
[Federal Register Volume 80, Number 190 (Thursday, October 1, 2015)]
[Notices]
[Pages 59207-59208]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-24881]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75983; File No. SR-ICEEU-2015-013]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to CDS End-of-Day Price 
Discovery Policy

September 25, 2015.

I. Introduction

    On July 24, 2015, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission''), 
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 
amend its end-of-day price discovery policies and procedures for credit 
default swap (``CDS'') contracts to incorporate certain enhancements 
(SR-ICEEU-2015-013). The proposed rule change was published for comment 
in the Federal Register on August 12, 2015.\3\ The Commission did not 
receive comments on the proposed rule change. 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. 34-75624 (Aug. 6, 2015), 
80 FR 48369 (Aug. 12, 2015) (SR-ICEEU-2015-013).
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II. Description of the Proposed Rule Change

    ICE Clear Europe has proposed to amend its CDS End-of-Day Price 
Discovery Policy (the ``EOD Price Discovery Policy'') to make certain 
enhancements to the end-of-day submission and firm trade process for 
CDS contracts. ICE Clear Europe also proposed to adopt a new Price 
Submission Disciplinary Framework (the ``Disciplinary Framework'') that 
addresses missed price submissions by Clearing Members for CDS 
contracts. ICE Clear Europe did not otherwise propose to change its 
Clearing Rules or Procedures in connection with these amendments.
    As described by ICE Clear Europe, under the EOD Price Discovery 
Policy, ICE Clear Europe currently utilizes a ``cross and lock'' 
algorithm as part of its CDS price discovery process. Under this 
algorithm, standardized 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 markets. Crossed markets are the 
Clearing Member pairs generated by the sorting and ranking process for 
which the bid price of one Clearing Member is above the offer price of 
the matched Clearing Member. The algorithm identifies locked markets, 
where the bid and the offer are equal, in a similar fashion.
    According to ICE Clear Europe, whenever there are crossed and/or 
locked matched markets, the algorithm applies a set of rules designed 
to identify standardized submissions that are ``obvious errors.'' The 
algorithm sets a high bid threshold equal to the preliminary end-of-day 
(``EOD'') level plus one bid-offer width (``BOW''), and a low offer 
threshold equal to the preliminary EOD level minus one BOW. The 
algorithm considers a Clearing Member's standardized submission to be 
an ``obvious error'' if the bid is higher than the high bid threshold, 
or the offer is lower than the low offer threshold.
    Clearing Member pairs identified by the algorithm as crossed or 
locked markets may be required from time to time, under the EOD Price 
Discovery Policy, to enter into cleared CDS trades with each other 
(``Firm Trades''). Currently, ICE Clear Europe excludes standardized 
submissions it identifies as obvious errors from potential Firm Trades 
and does not use these submissions in its determination of published 
EOD levels.
    ICE Clear Europe has proposed to impose certain consequences under 
the Firm Trade methodology for Clearing Members providing price 
discovery submissions deemed to be obvious errors. ICE Clear Europe has 
represented that, as revised, the process for determining potential 
Firm Trades will now include all standardized submissions, including 
those classified as obvious errors (and as a result submissions that 
are obvious errors may result in Firm Trades). However, obvious errors 
will not be used in the calculation of the final EOD level, as under 
the current framework. Thus, ICE Clear Europe has represented that it 
will effectively execute its current EOD algorithm twice: initially in 
the same way it does today (eliminating obvious errors) to generate the 
final EOD levels, and again, without excluding obvious errors, to 
generate Firm Trades and related reversing transactions.\4\
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    \4\ A reversing transaction is a second cleared transaction with 
identical attributes to the initial Firm Trade, but with the buyer 
and seller counterparties reversed, and at that day's EOD price 
rather than the initial Firm Trade price.
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    To limit the potential exposure created through Firm Trades that 
include a bid or offer from an obvious error submission, ICE Clear 
Europe has represented that it will adjust Firm Trade prices, where 
appropriate, to fall within a predefined band on either side of the EOD 
price such that the potential profit or loss (``P/L'') realized by 
unwinding the trade at the EOD level is capped.
    To prevent Clearing Members from receiving Firm Trades with large 
P/L impact in certain index instruments that are less actively traded, 
and for which it is therefore more difficult and/or more expensive to 
manage the associated risk, ICE Clear Europe has represented that it 
will automatically generate reversing transactions at the end-of-day 
price level for specific index CDS instruments (i.e., for specific 
combinations of index/sub-index and series determined by the ICE Clear 
Europe risk department in consultation with the trading advisory 
committee). Currently, reversing transactions are only available for 
eligible single name CDS instruments.
    ICE Clear Europe has also proposed revising the EOD Price Discovery 
Policy to remove the option for Clearing Members to provide end-of-day 
price submissions for single name CDS instruments in terms of spread 
and associated recovery rate. Under the revised approach, Clearing 
Members will be required to provide price submissions (or equivalent 
``points upfront'' submissions) for all single name CDS instruments. 
Clearing

[[Page 59208]]

