
[Federal Register Volume 81, Number 225 (Tuesday, November 22, 2016)]
[Notices]
[Pages 83906-83915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28032]



[[Page 83906]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79324; File No. SR-ICC-2016-013]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change to Amend the ICE Clear Credit Clearing 
Rules

November 16, 2016.
    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 November 4, 2016, ICE Clear Credit LLC (``ICC'') 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 ICC. 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 revise the 
ICC Rulebook (the ``Rules'') to amend the ICC Clearing Rules (``ICC 
Rules'') relating to default management, clearing house recovery and 
wind-down, and to adopt certain related default auction procedures.

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

    In its filing with the Commission, ICC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. ICC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

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

(a) Purpose
    ICC submits proposed amendments to the ICC Rules relating to 
clearing house default management, recovery and wind-down to address 
the risk of uncovered losses from a clearing participant 
(``Participant'') default or series of Participant defaults, among 
other risks. ICC also proposed to adopt two related sets of new default 
auction procedures: initial default auction procedures and secondary 
default auction procedures.\3\
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    \3\ Although the auction procedures will not be published, ICC 
will make such procedures available to all Participants, subject to 
existing confidentiality arrangements between ICC and Participants 
and the confidentiality provisions set forth in the auction 
procedures. ICC will also make such procedures available to 
customers of Participants at the request of such customers (and/or 
permit Participants to do so), subject to confidentiality 
arrangements.
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I. Summary of Proposed Amendments
    The amendments would, among other matters:
    (i) Enhance existing tools and establish new tools and procedures 
(and an order of priority for using such tools and procedures) to 
manage a Participant default or series of defaults and return to a 
matched book, specifically:
    (A) Initial default auctions, to be conducted in accordance with a 
defined set of default auction procedures;
    (B) if such initial default auctions are not fully successful, 
conducting a secondary auction of all remaining positions, to be 
conducted in accordance with a defined set of secondary auction 
procedures; and
    (C) if a secondary auction is unsuccessful, partial tear-up of 
positions of non-defaulting Participants corresponding to the 
defaulter's remaining portfolio; (Rules 20-605(d)-(f), 809)
    (ii) in connection with the new default management steps described 
in (i) above, eliminate forced allocation as a default management tool; 
(Rule 20-605(c))
    (iii) in connection with these default management steps, provide 
the ability to implement reduced gains distributions (a.k.a., variation 
margin haircutting) following exhaustion of other financial resources 
for up to five business days; (Rule 808)
    (iv) adopt new governance and consultation requirements for the use 
of these default tools and procedures; (Rule 20-605(l))
    (v) clarify in the Rules the distinction between the obligation of 
a Participant to ``replenish'' its guaranty fund contribution and its 
obligation to meet additional ``assessments'' that may be levied in 
respect of a Participant default. Consistent with the existing Rules, a 
Participant's liability for assessment contributions will remain capped 
at ``1x'' its guaranty fund contribution in respect of any single 
default; (Rule 803)
    (vi) establish a ``cooling-off period'' triggered by certain 
Participant defaults that result in guaranty fund depletion, in which 
case the aggregate liability of Participants for replenishments of the 
guaranty fund and assessments would be capped at ``3x'' its guaranty 
fund contribution for all defaults during that period; (Rule 806)
    (vii) establish a new process under which a Participant may 
withdraw from the clearing house, both in the ordinary course of 
business and during a cooling-off period, and related procedures for 
unwinding all positions of such a Participant and capping its 
continuing liability to ICC; (Rule 807)
    (viii) move ICC's current ``pro rata'' contribution to the guaranty 
fund higher in the priority waterfall of default resources; and (Rule 
802(b))
    (ix) clarify the procedures for full clearing service termination, 
where that is determined to be appropriate by ICC. (Rule 810)
    The proposed amendments are described in more detail in the 
following sections:
II. Revisions to Default Management Tools and Steps
    Rule 20-605, which specifies ICC's remedies upon a Participant 
default, has been substantially revised, both to implement the 
additional recovery tools discussed herein and to improve overall 
clarity. ICC's existing default remedies (as modified as discussed 
herein), such as initial default auctions, are referred to in the 
revised rule as ``Standard Default Management Actions''. The additional 
default management tools being adopted, such as secondary auctions, 
partial tear-up and reduced gain distributions, are referred to in the 
revised rule as ``Secondary Default Management Actions''. As discussed 
herein, additional governance and other requirements apply to Secondary 
Default Management Actions.
Overall Structure of Revised Rule 20-605
    Rule 20-605 has been restructured to reflect the distinction 
between Standard Default Management Actions and Secondary Default 
Management Actions referred to in the preceding paragraph, and to make 
certain drafting improvements. In the revised rule:
     Rules 20-605(a) and (b) set out the definition of Default 
and ICC's ability to declare a Participant in Default, which are 
substantially the same as in the current Rule.
     Rule 20-605(c) specifies the Defaulting Participant's 
resources that may be used to cover losses (and the order in which 
those resources may be applied). In substance, it is consistent with 
the current Rule.

[[Page 83907]]

