
[Federal Register Volume 82, Number 126 (Monday, July 3, 2017)]
[Notices]
[Pages 30918-30920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13897]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81031; File No. SR-ICEEU-2017-006]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Changes Relating to the CDS End-of-Day Price 
Discovery Policy and Price Submission Disciplinary Framework

June 27, 2017.

I. Introduction

    On April 26, 2017, ICE Clear Europe Limited (``ICE Clear Europe) 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change (SR-
ICEEU-2017-006) to amend ICE Clear Europe's End-of-Day Price Discovery 
Policy (``EOD Price Discovery Policy'') (1) to change the calculation 
of firm trade notional limits with respect to single-name credit 
default swap (``CDS'') contracts; (2) to update references to ICE Clear 
Europe's Clearing Risk Department, head of clearing risk, and other 
relevant risk personnel, and to add references to ICE Clear Europe's 
risk appetite, related risk metrics, and model validation and review 
policies; and (3) to amend ICE Clear Europe's Price Submission 
Disciplinary Framework with respect to the imposition of fines 
associated with missed price submissions. The proposed rule change was 
published for comment in the Federal Register on May 15, 2017.\3\ The 
Commission received no comment letters regarding the proposed rule 
change. For the reasons discussed below, the Commission is approving 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-80631 (May 9, 2017), 
82 FR 22357 (May 15, 2017) (SR-ICEEU-2017-006) (``Notice'').
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II. Description of Proposed Rule Change

    ICE Clear Europe proposed changes to its EOD Price Discovery Policy 
with respect to the calculation of firm trade notional limits for 
single-name CDS. Under its current EOD Price Discovery Policy, ICE 
Clear Europe requires CDS Clearing Members \4\ to submit end-of-day 
prices with respect to instruments relating to a Clearing Member's open 
interest. Based on these Clearing Member price submissions, ICE Clear 
Europe calculates CDS end-of-day price levels.\5\ As a mechanism for 
ensuring that Clearing Members provide high-quality submissions, ICE 
Clear Europe selects a subset of CDS instruments, on random days, to be 
eligible for required firm trades between Clearing Members. Where 
Clearing Members are identified for the purposes of a firm trade 
pursuant to ICE Clear Europe's ``cross and lock algorithm'' based on 
their price submissions, ICE Clear Europe may require such Clearing 
Members to enter into firm trades with each other.\6\
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    \4\ Capitalized terms used in this order, but not defined 
herein, have the same meaning as in the ICE Clear Europe Clearing 
Rules.
    \5\ Notice, 82 FR at 22358.
    \6\ Id.
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    In connection with the firm trade obligation, ICE Clear Europe has 
established pre-defined maximum notional amounts for firm trades in 
single-name CDS contracts (``firm trade notional limits''), which are 
currently set at the Clearing Member level.\7\ ICE Clear Europe 
proposed to amend the manner in which it applies the firm trade 
notional limits so that such limits apply on a group level to 
affiliated Clearing Members, or ``CP affiliate group'' level, rather 
than at the individual Clearing Member 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.\8\
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    \7\ Id.
    \8\ Id.
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    ICE Clear Europe believes that such an approach is appropriate 
because an affiliate group may have multiple CDS Clearing Members, 
which, in the absence of the proposed amendments, could result in a 
group-wide limit being multiples of the single entity notional 
limit.\9\
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    \9\ Id.
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    In addition to the changes to the firm trade notional limits, ICE 
Clear Europe also proposed changes to the EOD Price Discovery Policy to 
update references to ICE Clear Europe's Clearing Risk department and 
Head of Clearing Risk, as well as to certain other risk personnel.\10\
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    \10\ Id.
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    Other proposed changes to the EOD Price Discovery Policy include 
adding background information regarding standards relating to ICE Clear 
Europe's risk appetite, and related metrics and limits. Additionally, 
ICE Clear Europe proposed to amend the EOD Price Discovery Policy to 
include additional procedures relating to model validation and policy 
review. Under these amendments, the underlying models used to support 
the EOD Price Discovery Policy will be subject to an annual independent 
validation, and, pursuant to its terms of reference, the

[[Page 30919]]

