
[Federal Register Volume 82, Number 155 (Monday, August 14, 2017)]
[Notices]
[Pages 37917-37920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-17052]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81347; File No. SR-ICC-2017-011]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Granting Accelerated Approval of Proposed Rule Change Relating to the 
ICC Liquidity Risk Management Framework and the ICC Stress Testing 
Framework

August 8, 2017.

I. Introduction

    On June 28, 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 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change (SR-ICC-2017-011) to revise the 
ICC Liquidity Risk Management Framework and the ICC Stress Testing 
Framework. The proposed rule change was published for comment in the 
Federal Register on July 12, 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 on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 34-81132 (July 12, 2017), 82 FR 
32895 (July 18, 2017) (SR-ICC-2017-011) (``Notice'').
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II. Description of the Proposed Rule Change

    ICC stated that the proposed revisions to its Liquidity Risk 
Management Framework and Stress Testing Framework are for the purpose 
of revising its liquidity monitoring program to enhance compliance with 
U.S. Commodity Futures Trading Commission (``CFTC'') regulations, 
including Regulations 39.11, 39.33, and 39.36.\4\ ICC represented that 
the proposed revisions will also facilitate the prompt and accurate 
clearance and settlement of securities transactions and derivative 
agreements, contracts, and transactions for which it is responsible. 
These revisions would not require any changes to the ICC Clearing Rules 
(``Rules'').
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    \4\ 17 CFR 39.11; 17 CFR 39.33; 17 CFR 39.36.
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A. Liquidity Risk Management Framework

    ICC proposed to reorganize the format of the Liquidity Risk 
Management Framework to consist of three elements: Liquidity Risk 
Management Model; Measurement and Monitoring; and Governance. The 
Regulatory Requirements element, previously included as an element of 
the framework, would be deleted; however, the regulatory requirements 
applicable to liquidity risk management would still be referenced in 
the framework.
1. Liquidity Risk Management Model
    ICC proposed to enhance the description of several components of 
its Liquidity Risk Management Model. As revised, the Liquidity Risk 
Management Model now includes, but is not limited to, the following 
components: Currency-Specific Risk Requirements; Acceptable Collateral; 
Liquidity Requirements; Collateral Valuation Methodology; Investment 
Strategy; Clearing Participant (``CP'') Deposits as a Liquidity Pool, 
Liquidity Facilities (including committed repo facilities and committed 
foreign exchange (``FX'') facilities); and Liquidity Waterfall.
    For the Currency-Specific Risk Requirements component, ICC proposed 
to add language to cross reference ICC's current policy of maintaining 
cash and collateral assets posted by CPs (on behalf of themselves and/
or their clients) to meet currency-specific Initial Margin (``IM'') and 
Guaranty Fund (``GF'') requirements, to ensure ICC has sufficient total 
resources in the required currencies of denomination.
    With respect to the Liquidity Requirements component,\5\ ICC 
proposed to add a cross reference to ICC's requirement that each CP 
contribute to the GF a minimum of 20 million wholly in U.S. Dollars 
(``USD''), which is not a change but rather a restatement of ICC's 
current rules.\6\ Further, ICC proposed revisions to extend ICC's 
margin risk horizon up to 6-days in order to account for the risk 
associated with clearing Asia Pacific products. This change would apply 
throughout the framework.
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    \5\ The Liquidity Requirements component also reflects the 
changes to ICC's liquidity thresholds for Euro (``EUR'') denominated 
products approved by the Commission in rule filing ICC-2017-002. See 
Exchange Act Release No. 34-80324 (Mar. 28, 2017), 82 FR 16244 (Apr. 
3, 2017).
    \6\ See Schedule 401 of the ICC Rules.
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    With respect to the Liquidity Facilities component, ICC proposed 
revisions to add reference to its committed repurchase facility, 
consisting of committed repo lines from multiple financial institutions 
(as opposed to committed repurchase agreements as before), and its 
recently instituted committed FX facilities for converting USD cash to 
EUR cash. ICC also proposed removing reference to FX Swaps and 
Immediate FX Spot Transactions because these arrangements are not 
committed and therefore are not ``qualifying liquidity resources'' 
under CFTC Regulation 39.33, according to ICC.\7\ ICC also proposed 
removing reference to the Intercontinental Exchange, Inc. committed 
line of credit because ICC no longer participates in the arrangement.
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    \7\ 17 CFR 39.33.
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    In the Liquidity Waterfall component, ICC proposed revisions to its 
definition of Available Liquidity Resources (``ALR'') to note that ALR 
consists of the available deposits currently in cash of the required 
currency of denomination and the cash equivalent of the available 
deposits in collateral types that ICC can convert to cash, in the 
required currency of denomination, using all sources of liquidity 
available to it. For reference, the Liquidity Waterfall classifies ALR 
on any given day into four levels. Level One includes the House IM and 
GF cash deposits of the defaulting CP. Level Two includes GF cash 
deposits of ICC and non-defaulting CPs. Level Three includes House IM 
cash deposits of the non-defaulting CPs. Level Four includes committed 
repo facilities and FX facilities, as described above in the changes to 
the Liquidity Facilities component.
    A few of the Liquidity Risk Management Model components would 
remain the same or substantially the same. The Acceptable Collateral 
component would remain the same and will note that CPs may post IM and 
GF deposits that meet ICC's acceptable collateral criteria as described 
in ICC's Treasury Operations Policies and Procedures and Schedule 401 
of the ICC Rules. The Investment Strategy component would remain 
substantially the same and was proposed to be revised to note that, 
when beneficial, ICC diversifies its cash investments across multiple 
depository institutions to reduce its liquidity exposure to any single 
depository. The CP Deposits as a Liquidity Pool and Collateral 
Valuation Methodology components also would remain substantially the 
same.
2. Measurement and Monitoring
    With respect to the Measurement and Monitoring element of the 
Liquidity Risk Management Framework, ICC

