
[Federal Register Volume 82, Number 143 (Thursday, July 27, 2017)]
[Notices]
[Pages 34997-34998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15774]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81186; File No. SR-ICC-2017-006]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to ICC's End-of-Day Price 
Discovery Policies and Procedures

July 21, 2017.

I. Introduction

    On May 25, 2017, ICE Clear Credit LLC (``ICC'' or ``ICE Clear 
Credit'') 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-ICC-2017-006) to amend ICC's End-of-Day Price 
Discovery Policies and Procedures (``Pricing Policy'') to implement an 
automated bid-offer width scaling methodology as part of its end-of-day 
pricing process. The proposed rule change was published for comment in 
the Federal Register on June 15, 2017.\3\ The Commission did not 
receive comments regarding the proposed changes. 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. 34-80895 (June 9, 2017), 
82 FR 27539 (June 15, 2017) (SR-ICC-2017-006) (``Notice'').
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II. Description of the Proposed Rule Change

    Bid-offer width (``BOW'') is one input in ICC's end-of-day price 
discovery process used to determine end-of-day price levels for ICC's 
cleared products. ICC derives the BOW used in its end-of-day price 
discovery process for each clearing-eligible instrument from BOW 
information supplied by its Clearing Participants. Currently, ICC 
determines the end-of-day BOW for index products by comparing BOW data 
received from Clearing Participants to three pre-defined BOWs. The 
three pre-defined BOWs are progressively larger, such that the smallest 
BOW (``Regime 1'') is associated with normal market conditions; the 
next largest BOW (``Regime 2'') is associated with market conditions 
experiencing some measure of volatility; and the largest BOW (``Regime 
3'') is associated with more extreme market conditions. ICC selects as 
the end-of-day BOW (``EOD BOW) for an index product the pre-defined BOW 
that is most representative of the BOWs obtained from Clearing 
Participants based on ICC's methodology. For single-name instruments, 
ICC determines the EOD BOW by using intraday BOW data received from 
Clearing Participants and then applies various scaling factors to 
arrive at an EOD BOW based on ICC's methodology. The EOD BOWs are used 
for mark-to-market and risk management purposes.
    As currently constituted, ICC's procedures allow its Risk 
Department to override the EOD BOW based on the Risk Department's 
review and monitoring of market conditions. ICC represents that during 
periods of high market volatility, a significant number of BOW 
adjustments may need to be made, and that, if needed, such adjustments 
are determined and input manually.\4\ ICC believes that this manual 
intervention, which takes place in a short time period, is a potential 
source of operational risk.\5\
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    \4\ Notice, 82 FR at 27540.
    \5\ Id.
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    In order to reduce this operational risk, ICC proposes to replace 
the manual BOW adjustment process in the Pricing Policy with an 
algorithm that will automatically execute the widening of selected BOWs 
based on the dispersion of intraday mid-level quotes, an indicator of 
the day's volatility.
    To effectuate this automatic BOW-widening process, ICC proposed to 
introduce a new metric, a ``Variability Level,'' designed to measure 
the movement of intraday bid-offer mid-levels relative to the existing 
pre-defined BOWs described above. Under the proposed changes, where the 
intraday BOW mid-level falls above or below the prior day's end-of-day 
level by more than one pre-defined BOW, the Variability Level will be 
determined by a formula that takes the maximum deviation of the time 
series of intraday BOW mid-levels from the prior day's end-of-day level 
and divides it by the pre-defined BOW. Where the intraday BOW mid-level 
falls within one pre-defined BOW of the prior day's end-of-day level, 
the Variability Level would be set to 1.0, if the range of intraday 
mid-levels is less than the pre-defined BOW. If the range is greater 
than the pre-defined BOW, the Variability Level would be set to 1.2. 
Variability Levels

