
[Federal Register Volume 82, Number 92 (Monday, May 15, 2017)]
[Notices]
[Pages 22357-22360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09714]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80631; File No. SR-ICEEU-2017-006]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Proposed Rule Change, Security-Based Swap Submission or Advance 
Notice Relating to the CDS End-of-Day Price Discovery Policy

May 9, 2017.
    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 April 26, 2017, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change described in Items I, II, and III below, which 
Items have been prepared primarily by ICE Clear Europe. 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. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change, Security-Based Swap Submission, or Advance Notice

    The principal purpose of the changes is to modify certain aspects 
of ICE Clear Europe's CDS End-of-Day Price Discovery Policy (the ``EOD 
Price Discovery Policy'') and Price Submission Disciplinary Framework.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change, Security-Based Swap Submission or 
Advance Notice

    In its filing with the Commission, ICE Clear Europe 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. ICE Clear Europe has prepared summaries, 
set forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.

[[Page 22358]]

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change, Security-Based Swap Submission or 
Advance Notice

1. Purpose
    The purpose of the rule change is to amend the EOD Price Discovery 
Policy to change the calculation of firm trade notional limits for 
single-name CDS contracts. ICE Clear Europe also proposes to make 
certain amendments to its Price Submission Disciplinary Framework (the 
``Disciplinary Framework''), which addresses missed price submissions 
by CDS Clearing Members for CDS contracts (``Missed Submissions''). The 
proposed revisions are described in detail herein. ICE Clear Europe 
does not otherwise propose to change its Clearing Rules \3\ or 
Procedures in connection with these amendments.
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    \3\ Capitalized terms used but not defined herein will have the 
meanings specified in the ICE Clear Europe Clearing Rules (the 
``Rules'').
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    Under the EOD Price Discovery Policy, CDS Clearing Members are 
required to submit end-of-day prices for specific instruments relating 
to their open CDS interest at the Clearing House. ICE Clear Europe 
determines end-of-day settlement price levels from these price 
submissions, using its settlement price methodology. (ICE Clear Europe 
is not proposing to change the settlement price methodology in 
connection with these amendments.) To encourage CDS Clearing Members to 
submit high-quality price submissions, ICE Clear Europe, on random 
days, selects a subset of instruments to be eligible for required firm 
trades in cleared CDS contracts between CDS Clearing Members (``Firm 
Trades''). ICE Clear Europe currently utilizes a ``cross and lock'' 
algorithm for identifying Firm Trades. CDS Clearing Member pairs 
identified by the algorithm as crossed or locked markets in these 
instruments, based on their price submissions, may be required to enter 
into Firm Trades with each other.
    ICE Clear Europe currently establishes pre-defined maximum notional 
amounts for Firm Trades in single-name CDS contracts. Currently, 
single-name Firm Trade notional limits are set at the CDS Clearing 
Member level. The notional limits are intended to limit the risk (on an 
overnight basis) that a given CDS Clearing Member may face as a result 
of a Firm Trade, including in situations where submission errors or 
outlying pricing submissions have led to a Firm Trade.
    ICE Clear Europe is proposing to modify the EOD Price Discovery 
Policy to provide that single-name Firm Trade notional limits will 
instead apply on a group level to affiliated CDS Clearing Members, 
rather than at an individual CDS Clearing Member level. Under the 
current approach, an affiliate group may have multiple clearing 
memberships, which in turn leads to a group-wide limit that can be 
multiples of the single entity limit. Affiliated groups may use this 
approach, for example, where different clearing entities are needed for 
house or customer transactions originating from different 
jurisdictions. The result can be that an affiliated group with multiple 
CDS Clearing Members may be subject to significantly higher risk of 