[[Page 37918]]

proposed changes to the Methodology section to change the calculation 
for ALR. In response to CFTC feedback to ensure consistency with CFTC 
Regulation 39.33,\8\ ICC proposed replacing the estimation of minimum 
ALR based on risk requirements with the observation of cash and 
collateral on deposit (excluding cash that will be unavailable by the 
applicable ICC Payout Deadline because it has been invested by ICC). 
Accordingly, ICC proposed removing the section from the Liquidity Risk 
Management Framework which described the process for computing the 
estimation of minimum ALR. In addition, ICC proposed removing other 
references throughout the framework related to the estimation of 
minimum ALR. Thus, under its revised approach, ICC proposed executing 
stress test analysis by using the amount of liquid assets currently on 
deposit.
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    \8\ 17 CFR 39.33.
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    ICC proposed additional changes to the Methodology section. Among 
other things, the proposed revisions clarify that ICC's measurement and 
monitoring methodology assesses the adequacy of ICC's established 
liquidity resources in response to historically observed and 
hypothetically created (forward looking) scenarios with risk horizons 
up to and including 6-days. The analyzed scenarios feature assumptions 
that directly impact the ability of ICC to meet its payment 
obligations. Based on available IM and GF collateral on deposit on the 
day of the considered default(s), the analysis determines currency-
specific ALR by liquidity waterfall level, and compares these ALRs to 
the currency-specific Liquidity Obligations resulting from the analyzed 
scenarios on each day of the considered time horizon. According to ICC, 
to be conservative, the analysis assumes no client-related ALR and that 
only the day-1 ALR are available throughout the considered time horizon 
(i.e., the analysis does not consider ICC's ability during the 
considered time horizon to liquefy non-cash collateral on deposit or 
transform the currency of cash on deposit).
    In addition, ICC proposed changes to the Historical Analysis 
section of the Measurement and Monitoring element of the Liquidity Risk 
Management Framework. ICC proposed adding language to note that, as 
part of its historical liquidity analysis, ICC analyzes historical data 
sets to assess the level of liquidity coverage achieved for each 
currency. Under the revised framework, ICC would continue to conduct a 
historical liquidity analysis on both an individual affiliate group 
(``AG'') basis and a cover-2 basis.
    ICC also proposed the use of the Basel Traffic Light System \9\ to 
determine if the minimum cash component of its risk requirements truly 
covers historically observed 1-day liquidity obligations with a 99% 
level of confidence. ICC's risk requirements are designed to meet at 
least a 99% N-day VaR equivalent level of coverage. CPs must meet their 
IM and GF requirements with a minimum cash component equivalent to the 
1-day portion of the N-day requirement, computed using the square-root-
of-time approach.\10\
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    \9\ See Basel Committee on Banking Supervision (``BCBS''), 
Supervisory Framework for the use of ``Backtesting'' in Conjunction 
with the Internal Models Approach to Market Risk Capital 
Requirements (Jan. 1996).
    \10\ See BCBS, Amendment to the Capital Accord to Incorporate 
Market Risk (Jan. 1996).
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    ICC proposed additional enhancements to consider the simultaneous 
default of the two worst-case AGs of CPs, rather than the two worst-
case CPs, which, according to ICC, is consistent with CFTC regulations, 
including CFTC Regulation 39.33(c)(1)(ii).\11\ Under the revised 
framework, when computing a CP's combined house and client origin 
liquidity obligation for the purposes of selecting which AGs are 
considered to be in a state of default, ICC proposed to eliminate the 