     Rule 20-605(d) and (e) provide for Standard Default 
Management Actions, which are largely consistent with the current Rules 
but include the improvements to initial default auctions discussed 
below. Rule 20-605(e) also sets out the ability of ICC to defer the use 
of Standard Default Management Actions (which is largely consistent 
with the current Rules) or bypass the use of Standard Default 
Management Actions and proceed to the use of Secondary Default 
Management Actions.
     Rule 20-605(f) provides for the Secondary Default 
Management Actions, as discussed below.
     Rule 20-605(l) has been revised to impose enhanced 
governance procedures for Secondary Default Management Actions and 
certain other matters, as discussed below. As revised, Rule 20-605(l) 
specifies certain default management actions to be taken in 
consultation with the CDS Default Committee and other default 
management actions to be taken in consultation with the Risk Committee. 
The rule also requires that certain default management actions be taken 
by the ICC Board (and provides that such decisions may not be delegated 
to an officer).
Initial Default Auctions
    As revised, Rule 20-605(d)(v) provides for ICC to run one or more 
default auctions with respect to the remaining portfolio of the 
defaulting Participant.
    Default auctions are to be conducted in accordance with a new 
defined set of default auction procedures. Under those procedures, ICC 
may break the portfolio into one or more lots, each of which will be 
auctioned separately. Participants will have an obligation to bid for 
each lot in a minimum amount determined by ICC. (A Participant may 
transfer or outsource its minimum bid requirement to an affiliated 
Participant, and similarly a Participant may aggregate its own minimum 
bid requirement with that of its affiliated Participant.) A minimum bid 
requirement will not apply where the bid would be in breach of 
applicable law or the Rules (including Rules relating to entry into 
self-referencing credit default swaps) or where the relevant lot 
includes sovereign credit default swaps referencing the country in 
which the Participant (or its ultimate parent) is domiciled.
    Non-Participants may bid indirectly through a Participant. In 
addition, Non-Participants have the option to bid directly in the 
auction, provided that (i) a Participant has confirmed that it will 
clear any resulting transactions of the Non-Participant; (ii) the Non-
Participant makes a minimum deposit of US$10 million which may be 
applied by ICC in the same manner as Participants' guaranty fund 
contributions (e.g., subject to ``juniorization'' as described below); 
and (iii) the Non-Participant has entered into an agreement with ICC 
pursuant to which it agrees to the auction terms and confidentiality 
requirement in the same manner as they apply to Participants. If an 
auction for any lot or lots fails, as determined in accordance with the 
default auction procedures, ICC may determine to have a subsequent 
default auction or auctions under these auction procedures.
    The auction for each lot will be conducted as a modified Dutch 
auction, with all winning bidders paying or receiving the auction 
clearing price.
    Under Rule 802(b)(i)(B), all available default resources (both pre-
funded guaranty fund contributions of Participant, assessment 
contributions of Participant and ICC contributions to the guaranty 
fund) may be used to pay the cost of an initial default auction. 
Guaranty fund and assessment contributions of non-defaulting 
Participants are subject to ``juniorization'' and will be applied using 
a defined default auction priority set out in the default auction 
procedures based on the competitiveness of their bids. A portion of 
each Participant's guaranty fund contributions is allocated to the 
auction cost of each lot, and is further divided into three tranches. 
The lowest (and first-used) tranche consists of contributions of 
Participants that failed to bid in the required amount in the relevant 
auction. The second, or subordinate, tranche includes contributions of 
Participants whose bids were less competitive than a defined threshold 
based on the auction clearing price. The final, or senior, tranche 
includes contributions of Participants whose bids were more competitive 
than a second threshold. (For Participants who bid in the band between 
the two thresholds, their contributions will be allocated between the 
senior and subordinate tranches based on a formula.) Thus, 
contributions of Participants who fail to bid will be used before those 
who bid, and contributions of those who bid uncompetitively will be 
used before those who bid competitively. A parallel juniorization 
approach applies to the use of assessment contributions. With this 
design, ICC believes that the default auction procedures give 
Participants a strong incentive to bid competitively, with the goal of 
reaching an efficient auction clearing price that permits the clearing 
house to close out the defaulter's portfolio within the resources of 
the clearing house.
Secondary Auction
    If the initial default auctions are not fully successful in closing 
out the defaulting Participant's portfolio, ICC will proceed to use 
Secondary Default Management Actions with respect to the remaining 
portfolio. The first such step would be to conduct a secondary auction 
with respect to the defaulter's remaining portfolio under Rule 20-
605(f)(ii). (As discussed below, ICC may in certain circumstances 
invoke reduced gains distributions in connection with such an auction.)
    The secondary auction will be conducted pursuant to a separate set 
of secondary auction procedures. The secondary auction will also use a 
modified Dutch auction format, with all winning bidders paying or 
receiving the auction clearing price. ICC will endeavor to auction off 
the remaining portfolio in a single lot, although it may break the 
portfolio into separate lots if certain Participants are not able to 
bid on particular contracts or it otherwise determines that doing so 
would facilitate the auction process. A secondary auction for a lot 
will be deemed successful if it results in a price for the lot that is 
within ICC's remaining default resources, which will be allocated to 
each lot for this purpose based on the initial margin requirements for 
the lot. The secondary auction procedures contemplate that non-
Participants may bid directly in the secondary auction (without need 
for a minimum deposit, but provided that a Participant has confirmed 
that it will clear any resulting transactions of the Non-Participant), 
or may bid through a Participant.
    Under Rule 802(b)(i)(B), in the case of a secondary auction, ICC 
will apply all remaining clearing house default resources. Guaranty 
fund and assessment contributions of non-defaulting Participants, to 
the extent remaining, will be subject to ``juniorization'' in a 
secondary auction, similar to that described above for initial default 
auctions, in accordance with the secondary auction priority set forth 
in the secondary auction procedures.
    If a secondary auction is unsuccessful for any lot, ICC may run 
another secondary auction for that lot on a subsequent business day. 
ICC may repeat this process as necessary. However, pursuant to Rule 
808(e), if ICC has invoked reduced gains distributions, the last 
attempt at a secondary auction (if needed) will occur on the last day 
of the five-business-day reduced gain

[[Page 83908]]

