committee. In addition, the CDS Risk Policy is 
subject to at least an annual routine approval by the Board, after 
consultation with the CDS Risk Committee and the Board Risk Committee. 
CDS risk model performance testing is subject to review by the Director 
of Risk and reported to the CDS Risk Committee and the Board Risk 
Committee.
    Additional Changes. The Risk Policy Amendments contain certain 
other clarifications and enhancements. Certain clarifications are made 
in the CDS Risk Policy with respect to wrong way risk requirements. The 
policy has also been revised to clarify that the currency specific 
initial margin requirements must cover at least the specific and 
general wrong way risk components of the initial margin requirement for 
the relevant currency. The CDS Risk Policy has also been revised to 
incorporate (without change) from the Clearing House's existing CDS 
clearing membership policy the capital-to-margin ratio limit (which 
requires that certain remedial actions be taken if the margin 
requirement for a Clearing Member's CDS positions would exceed three 
times the Clearing Member's capital as set forth on its balance sheet). 
The description of the Clearing House's Monte Carlo model has been 
revised to clarify that model parameters used are the same as those 
used in the credit spread model. Various other defined terms and 
certain obsolete references have been updated throughout the CDS Risk 
Policy and Risk Model Description.
2. Statutory Basis
    ICE Clear Europe believes that the proposed rule change is 
consistent with the requirements of section 17A of the Act \5\ and the 
regulations thereunder applicable to it, including the standards under 
Rule 17Ad-22.\6\ Section 17A(b)(3)(F) of the Act \7\ 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. The proposed rule change is designed 
to enhance relevant risk policies, impose more conservative initial 
margin requirements and in general tailor CDS margin and guaranty fund 
requirements more closely to the specific risks presented by cleared 
CDS Contracts. As a result, ICE Clear Europe believes that the proposed 
rule change will enhance the financial resources available to the 
Clearing House and enhance the stability of the clearing system, by 
reducing the risk to market participants of a default by a CDS Clearing 
Member or customer. The amendments thereby facilitate the Clearing 
House's ability to promptly and accurately clear and settle CDS 
contracts, within the meaning of section 17(A)(b)(3)(F).\8\
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    \5\ 15 U.S.C. 78q-1.
    \6\ 17 CFR 240.17Ad-22.
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    In addition, the Risk Policy Amendments are consistent with the 
relevant requirements of Rule 17Ad-22.\9\ In particular, the amendments 
to the CDS Risk Policy and Risk Model Description will enhance the 
financial resources available to the clearing house by imposing more 
appropriate initial margin requirements for CDS, and are therefore 
reasonably designed to meet the margin and financial resources 
requirements of Rule 17Ad-22(b)(2-3).\10\ Additionally, the amendments 
to the CDS Guaranty Fund methodology further ensure that the Clearing 
House maintains sufficient financial resources for CDS clearing, 
consistent with the requirements of Rule 17Ad-22(b)(3).\11\ The changes 
also enhance and clarify the Clearing House's governance process 
concerning review and modification of the CDS risk policies, consistent 
with the requirements of Rule 17Ad-22(d)(8).\12\ For the reasons noted 
above, ICE Clear Europe believes that the proposed Risk Policy 
Amendments are consistent with the requirements of Section 17A of the 
Act and regulations thereunder applicable to it.
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    \9\ 17 CFR 240.17Ad-22.
    \10\ 17 CFR 240.17Ad-22(b)(2-3).
    \11\ 17 CFR 240.17Ad-22(b)(3).
    \12\ 17 CFR 240.17Ad-22(d)(8).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    ICE Clear Europe does not believe the Risk Policy Amendments would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The Risk Policy 
Amendments will apply to all CDS Clearing Members, and the changes to 
the margin model applicable to customer business will apply to all 
other market participants. ICE Clear Europe does not believe that the 
adoption of the policy amendments will adversely affect competition 
among Clearing Members, or the ability of market participants to clear 
contracts generally. The Clearing House also does not believe that the 
amendments will reduce access to clearing CDS contracts generally or 
limit market participants' choices for clearing CDS. The Risk Policy 
Amendments may result in higher initial margin or guaranty fund 
requirements for certain positions or portfolios of CDS, which may 
increase the costs for some Clearing Member and other market 
participants of trading or carrying those positions or portfolios. 
However, ICE Clear Europe believes that the amendments appropriately 
tailor CDS margin and guaranty fund requirements to the risks presented 
by particular CDS positions, and that the amendments will therefore 
enhance the Clearing House's financial resources and risk management. 
As a result, in ICE Clear Europe's view, any incremental increase in 
cost resulting from such higher margin or guaranty fund requirements is 
warranted in light of the risks posed to the Clearing House. ICE Clear 
Europe therefore believes that any impact on competition from the 
amendments 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 rule changes 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

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     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ICEEU-2015-010 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-2015-010. 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-2015-010 and should be submitted on or before August 6, 2015.

    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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-17399 Filed 7-15-15; 8:45 am]
BILLING CODE 8011-01-P