[[Page 34998]]

are calculated for the on-the-run instrument in each index family.\6\
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    \6\ Id.
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    Once Variability Levels are calculated, ICC proposed to convert 
Variability Levels into Variability Bands, which correspond to a range 
of Variability Levels. Once Variability Levels and Variability Bands 
have been determined, ICC proposed to create market groups and assign 
each index instrument to one of these market groups. For example, the 
CDX.NA.IG and CDX.NA.HY would be assigned to the North American group. 
After assigning each index instrument to a market group, ICC would use 
the largest Variability Band of any instrument within a market group as 
the Variability Band for that market group as a whole. ICC refers to 
this Variability Band as the ``Market-Proxy Variability Band.'' \7\ The 
proposed automated BOW algorithm would then adjust the EOD BOW (Regime 
1, 2, or 3) for the market group as a whole by one regime (moving from 
Regime 1 to Regime 2, or from Regime 2 to Regime 3) or two regimes 
(from Regime 1 to Regime 3), with higher Market-Proxy Variability Bands 
resulting in a two-regime adjustment, and smaller Market-Proxy 
Variability Bands resulting in a one-regime adjustment, or no 
adjustment.\8\
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    \7\ Id.
    \8\ Id.
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    For single-name instruments, ICC proposes to introduce a new 
scaling factor that would be applied, along with other scaling factors 
used in the current process, to the EOD BOW, as calculated based on BOW 
data received from participants. The Variability Scaling Factor for 
single-name instruments would depend on the Market-Proxy Variability 
Band for the market to which each single-name instrument is assigned. A 
higher Market-Proxy Variability Band will result in a larger scaling 
factor being applied.\9\
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    \9\ Id.
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    In addition to proposing to automate the process for increasing 
selected BOWs, ICC also proposed to remove a footnote from its Pricing 
Policy that set forth details of an intraday filtering algorithm that 
was planned but never implemented. Also, ICC proposed to correct 
inaccurate references in the Pricing Policy.\10\
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    \10\ Id. at 27540-41.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
propose 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.\11\ Section 17A(b)(3)(F) 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.\12\ Rule 17Ad-22(d)(4) requires, in 
relevant part, that a registered clearing agency shall establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to identify sources of operational risk and 
minimize them through the development of appropriate systems, controls, 
and procedures; and implement systems that are reliable, resilient and 
secure, and have adequate, scalable capacity.\13\
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(d)(4).
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    The Commission finds that the proposed rule change, which modifies 
ICC's Pricing Policy to implement an automated process for widening the 
EOD BOW for index and single-name instruments is consistent with 
Section 17A of the Act and Rule 17Ad-22 thereunder. By automating the 
process for widening the EOD BOWs when necessary, the Commission 
believes that ICC will likely reduce the risk of error or delay in the 
end-of-day pricing process in connection with a potentially significant 
number of adjustments to BOWs that would need to be made manually and 
in a short period of time absent the proposed changes. Since the end-
of-day BOW is an input in ICC's end-of-day price discovery process, the 
Commission believes that the proposed rule changes will likely enhance 
the speed and accuracy of that process, thereby promoting the prompt 
clearance and settlement of derivative agreements, contracts and 
transactions, consistent with Section 17A(b)(3)(F) of the Act.
    For similar reasons, the Commission finds that the proposed rule 
changes are also consistent with Rule 17Ad-22(d)(4) in that they are 
designed to reduce operational risk. Specifically, the proposed rule 
changes are intended to reduce ICC's operational risk in the end-of-day 
pricing process by establishing an automated process that will more 
quickly implement the widening of BOWs, if appropriate, based on a set 
of well-defined criteria. As a result, the risk of error that 
accompanies manual observation of market conditions and manual input of 
a potentially significant amount of adjustments in a small period of 
time during volatile market conditions is significantly reduced. 
Therefore, the Commission finds that the proposed rule changes are 
consistent with the requirements of Rule 17Ad-22(d)(4) that the 
registered clearing agencies establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to identify 
sources of operational risk and minimize them through the development 
of appropriate systems, controls, and procedures; and implement systems 
that are reliable, resilient and secure, and have adequate, scalable 
capacity.

IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-ICC-2017-006) be, and hereby is, 
approved.\14\
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    \14\ 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.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-15774 Filed 7-26-17; 8:45 am]
BILLING CODE 8011-01-P