distribution period. On that last day, the secondary auction for each 
lot will be successful if it results in a price that is within the 
default resources for such lot. ICC may also determine, for a secondary 
auction on that last day, that an auction for a lot will be partially 
filled. With respect to any lot that is not successfully auctioned, in 
whole or in part, ICC will proceed to partial tear-up under Rules 
808(e) and 809, as described below.
Partial Tear-Up
    If the secondary auction does not result in the close out of all of 
the defaulter's remaining portfolio within the clearing house's 
remaining resources, then ICC will proceed to a partial tear-up of the 
remaining positions under Rules 20-605(f)(iii) and 809. Under Rule 
809(a), ICC will be permitted to use partial tear-up only after it has 
attempted one or more initial default or secondary auctions. Pursuant 
to revised Rule 20-605(l)(iv) and (v), ICC must consult with the Risk 
Committee before invoking partial tear-up, and any decision to use 
partial tear-up must be made by the ICC Board. Rule 809(b) specifies 
certain notice requirements in connection with any partial tear-up.
    Pursuant to Rule 809(c), in a partial tear-up, ICC will terminate 
positions of non-defaulting Participants that exactly offset those in 
the defaulting Participant's remaining portfolio (i.e., positions in 
the identical contracts and in the same aggregate notional amount) 
(``Tear-Up Positions''). ICC will terminate Tear-Up Positions across 
both the house and customer origin accounts of all non-defaulting 
Participants that have such positions, on a pro rata basis. Within the 
customer origin account of a non-defaulting Participant, Tear-Up 
Positions of customers will be terminated on a pro rata basis. Where 
ICC has entered into hedging transactions relating to the defaulter's 
positions that will not themselves be subject to tear-up, ICC may offer 
to assign or transfer those transactions to Participants with related 
Tear-Up Positions.
    ICC will determine a termination price for all Tear-Up Positions, 
in accordance with Rule 809(e) based on the last established end-of-day 
mark-to-market settlement price. Under Rules 809(b)(iv) and (d), tear-
up will occur contemporaneously with the determination of such price 
(at 5 p.m., New York time). Because the termination price will equal 
the current mark-to-market value as determined pursuant to the ICC end-
of-day settlement price process (and will be satisfied by application 
of mark-to-market margin posted (or that would have been posted but for 
reduced gain distribution) under Rule 809(d)), no additional amount 
will be owed by ICC in connection with the tear-up.
Reduced Gains Distributions
    As an additional Secondary Default Management Action, where ICC has 
exhausted its remaining available default resources (including 
assessment contributions), ICC may invoke reduced gain distributions 
under Rules 20-605(f)(i) and 808 for up to five consecutive business 
days. Reduced gain distribution will allow ICC to reduce payment of 
variation, or mark-to-market, gains that would otherwise be owed to 
Participants, as it attempts a secondary auction or conducts a partial 
tear-up. Rule 808(b) specified certain conditions to the commencement 
of reduced gain distribution, including that ICC has exhausted all 
other available default resources and has determined that reduced gain 
distribution is appropriate in connection with a secondary auction or 
partial tear-up. Pursuant to revised Rule 20-605(l)(iv) and (v), ICC 
must consult with the Risk Committee before using reduced gain 
distribution, and any decision to use reduced gain distribution must be 
made by the ICC Board. Rule 808(c) specifies certain notice 
requirements in connection with reduced gain distributions.\4\
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    \4\ An error in the description of rule 808(c) was corrected by 
SEC staff and confirmed by ICC counsel via email on November 15, 
2016.
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    Pursuant to Rule 808(d), at the end of each day in the five 
business day period, ICC must determine whether it expects that there 
will be favorable conditions for completing a successful secondary 
auction. If so, ICC may continue the reduced gain distribution for that 
day.
    Under Rule 808(e), if ICC conducts a successful secondary auction 
on any day, any reduced gain distribution period that is in effect will 
end. If ICC has been unable to conduct a successful secondary auction 
by the end of the five business day reduced gain distribution period, 
ICC will proceed to conduct a partial tear-up under Rule 809 as of the 
close of business on such fifth business day.
    Pursuant to Rule 808(f) and (h), if reduced gain distribution 
applies on any day, the net amount owed on such day to each Participant 
that is deemed to be a ``cash gainer'' in respect of its house or 
customer origin account (i.e., a Participant that would otherwise be 
entitled to receive mark-to-market margin or other payments in respect 
of such account) will be subject to a percentage haircut. Haircuts are 
determined independently on each day of reduced gain distribution. 
Haircuts are applied separately for the house and customer origin 
accounts. Under Rule 808(p), within the customer origin account, 
haircuts are applied on a gross basis across the different customer 
portfolios, such that each customer portfolio receives the same haircut 
percentage. For each day of reduced gain distribution, ICC will notify 
Participants and the market more generally of the amount of the 
reduction, through a circular made available in the ordinary course on 
its Web site and through electronic distribution, promptly following 
the close of business on such day and completion of the relevant 
calculations as of the close of business (which is expected to be at 
approximately 7:30 p.m. New York time), in accordance with Rule 808(c).
    Following the conclusion of the closing-out process for a default, 
ICC will apply any recoveries from the defaulting Participant to make 
payments to non-defaulting Participants in an amount equal to the 
aggregate net amount of haircuts made during the period of reduced gain 
distributions, pursuant to Rule 808(m).
Removal of Forced Allocation as a Default Management Tool
    Existing Rule 20-605(c)(vii), which allowed ICC to make a forced 
allocation of positions in the defaulter's portfolio, has been removed 
in light of the new default management tools described above.
Governance for Use [sic] Default Management Tools
    The proposed amendments add new governance requirements around the 
ICC's use of the revised default management tools.
    Under new Rule 20-605(l)(iii), ICC will consult with its CDS 
Default Committee with respect to establishing the terms for default 
auctions and secondary auctions, including defining different lots for 
default auctions. In the context of an initial auction, ICC will also 
consult with the CDS Default Committee as to whether to hold additional 
such auctions and/or to accept a partial fill of any lot in such an 
auction. Under existing Rule 20-617, CDS Default Committee members 
consist of experienced trading personnel at Participants that serve on 
the CDS Default Committee on a rotating basis and who are seconded to 
ICC to assist with default management. Under revised Rule 20-617(g), 
and consistent

[[Page 83909]]

with current practice, seconded committee members are required to act 
in the best interests of ICE Clear Credit (rather than in the interests 
of their Participant firm). Members of the CDS Default Committee are 
expected to work together with, and under the supervision of, the ICC 
risk department, and are also supported by legal, compliance and other 
relevant ICC personnel. Ultimate decisions as to matters subject to 
consultation with the CDS Default Committee will be made by ICC 
management.
    Under new Rule 20-605(l)(iv), ICC will consult with its Risk 
Committee, to the extent practicable, with respect to key decisions 
involving Secondary Default Management Actions, including whether to 
hold a secondary auction, invoke reduced gains distribution, implement 
a partial tear-up and/or terminate the clearing service. The amendments 
also establish notice and similar procedures for Risk Committee 
consultation in this context, and address circumstances in which such 
consultation is impracticable (in which case ICC may act without prior 
consultation but must generally consult as soon as is practicable). In 
particular, under the ICC Code of Business Conduct and Ethics for 
Committee Members,\5\ the Risk Committee is charged with acting in the 
interests of the clearing house, rather than the interests of 
individual members (or the Participants they may represent). Consistent 
with its current practice, the Risk Committee would be provided with 
detailed, confidential information concerning the proposed actions to 
be taken. Under Chapter 5 of the Rules and the Charter of the Risk 
Committee,\6\ the committee is to have the resources and authority 
appropriate to discharge its function. Under the Rules, the role of the 
Risk Committee is advisory, and accordingly, the final decision with 
respect to Secondary Default Management Actions (like other actions) 
will rest with the ICC Board as discussed below. In practice, ICC 
management and the ICC Board have worked collaboratively with the Risk 
Committee, and there is no history of the ICC Board acting over the 
objection of the Risk Committee. As discussed below, Participants and 
their interests are also significantly represented on the ICC Board.
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    \5\ An error in the title of ICC Code of Business Conduct and 
Ethics for Committee Members was corrected by SEC staff and 
confirmed by ICC counsel via email on November 9, 2016.
    \6\ An error in the title of Rules and the Charter of the Board 
of Managers of ICC was corrected by SEC staff and confirmed by ICC 
counsel via email on November 9, 2016.
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    In addition, new Rule 20-605(l)(v) provides that certain key 
decisions involving Secondary Default Management Actions must be made 
by majority vote of the ICC Board (and may not be delegated to an 
officer). These include whether to hold a secondary auction, invoke 
reduced gains distribution, implement a partial tear-up and/or 
terminate the clearing service. Under the existing constitutive 
documents of the clearing house, including the Board charter and 
Governance Playbook, a majority of the ICC Board is required to be 
independent of ICC management. In addition, under the Board charter, 
four of the eleven members of the Board are designated by the Risk 
Committee (two of which are independent of Participants and two of 
which need not be so independent (and thus may be representatives of 
Participants)).
III. Clarifications of Guaranty Fund Requirements and Uses
    Various clarifications and conforming changes have been made to the 
provisions of Rules 801 and 802, which address the contributions to and 
uses of the guaranty fund. Provisions in Rules 803 and 804 have also 
been moved and reorganized. These changes include the following:
     The changes clarify the distinction between the obligation 
of a Participant to ``replenish'' its guaranty fund contribution (Rule 
803(a)) and its obligation to make ``assessment contributions'' (Rule 
803(b)). These clarifications do not change the substance of existing 
requirements. For this purpose, an ``assessment'' provides additional 
resources beyond funded resources to cover losses from a particular 
default that has already occurred. By contrast, a ``replenishment'' is 
designed to restore the required level of the guaranty fund following 
application thereof, and thus replenishments are to be used to cover 
future potential defaults.
     Rule 803(b) also permits assessments to be called in 
anticipation of any charge against the guaranty fund following a 
default, rather than only after such a charge.
     A parallel distinction has been made with respect to ICC's 
contribution to the guaranty fund between required replenishments and 
additional contributions where assessments have been levied on 
Participants (subject to a similar 1x limit per default (which is $25 
million), and an aggregate 3x limit for replenishments and assessments 
in a cooling-off period (which is $75 million)). (Rule 801(b)).
     ICC's current ``pro rata'' contribution to the guaranty 
fund has been moved higher in the priority waterfall, such that it will 
be used prior to the application of guaranty fund contributions of non-
defaulting Participants. Similarly, additional ICC contributions to the 
guaranty fund where assessments have been levied on Participants will 
be applied before such assessments. (Rule 801(b))
     Rule 801(a) has been revised generally to conform to the 
revised assessment limitations set forth in the other rules in Chapter 
8.
     Rules 802(a) and (c), which address the allocation of 
recoveries from a defaulting Participant, have been simplified and 
revised to conform to the other changes in the default waterfall.
     Rule 802(c) has also been revised to state ICC's 
obligations with respect to seeking recoveries from a defaulting 
Participant. Specifically, ICC will exercise the same degree of care in 
enforcement and collection of any claims against the defaulter as it 
exercises with respect to its own assets that are not subject to 
allocation to Participants and others.
IV. Cooling-Off Period
    New Rule 806 implements the ``cooling-off period'' concept. 
(Related definitions, including for ``cooling-off period,'' ``cooling-
off period trigger event,'' ``cooling-off termination period'' and 
``sequential guaranty fund depletion,'' have been included in Rule 
102.) A ``cooling-off period'' is triggered by certain calls for 
assessments or by sequential guaranty fund depletion within a 30 
calendar day period. Pursuant to Rule 806(b), liability of Participants 
for assessments as a result of the default or defaults that triggered 
the cooling-off period or that occur during the cooling-off period 
remains capped at ``1x'' the required guaranty fund contribution per 
default. In addition, the total amount of replenishments and assessment 
contributions during the cooling-off period cannot exceed three times 
the required guaranty fund contribution, regardless of the number of 
defaults during the period. The foregoing caps are based on a 
Participant's individual guaranty fund contribution immediately prior 
to the default that triggered the cooling-off period. Under Rule 
806(e), Participants may also be required to provide additional initial 
margin during the period, which will facilitate ICC's ability to 
continue to satisfy its regulatory minimum financial resources 
requirements.