Firm Trades, based on the aggregate notional, than it would if it 
cleared all of the same business through a single legal entity. In 
addition, over time, ICE Clear Europe has broadened the process for 
determining Firm Trades to include all submissions, including those 
classified as outlying pricing submission (or ``obvious errors''), 
which has made Clearing Members eligible to receive Firm Trades on a 
potentially wider range of submissions. As a result, there is 
heightened interest in adjusting the Firm Trade allocation process so 
that CDS Clearing Members are not overly penalized for Firm Trades in 
terms of group-wide risk exposure.
    Under the proposed changes, Firm Trade notional limits for single-
name CDS will be implemented at the ``CP affiliate group'' level. A CP 
affiliate group consists of all CDS Clearing Members that own, are 
owned or are under common ownership with other CDS Clearing Members. In 
determining Firm Trades, ICE Clear Europe will track the notional 
amounts of potential Firm Trades assigned to each CDS Clearing Member 
at the risk sub-factor and sector level. If the cumulative risk sub-
factor notional for the CP affiliate group exceeds the notional limit 
for that sub-factor, ICE Clear Europe will not designate further Firm 
Trades in that risk sub-factor for any CDS Clearing Member in the CP 
affiliate group. Cumulative sector notional limits will be applied 
similarly to CP affiliate groups. As under the current approach, the 
notional amount of reversing transactions will not count toward CP 
affiliate group notional limits.
    Certain other changes have been made to the EOD Price Discovery 
Policy to update references to the Clearing House's clearing risk 
department and head of clearing risk, and certain other risk personnel. 
The amendments add certain background standards relating to risk 
appetite and related metrics and limits, reflecting the overall 
approach of the Clearing House to such matters. The policy is also 
being revised to specify additional procedures relating to model 
validation and policy review, consistent with overall Clearing House 
risk governance policies. Specifically, relevant underlying models 
(within the definition thereof established by ICE Clear Europe) used to 
support the EOD Price Discovery Policy will be subject to an annual 
independent validation. The EOD Price Discovery Policy itself is to be 
reviewed by the CDS Risk Committee at least annually. In addition, 
material changes must be approved by the Board on the advice of the CDS 
Risk Committee and Board Risk Committee prior to implementation. The 
policy specifies certain metrics to be tracked by the clearing risk 
department and risk oversight department, and sets out escalation and 
notification protocols for those metrics, as well as for any deviations 
from the policy.
    ICE Clear Europe is also proposing to amend the Price Submission 
Disciplinary Framework, specifically with regard to the procedures for 
imposing fines, known as fixed cash assessments, for Missed 
Submissions. The amendments formalize certain procedures around notices 
and preliminary determinations with respect to Missed Submissions, 
consistent with the procedures for disciplinary proceedings under Part 
10 of the Rules. Consistent with the current framework, at the end of 
each calendar month, ICE Clear Europe will collect the details of 
alleged Missed Submission(s). The Clearing House will issue a Notice of 
Investigation under Rule 1002 to the relevant CDS Clearing Member with 
alleged Missed Submission(s). Within five days after the Notice of 
Investigation, and following an investigation, ICE Clear Europe will 
issue a Letter of Mindedness under Rule 1002 setting out its 
preliminary factual conclusions and intended course of action (which 
would be imposition of a fixed cash assessment). The CDS Clearing 
Member will have ten days from the date of the Letter of Mindedness to 
note any factual errors or objections. Following such ten day period, 
the Clearing House would finalize its findings and course of action. 
ICE Clear Europe does not propose to change the levels of cash 
assessments for Missed Submissions that are determined to have occurred 
under the revised policy.
    During an investigation into a Missed Submission, if a CDS Clearing 
Member is able to demonstrate that the alleged Missed Submission(s) are 
the first instance(s) of a Missed Submission for a particular 
instrument, provide an adequate explanation for the Missed

[[Page 22359]]