application of house origin gains against client origin losses, or 
house origin losses against client origin gains. This analysis is 
designed to demonstrate to what extent the liquidity resources 
available to ICC were sufficient to meet historical single and multi-
day cover-2 Liquidity Obligations, consistent with CFTC Regulation 
39.33(c)(1)(ii), according to ICC.\12\
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    \11\ 17 CFR 39.33(c)(1)(ii).
    \12\ Id.
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    ICC also proposed enhancements to note that, for each day of its 
historical analysis and on a currency specific basis, its Risk 
Department explores predefined cover-2 scenarios considering the 
default of the CPs within two AGs creating the largest remaining 
Liquidity Obligation after applying the IM and GF cash deposits of each 
constituent CP to that CP's Liquidity Obligation.\13\
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    \13\ ICC's cover-2 analysis considers the liquidity resources 
provided by the defaulting CPs, the GF, IM liquidity resources 
provided by the non-defaulting CPs and ICC, and any externally 
available liquidity resources.
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    ICC proposed clarifying changes to note that the prices considered 
for historical analysis purposes are ``dirty'' prices as they include 
riskless (deterministic) payments (e.g., upfront fees, coupon payments, 
credit event payments, interest on mark-to-market margin). ICC proposed 
adding explanatory language regarding its calculation of the N-day 
worst-case cumulative (combined house and client origin) liquidity 
obligations. ICC also proposed removing a measurement and monitoring 
framework diagram, representing that the diagram was no longer relevant 
or necessary in light of the larger changes to the framework.
    Finally, ICC proposed revisions to note that ICC reports cover-2 
results from the observed immediate liquidity obligation scenarios and 
the worst-case five-day liquidity obligation scenarios to various 
audiences, depending on the results. ICC notes that the results should 
exhibit no deficiencies of the combined resources in Levels One through 
Four of the Liquidity Waterfall.
    ICC proposed changes to the Stress Testing Analysis section of the 
Measurement and Monitoring element of the Liquidity Risk Management 
Framework. ICC proposed re-categorizing and adding to the stress 
testing scenarios. Under the revised approach, ICC would enhance its 
description of its historically observed extreme but plausible market 
scenarios to note that the scenarios define spread or price shocks 
based on observations during specific historical events. The historical 
data set from which ICC derives the proposed scenarios will continue to 
begin on April 1, 2007 and include periods of extreme market events 
such as the Bear Stearns collapse, the Lehman Brothers default, the 
2009 Credit Crisis, the US ``Flash Crash'' event, and the European 
Sovereign Crisis. The scenarios are similar to the stress testing 
currently performed under the financial resources Stress Testing 
Framework.
    ICC proposed eliminating all scenarios not expected to be realized 
as market outcomes (i.e., those considered extreme and not plausible). 
Under the revised approach, ICC would continue to have the ability to 
execute liquidity analyses based on extreme but not plausible scenarios 
on an ad-hoc basis. Further, ICC proposed to add 1-day, 2-day, and N-
day analogues in place of existing 5-day scenarios. Under the revised 
framework, each historically observed scenario would have three 
analogues: one representing a 1-day horizon, one representing a 2-day 
horizon, and one representing an N-day horizon. Previously, only 
analogues representing an N-day horizon were considered. The addition 
of the 1-day analogue would demonstrate ICC's ability to meet its 
immediate payment obligations over a one-day period (e.g., intraday and 
same-day obligations),