[[Page 83910]]

V. Participant Withdrawal
    New procedures for the withdrawal of Participants are added in 
revisions to Rule 207 and new Rule 807. These apply both to ordinary 
course terminations outside of a default scenario and termination 
during a cooling-off period. Under Rule 807(a), Participants may 
withdraw from ICC during a cooling-off period by providing an 
irrevocable notice of withdrawal in the first 10 business days of the 
period (subject to extension in certain cases if the cooling-off period 
is extended). Participants may withdraw from ICC at other times by 
notice to ICC under Rule 207. In either case, Participants must close 
out all outstanding positions by a specified deadline, generally within 
20 to 30 business days following notice of withdrawal. Withdrawal is 
not effective, pursuant to Rule 807, until the Participant has closed 
out all outstanding positions and satisfied any related obligations, 
and a withdrawing Participant remains liable under Rule 807(b) with 
respect to charges and assessments resulting from defaults that occur 
before such time. Under Rule 807(f), a Participant that seeks to 
withdraw other than during the first 10 business days of a cooling-off 
period may, at the direction of ICC, be required to make a deposit of 
up to three times its required guaranty fund contribution (including 
any Specific WWR Guaranty Fund Contribution). Such a deposit would not 
impose new liabilities on the Participant, but provide assurance that 
the withdrawing Participant will continue to meet its obligations in 
respect of defaults and potential defaults before its withdrawal is 
effective. It thus reduces the potentially destabilizing effect that 
Participant withdrawal (or a series of Participant withdrawals) could 
have on the clearing house during a stressed situation. Rule 807(a) 
also specifies the timing for the return of guaranty fund contributions 
to a withdrawing Participant. Certain related definitions (including 
``termination close-out deadline date'' and ``termination date'') have 
been added in Rule 102.
VI. Clearing Service Termination
    New Rule 810 revises and replaces current Rule 804, and addresses 
the procedures for full clearing service termination. As under current 
Rule 804, full termination will occur following an ICC default as 
provided in Rule 805, and in circumstances where termination is 
otherwise determined to be appropriate by the ICC Board in consultation 
with the Risk Committee. In the latter case, pursuant to revised Rule 
20-605(l)(iv) and (v), ICC must consult with the Risk Committee before 
terminating the clearing service, and any decision to do so must be 
made by the ICC Board.
    Rule 810(b) specifies more precisely the time at which termination 
will occur, which, in the case of an ICC default, will be 5 p.m. New 
York time on the second business day following the default. In the case 
of other termination scenarios, termination will occur at the time 
specified by ICC in the circular, which must be within one business day 
of the issuance of the circular. Rule 810(c) specifies notice 
requirements for full termination. Rule 810(d) establishes a procedure 
for determination of the termination price. ICC will determine a 
termination price for all positions (based on the last established 
mark-to-market price, if available, a final price submission process, 
or certain other specified objective sources). Rule 810(e) clarifies 
the procedures for determining a net amount owed to or by each 
Participant (separately for its house and customer accounts) in 
connection with the termination. Rule 810(e) in particular clarifies 
the treatment of mark-to-market margin and reduced gain distributions 
in the calculation of net amounts owed. ICC will use all available 
default resources and net payments owed by Participants to make net 
payments owed to Participants, and in the event of a shortfall, 
available amounts will be applied on a pro rata basis.
VII. Additional Changes
    ICC has proposed certain additional changes to the Rules that are 
generally in the nature of drafting improvements, clarifications and 
conforming changes. In particular, ICC has revised Rule 102 to include, 
for clarity, additional cross-references to various terms that are 
defined in other parts of the Rules. Similarly, updated definitions and 
cross-references have been added in new Rule 700 for Chapter 7 of the 
Rules, in Rule 901 for Chapter 9 of the Rules, in new Rule 2100 for 
Chapter 21 of the Rules, in Rule 2200 for Chapter 22 of the Rules,\7\ 
and in Rule 26E-102 for Chapter 26E of the Rules. Rule 102 has also 
been revised to add new defined terms that are used in the rule changes 
discussed above, such as those relating to cooling-off period and the 
distinction between initial phase default resources (generally 
available for standard default management actions) and final phase 
default resources (generally available for secondary default management 
actions).
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    \7\ An error in the citation was corrected by SEC staff and 
confirmed by ICC counsel via email on November 9, 2016.
---------------------------------------------------------------------------