Submission, and a remedial plan of action to prevent future Missed 
Submissions, ICE Clear Europe may take no further action, provided that 
another Missed Submission for the same type of instrument does not 
occur within ninety days of the first Missed Submission. If a second 
Missed Submission were to occur in that period, the CDS Clearing Member 
will be subject to a cash assessment for both the initial and 
subsequent Missed Submissions.
    In addition, consistent with the current framework, if a CDS 
Clearing Member is able to demonstrate that an alleged Missed 
Submission was due to extraordinary circumstances outside of the CDS 
Clearing Member's control (such as a market-wide disruption), the head 
of clearing compliance has the ability to determine that a CDS Clearing 
Member should not be subject to a cash assessment. Neither of these two 
exceptions will preclude ICE Clear Europe from undertaking disciplinary 
action against a CDS Clearing Member who persistently fails to submit 
end-of-day prices or submits prices treated as obvious errors by the 
end of day pricing algorithm.
2. Statutory Basis
    ICE Clear Europe believes that the proposed amendments are 
consistent with the requirements of Section 17A of the Act \4\ and the 
regulations thereunder applicable to it. Section 17A(b)(3)(F) of the 
Act \5\ in particular requires, among other things, that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions, the 
safeguarding of securities and funds in the custody or control of the 
clearing agency, and the protection of investors and the public 
interest. The proposed amendments are designed to enhance the Clearing 
House's EOD Price Discovery Policy, which is a key aspect of the risk 
management and daily settlement procedures of the Clearing House. In 
ICE Clear Europe's view, the changes will maintain the strong incentive 
of Clearing Members to provide accurate end-of-day price submissions, 
while appropriately treating affiliated CDS Clearing Members as a group 
for purposes of the notional limit. In the Clearing House's experience, 
setting notional limits on a CP affiliate group basis is consistent 
with CDS Clearing Member price submission practices, where end-of-day 
submissions from multiple affiliated entities often are made by the 
same personnel or desk and reflect the overall affiliate group's view 
on the value of the relevant instrument. The amendments will avoid 
unfairly penalizing affiliated Clearing Members with Firm Trades, and 
limit the potential overnight risk that a CP affiliate group may face 
as a result of the Firm Trade process. The ICE Clear Europe believes 
the amendments will not adversely affect the integrity of the 
settlement price determination process, as all CDS Clearing Members 
will continue to be subject to potential Firm Trades for any given 
price submission, on a randomized basis. As a result ICE Clear Europe 
does not believe the amendments will change price submission behavior 
or materially limit the effectiveness of the Firm Trade process as an 
incentive to robust price submissions. Furthermore, ICE Clear Europe 
believes that the enhancements to the Disciplinary Framework will 
reinforce the price submission process, by clarifying the procedures 
for implementing fines and cash assessments for Missed Submissions. As 
a result, in ICE Clear Europe's view, the amendments are consistent 
with, and will promote, the prompt and accurate clearance and 
settlement of securities transactions and derivatives agreements, 
contracts and transactions, within the meaning of Section 17A(b)(3)(F) 
of the Act.\6\
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    \4\ 15 U.S.C. 78q-1.
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    ICE Clear Europe also believes that the amendments will not permit 
unfair discrimination among participants in the use of the Clearing 
House, within the meaning of Section 17A(b)(3)(F). In particular, the 
amendments are designed to treat affiliated groups of CDS Clearing 
Members fairly, such that they are not subject to excessive overnight 
risk as a result of the Firm Trade submission process, as potentially 
applied to multiple CDS Clearing Member entities within the group. The 
approach thus is designed to prevent the Firm Trade process from 
disadvantaging those CP affiliate groups that have chosen to conduct 
their clearing business through multiple CDS Clearing Members, as 
opposed to a single clearing entity. This is particularly appropriate 
where a single or consolidated trading desk is submitting end-of-day 
prices for the entire CP affiliate group.
    For similar reasons, ICE Clear Europe believes that the amendments 
are consistent with the requirements of Section 17A(b)(3)(D) \7\ of the 
Act, which requires that the rules of a clearing agency provide for the 
equitable allocation of reasonable fees, dues and other charges among 
its participants. As discussed above, the amendments are intended to 
equitably allocate the risk and potential cost of Firm Trades across 
the members of a CP affiliate group, to avoid unfairly disadvantaging 
each CDS Clearing Member in that group. The amendments mitigate the 
potential overnight risk exposure of an entire affiliate group from 
Firm Trades, to the same level that would apply if the group cleared 
all of its trades through a single CDS Clearing Member entity. At the 
same time, all such CDS Clearing Members remain potentially subject to 
Firm Trades for any given submission, on a randomized basis. Thus, if 
only one CDS Clearing Member within a CP affiliate group submits an 
off-market submission resulting in a Firm Trade for that entity only, 
the full notional limit would potentially be applicable to it. In ICE 
Clear Europe's view, this revised approach provides for the equitable 
allocation of reasonable dues, fees and charges among participants, 
within the meaning of Section 17A(b)(3)(D) of the Act.\8\
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    \7\ 15 U.S.C. 78q-1(b)(3)(D).
    \8\ 15 U.S.C. 78q-1(b)(3)(D).
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    In addition, in ICE Clear Europe's view, the amended Disciplinary 
Framework, like the current framework, provides an appropriately 
tailored set of cash assessments for Missed Submissions by Clearing 
Members, in light of the importance of end-of-day price submissions to 
the Clearing House risk management and settlement procedures. The 
framework is thus consistent with the requirements of Section 
17A(b)(3)(G) of the Act.\9\ The amendments also enhance the procedures 
for investigating and notifying Clearing Members of potential Missed 
Submissions and related assessments, and for Clearing Members to 
dispute and/or seek a waiver of such assessments in particular 
circumstances. In ICE Clear Europe's view, this aspect of the amended 
framework is consistent with the requirements of Section 17A(b)(3)(H) 
of the Act.\10\
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    \9\ 15 U.S.C. 78q-1(b)(3)(G).
    \10\ 15 U.S.C. 78q-1(b)(3)(H).
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed rule changes would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The enhancements 
to ICE Clear Europe's price discovery process apply uniformly to all 
CDS Clearing Members. As discussed above,