ICE Clear Europe CDS Risk Committee will review the EOD Price Discovery 
Policy at least annually before such Policy is submitted to the ICE 
Clear Europe Board for its approval.\11\ In addition to the annual 
review process, any material changes to the EOD Price Discovery Policy 
require ICE Clear Europe Board approval, on the advice of the CDS Risk 
Committee and Board Risk Committee, prior to implementation of such 
changes.\12\ The proposed amendments also set forth various metrics to 
be used by the Clearing Risk Department and Risk Oversight department, 
as well as escalation and Risk Committee and Board notification 
protocols related to those metrics.\13\
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    \11\ Id.
    \12\ Id.
    \13\ Id.
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    Beyond amendments to its EOD Price Discovery Policy, ICE Clear 
Europe also proposed to amend its Price Submission Disciplinary 
Framework with respect to the provisions regarding the imposition of 
fines, known as fixed cash assessments, in instances where members do 
not submit required prices. Under the proposed amendments to the Price 
Submission Disciplinary Framework, at the end of each calendar month 
ICE Clear Europe will collect the details of alleged Clearing Member 
missed price submissions. Once these details are obtained, ICE Clear 
Europe will issue a Notice of Investigation pursuant to Rule 1002 of 
its CDS Clearing Rulebook to the relevant Clearing Member setting forth 
the details of the missed price submission. ICE Clear Europe would then 
perform its investigation, and within five days of sending the Notice 
of Investigation, provide the Clearing Member with a Letter of 
Mindedness, which sets forth ICE Clear Europe's preliminary factual 
conclusions and proposed cash assessment. Thereafter, ICE Clear Europe 
would provide the Clearing Member ten days from the date of the Letter 
of Mindedness to inform ICE Clear Europe of any factual errors or 
objections. After this ten-day period, ICE Clear Europe would finalize 
its findings and course of action.\14\
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    \14\ Id.
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    Furthermore, under the proposed amendments ICE Clear Europe's Price 
Submission Disciplinary Framework would provide that, if a Clearing 
Member is able to demonstrate that (i) the alleged missed price 
submissions are the first instance(s) of a missed submission with 
respect to a specific instrument in that month; (ii) provide an 
adequate explanation for the missed price submissions; and (iii) offer 
a remedial plan to prevent future missed submissions, ICE Clear Europe 
may determine to take no action. However, if another missed price 
submission for the same type of instrument occurs within ninety days of 
the first missed price submission then, under the proposed amendments, 
the Clearing Member will be subject to a cash assessment for both the 
first and subsequent missed price submissions. Additionally, ICE Clear 
Europe's head of clearing compliance would have the ability to 
determine that a Clearing Member should not be subject to a cash 
assessment if a Clearing Member is able to demonstrate that an alleged 
missed submission occurred due to extraordinary circumstances outside 
of the Clearing Member's control.\15\ ICE Clear Europe did not propose 
to amend the established levels for cash assessments.
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    \15\ Notice, 82 FR at 22358-59.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \16\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. Section 17A(b)(3)(F) \17\ of the Act 
requires, among other things, that the rules of a registered 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, to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible and, in 
general, to protect investors and the public interest. Section 
17A(b)(3)(D) \18\ of the Act requires that the rules of a clearing 
agency provide for the equitable allocation of reasonable fees, dues, 
and other charges among its participants. Section 17A(b)(3)(G) of the 
Act \19\ requires that the rules of a clearing agency provide that its 
participants shall be appropriately disciplined for violation of any 
provision of the rules of the clearing agency by expulsion, suspension, 
limitation of activities, functions, and operations, fines, censure, or 
any other fitting sanction. Section 17A(b)(5)(A) of the Act \20\ 
requires, in relevant part, that in any proceeding by a registered 
clearing agency to determine whether a participant should be 
disciplined, the clearing agency shall bring specific charges, notify 
such participant thereof, and give him an opportunity to defend against 
such charges, and keep a record. Section 17A(b)(5)(A) further requires 
that a determination by the clearing agency to impose a disciplinary 
sanction shall be supported by a statement setting forth (i) any act or 
practice in which such participant has been found to have engaged or to 
have omitted; (ii) the specific provisions of the rules of the clearing 
agency which any such practice or omission to act is deemed to violate; 
and (iii) the sanction imposed and the reasons therefore. Rule 17Ad-
22(e)(3)(i) \21\ requires covered clearing agencies to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to include risk management policies, procedures, 
and systems designed to identify, measure, monitor, and manage the 
range of risks that arise in or are borne by the covered clearing 
agency, that are subject to review on a specified periodic basis and 
approved by the board of directors annually. Rule 17Ad-22(e)(6)(vii) 
\22\ requires a covered clearing agency to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to require a model validation for the covered clearing 
agency's margin system and related models to be performed not less than 
annually, or more frequently as may be contemplated by the covered 
clearing agency's risk management framework.
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    \16\ 15 U.S.C. 78s(b)(2)(C).
    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ 15 U.S.C. 78q-1(b)(3)(D).
    \19\ 15 U.S.C. 78q-1(b)(3)(G).
    \20\ 15 U.S.C. 78q-1(b)(5)(A).
    \21\ 17 CFR 240.17Ad-22(e)(3)(i).
    \22\ 17 CFR 240.17Ad-22(e)(6)(vii).
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    The Commission finds that the proposed rule change, which amends 
ICE Clear Europe's EOD Price Discovery Policy and Price Submission 
Disciplinary Framework, is consistent with relevant provisions of 
Section 17A of the Act and the applicable provisions of Rule 17Ad-22 
thereunder.
    With respect to the changes to ICE Clear Europe's EOD Price 
Discovery Policy that amend the application of the firm trade notional 
limit to be imposed at the CP affiliate group level rather than at the 
individual Clearing Member level, the changes are intended to manage 
what, in ICE Clear Europe's view, is an inappropriate level of risk to 
its Clearing Members, while also ensuring the integrity of the end-of-
day price submission process. ICE Clear Europe asserts that the 
proposed change is intended to apply to Clearing Members fairly, and 
ICE Clear Europe has represented that the proposed rule