    Certain other conforming changes have been made throughout the 
Rules to reflect the new default management tools and provisions 
discussed above, including in Rules 207, 209 and 502. In Rule 312, ICC 
has clarified its liability for certain actions in connection with the 
default management process, and made certain other conforming changes. 
In Rule 406(g), ICC has clarified its liability for certain investments 
of customer funds, consistent with Commodity Futures Trading Commission 
(``CFTC'') requirements. In Rule 601, ICC has clarified that its 
emergency authority does not override the limitations on Participant 
liability in Chapter 8 of the Rules, or permit partial tear-up of 
positions except as otherwise provided in the Rules. Certain other 
typographical and cross-reference corrections have been made throughout 
the Rules. Certain incorrect references in the Rules to the title of 
``chief executive officer'' have been removed, in light of the fact 
that the senior ICC officer is titled ``president.''
(b) Statutory Basis
    ICC believes that the proposed rule changes are consistent with the 
requirements of Section 17A of the Act \8\ and the regulations 
thereunder applicable to it, including the standards under Rule 17Ad-
22,\9\ and in particular are consistent with the prompt and accurate 
clearance and settlement of securities transactions and derivative 
agreements, contracts and transactions cleared by ICC, the safeguarding 
of securities and funds in the custody or control of ICC or for which 
it is responsible, and the protection of investors and the public 
interest, within the meaning of Section 17A(b)(3)(F) of the Act.\10\ As 
discussed herein, the proposed rule changes are principally designed to 
address the risks posed to ICC by a significant default by one or more 
Participants, as well as certain other loss events. Although ICC has 
established the level of its required financial resources in order to 
cover defaults in extreme but plausible market conditions, consistent 
with regulatory requirements, ICC nonetheless faces the risk of a loss 
scenario (however implausible) that exceeds such conditions (as a 
result of which its financial resources may not be sufficient to cover 
the loss in full). The proposed rule changes are intended to enhance 
the ability of ICC to manage the risk of

[[Page 83911]]

such a default. ICC does not propose to change its existing risk 
methodology or margin framework, which are its initial lines of defense 
against losses from Participant default. However, as discussed herein, 
the amendments provide additional default tools and procedures, 
including initial and secondary auction procedures and partial tear-up, 
that are designed to permit ICC to restore a matched book and limit its 
exposure to potential losses from a Participant default in extreme 
scenarios that may not be able to be addressed by standard risk 
management and default procedures. The enhanced procedures for full 
termination also serve as a means of addressing general business risk, 
operational risk and other risks that may otherwise threaten the 
viability of the clearing house. Moreover, the amendments clarify the 
ability of Participants to withdraw from the clearing house (and 
specify the responsibilities and liabilities of the clearing house and 
the Participant in such situations.)
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78q-1.
    \9\ 17 CFR 240.17Ad-22.
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In the proposed rule changes, ICC has sought to develop default 
management tools that permit and incentivize involvement of both 
Participants and customers of Participants in a default management 
scenario. For example, the new default auction procedures are designed 
to incentivize competitive bidding through the possibility of 
juniorization of guaranty fund and assessment contributions. The 
auction procedures further contemplate that customers may participate 
directly in default auctions at their election (subject to making the 
required clearing deposit), or alternatively may participate through a 
Participant (without the need for such a deposit). ICE Clear Credit 
believes that such participation will lead to more effective and 
efficient auctions, and give customers of Participants the opportunity 
to protect against the possibility of partial tear-up (to the extent 
the consequences thereof are adverse to them) and reduced gain 
distribution through bidding competitively in the auction.
    The amendments also more clearly allocate certain losses as among 
ICC, Participants and their customers. The amendments are designed to 
plan for a remote and unprecedented, but potentially extreme, type of 
loss event--a loss from one or more Participant defaults that exhausts 
funded resources and requires additional recovery or wind-down steps. 
Such losses will necessarily and adversely affect some or all 
Participants, customers or other stakeholders. In ICE Clear Credit's 
view, its current Rules, with the possibility of forced allocation, 
could force certain risks of loss only on Participants, in a way that 
is unpredictable and difficult to quantify in advance, and that 
Participants have strongly stated is undesirable from their 
perspective. ICE Clear Credit believes that the amendments take a more 
balanced approach that distributes potential losses more broadly, to 
both Participants and customers that would otherwise have potential 
gains. Specifically, in the event of a partial tear-up, all market 
participants (both Participants and customers) holding the relevant 
positions would be affected on a pro rata basis. Similarly, losses 
arising from reduced gain distribution (which would be invoked only 
following exhaustion of all other resources) would be shared on a pro 
rata basis by both Participants and customers with gain positions. In 
the event of a full termination, any shortfall in resources would 
similarly be shared on a pro rata basis across all Participants and 
their customers. ICE Clear Credit also believes that the amendments 
provide greater certainty as to the consequences of default and the 
resources that would be available to support clearing operations, to 
allow stakeholders to evaluate more fully the risks and benefits of 
clearing.
    In light of extensive discussions with Participants, customers and 
others, and the views expressed by industry groups and others, ICE 
Clear Credit believes that the amendments provide an appropriate and 
equitable method to allocate the loss from an extreme default scenario 
to both Participants and their customers on the basis of their 
positions. ICE Clear Credit further believes that the approach taken 
will facilitate the ability of the clearing house to fully allocate the 
loss so that it can continue clearing operations and withstand and/or 
recover from extreme loss events. The amendments therefore further the 
prompt and accurate clearance and settlement of cleared transactions. 
The amendments will also support the stability of the clearing system, 
as part of the broader financial system, and will promote the 
protection of market participants from the risk of default by another 
market participant and the public interest more generally. In light of 
the importance of clearing houses to the financial markets they serve, 
the policy in favor of clearing of financial transactions as set out in 
the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the 
potential adverse consequences of a clearing house failure for the 
financial markets, the amendments support the public interest.
    In addition to the Act, the amendments are designed to satisfy the 
requirements of CFTC Rules 39.35 and 39.39 applicable to ICC as a 
derivatives clearing organization designated as systemically important 
under Title VIII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, and to be consistent with relevant international 
standards, including the Principles of Financial Market Infrastructure 
developed by CPMI-IOSCO.
    The amendments will also satisfy the specific relevant requirements 
of Rule 17Ad-22,\11\ as set forth in the following discussion:
---------------------------------------------------------------------------

    \11\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

    Financial Resources. ICC's funded margin and guaranty fund 
resources are currently designed to be sufficient to meet ICC's 
financial obligations to clearing members notwithstanding a default by 
the two clearing members creating the largest combined loss, in extreme 
but plausible market conditions, consistent with regulatory 
requirements. ICC does not propose to reduce such funded resources. The 
amendments are intended to enhance and provide greater certainty as to 
the additional resources, beyond the funded margin and guaranty fund 
resources, that will be available to support clearing operations in 
more extreme Participant default scenarios. ICC also proposes to 
maintain the current level of its own contributions to default 
resources, but to move those resources higher in the default waterfall 
(so that they are used prior to the guaranty fund contributions of non-
defaulting Participants) and thus provide additional protection for the 
contributions of non-defaulting Participants.
    As set forth above, the amendments would maintain the existing 
``1x'' limitation on assessments per default, and impose a new 
limitation on guaranty fund replenishments and assessments during a 
cooling-off period resulting from guaranty fund depletion. The 
amendments will require that Participants continue to replenish and 
meet assessment obligations during the cooling-off period, subject to a 
3x limit. In addition, in the event the 3x limit is reached, the 
amended rules allow ICC to call on Participants for additional initial 
margin in order to ensure that it maintains sufficient resources to 
comply with applicable minimum regulatory financial resources 
requirements. In ICC's view, these changes provide an appropriate 
balance between several competing interests of the clearing house and 
Participants. Although the amendments may in theory limit the maximum 
resources available to the

