
[Federal Register Volume 81, Number 216 (Tuesday, November 8, 2016)]
[Notices]
[Pages 78677-78678]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26906]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79220; File No. SR-ICC-2016-010]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change To Revise the ICC Risk Management Model 
Description Document and the ICC Risk Management Framework

November 2, 2016

I. Introduction

    On July 15, 2016, ICE Clear Credit LLC (``ICC'') 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 revise the ICC 
Risk Management Framework to incorporate changes to the single name 
credit default swap (``CDS'') liquidity charge methodology and make 
additional minor, clarifying changes (SR-ICC-2016-010). The proposed 
rule change was published for comment in the Federal Register on August 
4, 2016.\3\ On September 15, 2016, 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 November 
2, 2016.\4\ The Commission did not receive comments on the proposed 
rule change. For the reasons discussed below, 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. 34-78448 (July 29, 
2016), 81 FR 51532 (Aug. 4, 2016) (SR-ICC-2016-010).
    \4\ Securities Exchange Act Release No. 34-78846 (Sept. 15, 
2016), 81 FR 64574 (Sept. 20, 2016) (SR-ICC-2016-010).
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II. Description of the Proposed Rule Change

    ICC proposes revising the ICC Risk Management Framework to 
incorporate certain risk model enhancements related to its single name 
CDS liquidity charge methodology. ICC also proposes minor clarifying 
edits to the ICC Risk Management Model Description document and the ICC 
Risk Management Framework. These revisions do not require any changes 
to the ICC Clearing Rules.
    Specifically, ICC proposes to introduce minimum instrument 
liquidity requirements independent of instrument maturities. ICC's 
current approach features instrument liquidity requirements that decay 
with time to maturity for fixed credit spread levels. The proposed 
approach introduces minimum liquidity requirements for individual 
instruments, independent of time to maturity for the considered 
instruments. ICC believes the proposal thus establishes minimum 
liquidity charges that do not decay over time as maturity is 
approached. The revised calculation for single name CDS liquidity 
charges at the instrument level will incorporate a price-based bid-
offer width (``BOW'') floor component, which ICC asserts will provide 
stability of requirements, as well as a dynamic spread-based BOW 
component, which ICC asserts will reflect the additional risk 
associated with distressed market conditions. The values of such price-
based BOW and spread-based BOW will be fixed factors, which will be 
subject to at least monthly reviews and updates by ICC Risk Management 
Department with consultation with the Risk Committee.
    ICC also proposes enhancements to the liquidity charge calculation 
at the risk factor level. ICC's current risk factor level liquidity 
requirements are based on forward CDS spread levels. Under the revised 
calculation, liquidity charges at the risk factor level will be 
computed by first calculating the liquidity requirements for each 
individual instrument position in the portfolio, and then summing all 
instrument liquidity requirements for positions with the same 
directionality, i.e. bought or sold protection. The risk factor 
liquidity requirement will be the greatest liquidity requirement 
associated with either the sum of all bought protection position 
liquidity requirements, or the sum of all sold protection position 
liquidity requirements. ICC is not proposing any changes to the 
liquidity charge calculation at the portfolio level. ICC expects these 
enhancements will ensure more stable liquidity requirements for 
instruments across the curve and simplify ICC's liquidity charge 
methodology, which ICC believes should promote ease of understanding. 
In ICC's view, the current risk factor level liquidity requirements, 
based on forward CDS spread levels, are, in general, more difficult to 
replicate due

[[Page 78678]]

to the need for knowledge of spread levels across the entire term 
structure.
    Additionally, to facilitate replication of the enhanced liquidity 
charge calculations, ICC will provide end-of-day data for instruments 
in which clients have open positions, allowing for additional 
transparency and easier replication for clients who wish to estimate 
liquidity charges for hypothetical and current positions.
    ICC also proposes updating liquidity scaling factors to reflect the 
methodology enhancements. There is no price based component under the 
current methodology. To reflect the introduction of a price based 
component, the liquidity scaling factors will be decomposed and 
adjusted in order to maintain the same overall composition with both 
price and spread based components.
    ICC has also proposed minor clarifying edits to the ICC Risk 
Management Framework and the ICC Risk Management Model Description 
document. ICC will add language to the Overview section of the Risk 
Management Framework to identify which ICC documents provide additional 
details regarding ICC's risk management approach. ICC will add language 
to the Governance and Organization section of the Risk Management 
Framework to note that the reporting line of ICC's Chief Risk Officer 
to the Chairperson of the ICC Risk Committee, who is also a non-
executive manager on the Board, allows the Chief Risk Officer to bring 
any issues or concerns directly to the Board without intermediation by 
other ICC personnel. ICC will also make edits to the Governance and 
Organization section of the Risk Management Framework to revise the 
list of documents reviewed by the Risk Committee on at least an annual 
basis to include the ICC End-of-Day Price Discovery Policies and 
Procedures and the ICC Operational Risk Management Framework. Finally, 
ICC will add minor clarifying details to the technical calculation 
descriptions set forth in the ICC Risk Management Model Description 
document, specifically in the Recovery Rate Sensitivity Risk Analysis, 
Interest Rate Sensitivity Risk Analysis, Spread Risk Analysis, and 
Guaranty Fund Size Estimation sections.

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 the 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 to 
comply with the provisions of the Act and the rules and regulations 
thereunder.
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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 the requirements of Section 17A of the Act \7\ and the rules and 
regulations thereunder applicable to ICC. ICC asserts that the proposed 
change will simplify its initial margin methodology and lead to more 
stable initial margin requirements. The Commission believes that ICC's 
proposed revisions to the ICC Risk Management Framework and the ICC 
Risk Model Description Document, including the introduction of minimum 
liquidity requirements for the relevant instruments that do not decay 
over time and therefore are independent of instrument maturities, are 
reasonably designed to meet the margin and financial resource 
requirements of Rule 17Ad-22(b)(2-3).\8\ In addition, the Commission 
believes that the revised methodology should assist market participants 
clearing or deciding whether to clear instruments through ICC to 
estimate liquidity charges for hypothetical and current positions. This 
enhancement in transparency is consistent with Rule 17Ad-22(d)(9),\9\ 
which requires clearing agencies to establish, implement, maintain, and 
enforce policies and procedures reasonably designed to provide market 
participants with sufficient information for them to identify and 
evaluate the risks and costs associated with using its service.
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    \7\ 15 U.S.C. 78q-1.
    \8\ 17 CFR 240.17Ad-22(b)(2-3).
    \9\ 17 CFR 240.17Ad-22(d)(9).
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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 \10\ and the 
rules and regulations thereunder.
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    \10\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-ICC-2016-010) be, 
and hereby is, approved.\12\
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 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.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-26906 Filed 11-7-16; 8:45 am]
BILLING CODE 8011-01-P