[[Page 30920]]

change recognizes common price submission practices whereby end-of-day 
submissions from multiple affiliated entities often reflect the 
institution's overall view on the value of the relevant instrument.\23\ 
Accordingly, the Commission finds that the proposed amendment regarding 
firm trade notional limits is designed to promote the prompt and 
accurate clearance and settlement of securities transactions, 
derivatives agreements, contracts, and transactions consistent with the 
requirements of Section 17A(b)(3)(F), and also finds that the proposed 
rule change provides for the equitable allocation of reasonable fees, 
dues and other charges among its participants, consistent with Section 
17A(b)(3)(D) of the Act.
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    \23\ Notice, 82 FR at 22359.
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    Regarding the changes to the EOD Price Discovery Policy that 
provide for validation of models supporting the end-of-day price 
discovery process and for review of the EOD Price Discovery Policy by 
the Board, the Commission believes that the proposed changes are 
consistent with Section 17A(b)(3)(F) of the Act, Rule 17Ad-22(e)(3)(i), 
and Rule 17Ad-22(e)(6)(vii). By requiring an independent validation of 
models used to support the EOD Price Discovery Policy, ICE Clear Europe 
will be better able to ensure that the end-of-day pricing models are 
appropriately designed and provide reliable results in the end-of-day 
pricing process. Additionally, with the requirement that the EOD Price 
Discovery Policy be reviewed at least annually by the CDS Risk 
Committee, and ICE Clear Europe Board and separately requiring that 
material changes be approved by ICE Clear Europe's Board, with the 
advice of both the CDS and Board Risk Committees, the proposed rule 
changes will provide for more substantial involvement in the ongoing 
management of, and review of changes to, the end-of-day pricing 
processes by those responsible for ICE Clear Europe's risk governance. 
Thus, the Commission believes that the proposed rule change will result 
in more consistent oversight and improvement of the EOD Price Discovery 
Policy and the underlying models and processes related thereto. The 
Commission therefore finds that the proposed rule change is designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions, derivatives agreements, contracts, and transactions, 
consistent with the requirements of Section 17A(b)(3)(F), and also is 
consistent with the requirements of Rule 17Ad-22(e)(3)(i) regarding 
periodic review and annual approval by the Board, and the requirements 
of Rule 17Ad-22(e)(6)(vii) regarding model validation of models related 
to the covered clearing agency's margin system.
    The Commission also finds that the proposed changes to ICE Clear 
Europe's Price Submission Disciplinary Framework are consistent with 
the requirements of the Act. Specifically, the proposed changes would 
amend and formalize the process in which Clearing Members are 
sanctioned for failure to comply with the price submission process. 
Specifically, the proposed rule change will set forth the process under 
which ICE Clear Europe will provide notice to Clearing Members of its 
allegation(s) of their failures to meet the price submission 
requirements, methods in which the Clearing Members can respond or 
object, and the sanctions that will be imposed for failures to meet the 
price submission requirements. The Commission finds that the 
formalization of this process in ICE Clear Europe's Price Submission 
Disciplinary Framework is consistent with the requirement of Section 
17A(b)(3)(G) of the Act that the rules of a clearing agency provide 
that its participants shall be appropriately disciplined for violations 
of any provision of the clearing agency's rules by sanction; and that 
Clearing Members will be duly informed regarding such discipline, 
consistent with Section 17A(b)(5)(A) of the Act.

IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that he proposed rule change (SR-ICEEU-2017-006) be, and hereby is, 
approved.\24\
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    \24\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-13897 Filed 6-30-17; 8:45 am]
 BILLING CODE 8011-01-P