[[Page 83912]]

clearing house (as compared to the absence of a cap), the changes will 
provide greater certainty for Participants as to their maximum 
liability with respect to the guaranty fund in the event of defaults 
(and thus their maximum amount of mutualized risk), in order to 
facilitate their own risk management, regulatory and capital 
considerations. This greater certainty is in turn intended to help 
stabilize the clearing house during a period of significant stress, 
including where there are multiple defaults. In particular, a cooling-
off period and limit on assessments may reduce the risk of cascading 
defaults, where the financial demands placed on non-defaulting 
Participants for repeated assessments or replenishments could cause 
such Participants to themselves experience financial stress or even 
default, which could make the default management process more 
difficult. The cooling-off period thus reduces the potential 
procyclical effect of requiring additional mutualized guaranty fund 
contributions in times of stress. The period is designed to give the 
clearing house time to work out the default without exacerbating these 
stresses, while also allowing the clearing house and Participants time 
to assess whether the defaults will be able to be resolved and normal 
clearing will be able to resume.
    In addition, the amendments will ensure that ICC maintains 
sufficient resources to continue operations in compliance with minimum 
regulatory financial resources requirements, either through 
replenishment of the guaranty fund in the normal course, or in an 
extreme situation where the 3x cap is reached, by providing ICC the 
ability to call for additional initial margin. ICC recognizes that the 
ability to call for such additional initial margin, particularly in 
times of stress, may have a potential procyclical impact and potential 
liquidity impact on Participants and their customers that is greater 
than guaranty fund replenishment, because initial margin is not subject 
to mutualization. As a result, the amount of additional initial margin 
required may exceed the amount of guaranty fund replenishment that 
would be required in the absence of the 3X cap. At the same time, ICC 
believes that these risks are limited to a particular remote loss 
scenario, and are mitigated by certain factors. ICC expects to limit 
the additional margin to the amount necessary to maintain minimum 
regulatory financial resources compliance, which may be less than the 
amount ICC would otherwise require under its guaranty fund methodology. 
ICC also expects that over the course of a cooling-off period, 
aggregate potential stress losses, and thus the need for additional 
financial resources, will generally decrease. In particular, 
Participants (and their customers) have the opportunity during the 
cooling-off period to reduce or rebalance the risk in their own 
portfolios, and thus mitigate potential stress loss and exposure to 
initial margin increases. Participants and their customers can also 
participate in default management (through participation in auctions), 
which will help them reduce their own risk profile. Greater involvement 
in default management may enhance competitive bidding, which in turn 
may reduce the likelihood that the 3X cap will be reached. In addition, 
and most importantly, additional initial margin posted by Participants 
is not subject to mutualization and cannot be used to cover defaults of 
other Participants. As a result, while Participants may be required to 
post more funds as additional initial margin than in a replenishment of 
a mutualized guaranty fund, the risk of loss to Participants of those 
additional margin funds is substantially less than for guaranty fund 
replenishment. Based on discussions with its Participants, ICC 
understands that for these reasons Participants prefer the use of 
additional initial margin in this remote, but potentially highly 
stressed scenario, notwithstanding the potentially higher procyclical 
or liquidity effect.
    The clearing house has set the length of the cooling-off period at 
a duration of 30 calendar days, which is intended to be long enough to 
provide the clearing house and Participants with a measure of stability 
and predictability as to the use of guaranty fund resources and avoid 
incentivizing Participants to withdraw from the clearing house 
following a default. This period is consistent with the timeframe for 
the normal, periodic recalculation of ICC's guaranty fund under Rule 
801 (which is done on a monthly basis), a period that ICC has found 
appropriately balances stable guaranty fund requirements with the 
ability to make changes as necessary. ICC also believes, based on its 
analysis of the OTC derivatives markets and historical default 
scenarios involving a large OTC market participant, that 30 days has 
historically been an adequate period for the market to stabilize 
following a significant default event. (This was, for example, observed 
in the interest rate swap market following the Lehman insolvency.) ICC 
similarly believes that in the context of a cooling-off period, 30 
calendar days is an appropriate time horizon to seek to stabilize the 
clearing house, in light of the products cleared by ICC, and reduce 
stress on non-defaulting Participants (and their customers) as the 
clearing house conducts its default management. It provides a minimum 
period for Participants (and their customers) to reduce or rebalance 
their positions in an orderly manner to facilitate continued clearing 
operations once the cooling-off period ends. The 30-day cooling-off 
period will thus help provide stability for the market and 
predictability for Participants and their customers as they seek to 
manage their own risks. In ICC's view, this may increase the 
willingness and ability of Participants and their customers to 
participate in a default auction and absorb the defaulter's positions 
through the default management process.
    A shorter cooling-off period, in ICC's view, may result in greater 
potential assessment and replenishment liability for Participants, 
which in turn may increase the risk of a default (or series of 
defaults) caused by an inability of Participants to meet such 
liabilities on a timely basis. A shorter period may also give non-
defaulting Participants an incentive to withdraw quickly from the 
clearing house following a default. That may destabilize the clearing 
house, make it more difficult to resolve the default and achieve 
recovery following default, and reduce confidence in the ability of the 
clearing house to resume non-distressed clearing operations going 
forward. A longer cooling-off period may thus help stabilize the 
clearing system during the default management process. On the other 
hand, a longer cooling-off period may make it more likely that the 3X 
cap will be reached, which could in turn increase the stress on 
clearing house resources and make it more likely that ICC would need to 
call additional margin from Participants in order to meet ICC's 
regulatory financial resources requirements, which can itself adversely 
affect Participants. In ICC's view, the 30-day cooling-off period and 
assessment limits balance the interests of both the clearing house and 
Participants and in the aggregate enhances the likelihood that the 
clearing house can withstand a default.
    In ICC's view, the amendments are thus consistent with the 
financial resources requirements of Rule 17Ad-22(b)(2)-(3).\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 240.17Ad-22(b)(2)-(3)
---------------------------------------------------------------------------

    Settlement Process and Reduced Gain Distribution. The amendments 
contemplate that as a Secondary Default Management Action, in extreme 
cases,

[[Page 83913]]