Members may provide a recovery rate, which ICE Clear Europe will use 
for purposes of its own analysis. Accordingly, ICE Clear Europe will no 
longer need to convert spread submissions for single name instruments 
into a price level for purposes of the EOD price determination process. 
Various conforming changes will be made throughout the policy as a 
result.
    ICE Clear Europe has also proposed to implement a new Disciplinary 
Framework, which addresses failures by a Clearing Member to provide 
required EOD price submissions for CDS Contracts in which they hold 
cleared open interest with ICE Clear Europe (``Missed Submissions''). 
For purposes of the Disciplinary Framework, obvious errors (as 
described above) with respect to CDX index CDS contracts will also be 
treated as Missed Submissions (since such instruments are not subject 
to Firm Trade requirements). ICE Clear Europe has represented that it 
will impose a cash assessment on Clearing Members for each Missed 
Submission, generally ranging from $1,000 to $4,000, depending on 
whether the Missed Submission related to an index or single-name, 
whether it occurred on an announced firm trade date and whether the 
related contract is actively traded. For single name CDS contracts, the 
framework will also specify an aggregate daily maximum assessment per 
Clearing Member for multiple Missed Submissions and a daily maximum 
assessment per Clearing Member per risk sub-factor.
    As part of a new summary assessment process, ICE Clear Europe has 
represented that it will determine on a monthly basis whether a 
Clearing Member has any Missed Submissions and provide the Clearing 
Member a notice of assessment with details of such Missed Submissions. 
The notice of assessment will include information about the date, type, 
quantity and assessment amount for the relevant Missed Submission(s). 
The Disciplinary Framework will also provide a procedure for a Clearing 
Member to dispute a notice of assessment. ICE Clear Europe has 
represented that a Clearing Member will have fifteen days from the 
notice of assessment to dispute the notice or seek to have it waived or 
rescinded. ICE Clear Europe has represented that it may grant a waiver 
of an assessment for certain specified reasons. A conditional waiver 
may be granted for the first instance of a Missed Submission for a 
particular instrument, provided that the Clearing Member does not have 
another Missed Submission in that instrument within 90 days. ICE Clear 
Europe has represented that it may grant an unconditional waiver where 
Missed Submissions result from extraordinary circumstances outside of 
the Clearing Member's control, such as market-wide disruptions. ICE 
Clear Europe has represented the imposition of a cash assessment on a 
Clearing Member does not preclude ICE Clear Europe from taking any 
other disciplinary action against a Clearing Member under the Rules and 
Procedures, including for persistent failures to meet the requirements 
of the EOD Price Discovery Policy.

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 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 ICE Clear Europe's proposed revisions to 
its EOD Price Discovery Policy and its proposed new Disciplinary 
Framework are consistent with the requirements of Section 17A of the 
Act \7\ and rules thereunder applicable to ICE Clear Europe. The 
proposed revisions are intended to enhance ICE Clear Europe's price 
discovery process by including all price submissions (including those 
classified as obvious errors) in the process of determining Firm 
Trades, thereby strengthening the incentives for Clearing Members to 
provide accurate end-of-day price submissions. In addition, the 
proposed rule change would adjust the trading prices of Firm Trades 
that include a bid or offer classified as an obvious error to fall 
within a predefined range on either side of the EOD price, thereby 
limiting Clearing Members' potential P/L exposure to obvious errors 
from the risk management perspective, while holding them accountable 
for their price submissions. The proposed rule change would also assist 
Clearing Members in unwinding Firm Trades in certain less actively 
traded index products by automatically generating reversing trades at 
the EOD level. Finally, the proposed rule change further incentivizes 
accurate price submissions by imposing financial consequences on 
Clearing Members for Missed Submissions, through cash assessments under 
the new Disciplinary Framework. The Disciplinary Framework is intended 
to further enhance compliance with the EOD Price Discovery Policy and 
provides Clearing Members with notice and a mechanism to dispute any 
Missed Submissions or seek a waiver of any assessments.
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    \7\ 15 U.S.C. 78q-1.
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    The Commission therefore believes that the proposal is designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions and derivative agreements, contracts and transactions 
cleared by ICE Clear Europe 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 proposed Disciplinary 
Framework is designed to subject participants to appropriate discipline 
for violation of ICE Clear Europe's end-of-day price submission 
requirements, consistent with section 17A(b)(3)(G) of the Act.\9\ 
Finally, the Commission believes that the proposed Disciplinary 
Framework provides a fair procedure with respect to the disciplining of 
participants, consistent with section 17A(b)(3)(H) of the Act.\10\
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 15 U.S.C. 78q-1(b)(3)(G).
    \10\ 15 U.S.C. 78q-1(b)(3)(H).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \11\ and 
the rules and regulations thereunder.
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    \11\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-ICEEU-2015-013), is 
approved.\13\
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    \12\ 15 U.S.C. 78s(b)(2).
    \13\ In approving the proposed rule change, the Commission 
considered the proposed rule change'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.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-24881 Filed 9-30-15; 8:45 am]
BILLING CODE 8011-01-P