[[Page 22360]]

the amendments are designed to avoid unfairly burdening affiliate 
groups that have elected to clear through more than one affiliated CDS 
Clearing Member, by setting the relevant Firm Trade notional limit at 
the CP affiliate group level. In ICE Clear Europe's view, the revised 
approach appropriately incentivizes CDS Clearing Member participation 
in the end-of-day price submission process, while balancing the risks 
of the Firm Trade process fairly across different CDS Clearing Members. 
The amendments to the Disciplinary Framework will also apply to all CDS 
Clearing Members, and establish new procedures for determinations that 
a Clearing Member is subject to a cash assessment as a result of a 
Missed Submission. ICE Clear Europe does not believe that the adoption 
of the amendments will adversely affect competition among Clearing 
Members, or the ability of market participants to clear contracts 
generally. The Clearing House also does not believe that the amendments 
will reduce access to clearing CDS contracts or limit market 
participants' choices for clearing CDS.
    The amended policies, like the current policies, may result in 
certain costs for Clearing Members that are required to enter into Firm 
Trades as a result of obvious errors in their submissions or otherwise, 
or are subject to cash assessments as a result of Missed Submissions. 
ICE Clear Europe believes that these costs are warranted to enhance the 
integrity of the price submission process, and are in any event 
generally within the control of the Clearing Member. As a result, ICE 
Clear Europe does not believe the proposed amendments impose any burden 
on competition that is inappropriate in furtherance of the purposes of 
the Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the proposed changes to the rules have 
not been solicited or received. ICE Clear Europe will notify the 
Commission of any written comments received by ICE Clear Europe.

III. Date of Effectiveness of the Proposed Rule Change, Security-Based 
Swap Submission and Advance Notice 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.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, security-based swap submission or advance notice 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-ICEEU-2017-006 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ICEEU-2017-006. 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, security-
based swap submission or advance notice that are filed with the 
Commission, and all written communications relating to the proposed 
rule change, security-based swap submission or advance notice between 
the Commission and any person, other than those that may be withheld 
from the public in accordance with the provisions of 5 U.S.C. 552, will 
be available for Web site viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE., Washington, DC 20549, on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
Copies of such filings will also be available for inspection and 
copying at the principal office of ICE Clear Europe and on ICE Clear 
Europe's Web site at https://www.theice.com/clear-europe/regulation#rule-filings.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-ICEEU-2017-006 
and should be submitted on or before June 5, 2017.
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    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Eduardo A. Aleman,
 Assistant Secretary.
[FR Doc. 2017-09714 Filed 5-12-17; 8:45 am]
BILLING CODE 8011-01-P