ICC may implement reduced gains distributions for up to five business 
days where it has exhausted all other financial resources (including 
assessment contributions). In such case, ICC will continue to collect 
mark-to-market margin owed to it from all non-defaulting Participants, 
but will reduce outbound payments of mark-to-market margin owed to 
Participants to reflect available resources. ICC will calculate the 
haircut amount on a daily basis for each day of reduced gain 
distribution, without consideration of reductions on prior days. As a 
result, settlement on any day of reduced gain distributions will be 
final, as ICC does not have any ability to reverse or unwind the 
settlement. As a result, in ICC's view, the amendments are consistent 
with the requirements of requirements of Rule 17Ad-22(d)(5), (12) and 
(15) \13\ as to the finality and accuracy of its daily settlement 
process.
---------------------------------------------------------------------------

    \13\ 17 CFR 240.17Ad-22(d)(5), (12) and (15).
---------------------------------------------------------------------------

    Default Procedures. The amendments clarify and augment the Rules 
and procedures relating to default management, with the goal of 
enhancing the ability of the clearing house to withstand extreme 
default events. The amendments more clearly distinguish between 
standard default management events, largely covered by its existing 
default rules and procedures, and more extreme default management 
scenarios, for which recovery tools may be appropriate. The amendments 
include a new set of initial auction procedures, designed to facilitate 
liquidation of the defaulter's portfolio through a multi-lot modified 
Dutch auction. The auction procedures require participation of all 
Participants (unless outsourced to another Participant in accordance 
with the Rules), and permit direct participation in the auction by 
customers as well as Participants. The procedures also provide 
incentives for competitive bidding through juniorization of guaranty 
fund and assessment contributions, as discussed above. The amendments 
further include a set of secondary auction procedures, intended to 
provide for an effective final auction of the entire remaining 
portfolio, prior to the exercise of recovery tools such as tear-up.
    Following extensive consultation with Participants, ICE Clear 
Credit is proposing to remove the existing tool of forced allocation, 
which may result in unpredictable and unquantifiable liability for 
Participants. Instead, ICE Clear Credit will have the option to invoke 
a partial tear-up of positions to restore a matched book in the event 
that it is unable to auction the defaulter's remaining portfolio. 
Partial tear-up, if used, will occur at the most recent mark-to-market 
settlement price determined by ICC, contemporaneously with such 
determination. As a result, partial tear-up will not result in 
additional loss to Participants as compared to the most recent mark to 
market settlement (and if reduced gain distribution is invoked, partial 
tear-up will not entail additional loss beyond that resulting from such 
reduced gain distribution). ICE Clear Credit believes that this revised 
set of tools will maximize the clearing house's ability to efficiently, 
fairly and safely manage extreme default events. The amendments further 
provide for the allocation of losses that exceed funded resources, 
through assessments and replenishments to the guaranty fund, as 
described herein, and the use of reduced gains distributions when 
necessary, following the exhaustion of all other resources. The 
amendments thus are designed to permit ICC to fully allocate losses 
arising from default by one or more Participants, with the goal of 
permitting the clearing house to resume normal operations.
    As a result, in ICE Clear Credit's view, the amendments will allow 
it to take timely action to contain losses and liquidity pressures and 
to continue meeting its obligations in the event of clearing member 
insolvencies or defaults, in accordance with Rule 17Ad-22(d)(11).\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 240.17Ad-22(d)(11).
---------------------------------------------------------------------------

    Operational Resources. ICC believes that its operational systems 
and capabilities are sufficient to support the proposed rule changes 
and new default management tools that would be implemented under those 
amendments. ICC contemplates testing of the use of the new tools and 
procedures as part of its regular default management exercises, in 
order to identify and manage any related operational risks. ICC has 
developed various automated systems relating to the default management 
process, and has done significant preparatory work to incorporate the 
new recovery tools and procedures in those systems. Once the rule 
amendments are effective, ICC will complete the incorporation of those 
tools into its systems, and test such systems as part of its regular 
system testing process. The results of such testing will be shared with 
appropriate ICC risk and governance committees and regulators, 
consistent with the treatment of the results of other default 
management testing. These arrangements will address relevant sources of 
operational risk in the default management process and are designed to 
minimize such risks, within the meaning of Rule 17Ad-22(d)(4).\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 240.17Ad-22(d)(4).
---------------------------------------------------------------------------

    Well-Founded Legal Framework. Rule 17Ad-22(d)(1) requires that a 
clearing agency have rules and policies reasonably designed to provide 
a well-founded, transparent and enforceable legal framework for each 
aspect of its activities in all relevant jurisdictions. ICC believes 
that the amendments will provide a clearer and more transparent set of 
default management procedures for addressing extreme loss events, and 
thus provide greater certainty to the clearing house, Participants and 
other market participants as to the various tools available to the 
clearing house and the potential liabilities of Participants and others 
in such events. ICC further believes that the amendments will permit 
the clearing house to conduct an orderly recovery or, if necessary, 
wind-down process, in accordance with the requirements of applicable 
regulations. ICC has in addition considered and obtained legal advice, 
as appropriate, as to the enforceability of the amendments. As a 
result, ICC believes the amendments are consistent with the 
requirements of Rule 17Ad-22(d)(1).
    Governance Arrangements. Rule 17Ad-22(d)(8) requires that a 
clearing agency have governance arrangements that are clear and 
transparent to fulfill the public interest requirements in Section 17A 
of the Act, to support the objectives of owners and participants, and 
to promote the effectiveness of the clearing agency's risk management 
procedures. ICE Clear Credit believes the amendments discussed herein 
satisfy these requirements. The amendments are designed to address 
extreme loss scenarios resulting from Participant default, and provide 
an orderly means for recovery or wind-down of clearing operations if 
necessary. The amendments also clarify the procedures for clearing 
service termination, which is designed to address other extreme loss 
scenarios that may necessitate wind-down of operations, to provide 
greater certainty as to the circumstances under which such termination 
may occur and the timing and price of any such termination, among other 
matters. The amendments set out in detail the responsibilities of ICE 
Clear Credit management, the ICE Clear Credit Board, the ICC Risk 
Committee (consisting of representatives of Participants) and the ICC 
CDS Default Committee (consisting of trading personnel seconded from 
Participants to assist with default management) for key

[[Page 83914]]

decisions relating to the use of recovery and wind-down tools. As 
discussed above, the revised Rules build on the existing procedures 
(and historical practice) for consultation with the Risk Committee and 
CDS Default Committee, and provide adequate resources for those 
committees to perform their functions. They also reflect the 
collaborative relationship between the Board and Risk Committee, and 
the independence of the Board and the significant participation of 
Participants on the Board. In taking decisions concerning these 
matters, the Rules, the ICC mission statement, and the relevant 
governance committee charters will require the Board to take into 
consideration both the interests of Participants, customers and other 
stakeholders and the broader goal of providing safe and sound central 
counterparty services to reduce systemic risk in an efficient and 
compliant manner, consistent with the requirements of the Act and Rule 
17Ad-22(d)(8). These governance procedures have been tailored to 
provide for meaningful consultation with relevant stakeholders while 
preserving the ability of the clearing house to act decisively in the 
exigent and likely unpredictable circumstances of a major Participant 
default or defaults or other significant loss events.
    As noted above, key decisions involving the use of recovery or 
wind-down tools (including the use of partial tear-up, reduced gain 
distribution or full clearing service termination) are subject to 
additional governance requirements that require consultation with the 
Risk Committee and further require that decisions must be made by the 
Board (and cannot be delegated to an officer). A majority of the 
members of the Board are independent of ICE management and the ICE 
parent. The interests of Participants are clearly taken into 
consideration, through both the recommendations of the Risk Committee 
and the participation of Participant representatives on the Board 
itself. ICC regularly also takes into account the feedback of customers 
of Participants, both through its buy-side advisory committee and 
otherwise. Although ICC does not provide for direct customer 
participation in governance (unlike in the case of Participants), ICC 
believes that approach is appropriate in light of the particular risks 
faced by Participants (in light of their financial responsibilities to 
the clearing house) and the role Participants are required to play in 
the default management process.
    For the foregoing reasons, ICE Clear Credit believes that the 
proposed rule changes are consistent with the requirements of Section 
17A of the Act \16\ and the regulations thereunder applicable to it, 
including the standards under Rule 17Ad-22.\17\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78q-1.
    \17\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

(B) Self-Regulatory Organization's Statement on Burden on Competition

    ICC does not believe the proposed amendments would have any impact, 
or impose any burden, on competition not necessary or appropriate in 
furtherance of the purpose of the Act. The amendments will apply 
uniformly to all Participants (and customers of Participants). ICC does 
not anticipate that the amendments would affect the day-to-day 
operation of the clearing house under normal circumstances, or even in 
typical default management scenarios. ICC is not proposing to alter the 
standards or requirements for becoming or remaining a Participant, or 
otherwise using the clearing services it provides. ICC also does not 
propose to change its methodology for calculation of margin or guaranty 
fund contributions. The amendments are intended to address instead the 
risk of extreme loss events, and provide the clearing house additional 
tools and resources to withstand and/or recover from extreme loss 
events, so that it can restore a matched book, fully allocate any 
losses, and resume normal clearing operations. The amendments are 
consistent with requirements for clearing organizations to implement 
such procedures under applicable law and regulation, and relevant 
international standards. As a result, ICC does not believe the 
amendments will adversely affect the ability of Participants or other 
market participants to continue to clear CDS contracts. ICC also does 
not believe the enhancements will limit the availability of clearing in 
CDS products for Participants or their customers or otherwise limit 
market participants' choices for selecting clearing services in CDS.
    In the case of an extreme default scenario, as discussed herein, 
the proposed rules and default management procedures may impose certain 
costs and losses on Participants or their customers, as well as ICC. 
ICC has sought to appropriately balance the allocation of such costs 
and losses, with appropriate techniques (such as competitive auctions) 
through which Participants and customers can mitigate the risks of such 
losses. The amendments also remove the tool of forced allocation, which 
potentially forced Participants to face uncertain and unquantifiable 
liability in certain default scenarios. The amendments contain features 
such as cooling-off periods, that provide appropriate and transparent 
limits on the potential liability faced by Participants. As a result, 
in ICC's view, while the proposed amendments may impose certain costs 
and losses on market participants, that allocation is appropriate in 
light of the default management goals of the clearing house, the goals 
of promoting orderly clearing house recovery, and the broader public 
interest in the strengthening of the clearing system to withstand 
significant default events. As a result, ICC does not believe that the 
proposed rule changes impose any burden on competition that is not 
appropriate in furtherance of the purpose of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    The proposed rule changes have been discussed at length with 
Participants (individually and as a group). The changes have been 
developed over the course of several years, and throughout that time 
ICC has regularly consulted with Participants on both the overall 
design and the detailed drafting of the amendments. Several aspects of 
the amendments reflect specific requests of Participants and concerns 
identified by Participants, as discussed above, including the removal 
of forced allocation, introduction of a cooling-off period and 
establishment of aggregate limitations on assessments and 
replenishments. The introduction of partial tear-up and reduced gain 
distributions as recovery tools have also been discussed in detail with 
Participants, and have been drafted to take into account and 
suggestions issues raised by Participants, including to define the 
circumstances in which those tools may be used and to limit the adverse 
impact of such tools on netting, regulatory capital and other matters. 
Certain Participants have expressed concern in particular with the 
potential use of reduced gain distribution as a recovery tool. While 
ICC believes reduced gain distribution is an important tool for 
ensuring its ability to fully allocate losses, ICC has, in light of 
such concerns, limited the use of reduced gain distribution to 
scenarios in which all other financial resources of the clearing house 
have been exhausted. ICC has also consulted with Participants on the 
details of the initial and secondary auction procedures, and has taken 
into account comments and suggestions concerning such matters as 
minimum bid requirements, use of a

[[Page 83915]]

Dutch versus other auction methodologies, degree and triggers for 
juniorization and participation by customers. Certain of the proposed 
governance arrangements in the amendments also reflect feedback from 
Participants, including with respect to the role of Risk Committee in 
major decisions. Throughout the process, ICC has regularly shared 
drafts of the amendments with Participants, and sought (and received) 
comment from Participants and Participants' internal and external 
counsel on such drafts, which ICC has taken into consideration in the 
drafting of the amendments.
    ICC has discussed the amendments individually with members of its 
buy-side advisory committee, which consists of customers of 
Participants. ICC also considered the views of industry groups 
representing customers of Participants, both through discussions with 
members of such groups and through the public statements and positions 
of such groups. Certain buy-side customers have expressed concern with 
aspects of the amendments, particularly the application of partial 
tear-up and reduced gain distributions to customer positions. As 
discussed above, ICC believes the use of these recovery tools, for 
customer as well as proprietary positions of Participants, reflects an 
appropriate balancing of the legitimate interests of the clearing 
house, Participants and customers in extreme default scenarios. ICC 
also believes that the risks of such recovery tools are mitigated by 
the expanded opportunity for customers to participate, either directly 
or indirectly, in default auctions, as noted above. Other buy-side 
customers have expressed concern with the potential use of reduced gain 
distribution before the exhaustion of all other potential clearing 
house resources. As discussed above, in light of such concerns, ICC has 
limited the use of reduced gain distribution to scenarios where all 
other financial resources of the clearing house have been exhausted. 
Certain customers have also suggested that the clearing house increase 
the amount of its own contribution to the guaranty fund, and place such 
contribution higher in the priority waterfall of default resources. As 
discussed above, ICC has increased the priority of its contributions in 
the waterfall, to a position prior to the guaranty fund contributions 
of non-defaulting Participants (although ICC has not proposed to change 
the aggregate amount of its contribution).
    ICC will notify the Commission of any written comments on the 
proposed rule changes received by ICC.

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-ICC-2016-013 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-ICC-2016-013. 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. [sic] Copies of such filings will also be 
available for inspection and copying at the principal office of ICE 
Clear Credit and on ICE Clear Credit's Web site at https://www.theice.com/clear-credit/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-ICC-2016-013 
and should be submitted on or before December 13, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-28032 Filed 11-21-16; 8:45 am]
 BILLING CODE 8011-01-P