[[Page 37919]]

while the 2-day and N-day analogues would demonstrate ICC's ability to 
meet its payment obligations over a multiday period.
    ICC also proposed adding a number of hypothetically constructed 
(forward looking) extreme but plausible market scenarios comprised of a 
given historically observed extreme but plausible market scenario and 
additional stress enhancements representing forward looking 
hypothetical adverse market events. Specifically, two sets of 
hypothetically constructed (forward looking) extreme but plausible 
market scenarios were proposed: loss-given default scenarios and one-
service-provider-down scenarios. The loss-given default scenarios 
consider the addition of up to three adverse credit events including 
the holder of the considered portfolio, one additional CP name, and one 
additional non-CP name. The one-service-provider-down scenarios 
consider a reduction in ALR designed to represent ICC's worst-case 
exposure to a single service provider at which it maintains cash 
deposits or investments, due to ICC's potential inability to access 
those deposits and/or investments when required. ICC proposed that the 
reduction in ALR used in the one-service-provider-down scenarios is 
based on ICC's analysis of the diversification of its deposits and 
investments across its multiple service providers. Additionally, ICC 
proposed revisions to further describe its analysis under the above 
referenced scenarios.
    ICC proposed revisions to consider the simultaneous default of the 
two worst-case AGs of CPs, rather than the two worst-case CPs, to 
conform with CFTC regulations, including CFTC Regulation 
39.33(c)(1)(ii), as ICC interprets such regulations.\14\ Under the 
proposed revisions, ICC would perform cover-2 analysis in which, for 
each scenario, it determines the two AGs creating the largest remaining 
Liquidity Obligation after applying the IM and GF cash deposits of each 
constituent CP to its own Liquidity Obligation. ICC would compare the 
remaining Liquidity Obligation of the AG to the remaining liquidity 
resources to determine if there are sufficient resources to meet the 
obligation.
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    \14\ 17 CFR 39.33(c)(1)(ii).
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    ICC proposed enhancements to describe its cover-N analysis in 
which, for each scenario, it first considers the default of one AG, 
then the defaults of two AGs, then three AGs, and so forth. The 
sequence of selecting AGs is based on the remaining Liquidity 
Obligation associated with the constituent CP's portfolios after 
applying the IM and GF cash deposits of each constituent CP to its own 
Liquidity Obligation. AGs are sequenced from largest to smallest 
remaining Liquidity Obligation. For each set of AGs considered to be in 
a state of default (1 AG, 2 AGs, 3 AGs, etc.), ICC compares the total 
remaining Liquidity Obligation to the remaining liquidity resources to 
determine if there are sufficient resources to meet the obligation. In 
this way, ICC determines how many AGs it would require to be in a state 
of default to consume all available liquidity resources.
    To determine the Liquidity Obligations in the above analysis, ICC 
applies the stress scenarios to actual cleared portfolios to determine 
a currency-specific profit/loss for each CP, representing the largest 
cumulative loss over the specified risk horizon. The considered profit/
loss in the analysis is the sum of the upfront fee changes 
corresponding to the clean prices associated with the hypothetical 
scenarios, and excluding the riskless (deterministic) payments.
    To determine ICC's liquidity needs for each scenario, ICC's Risk 
Department computes Liquidity Obligations for futures commission 
merchant and broker-dealer CPs by combining the net payments for house 
and client origin accounts. For the purposes of selecting defaulting 
AGs, ICC's Risk Department does not offset client origin losses with 
house origin gains, or offset house origin losses with client origin 
gains.
3. Governance
    With respect to the Governance element of the Liquidity Risk 
Management Framework, the Required Analysis and Interpretation of 
Results and Potential Actions sections would remain substantially the 
same. The Model Validation section would be revised to note that the 
Liquidity Risk Management Framework is under the purview of the Model 
Validation Framework and subject to initial validations.
    In the Materiality and Reporting Framework section, ICC proposed a 
change that would note that, at each ICC Risk Committee meeting, ICC's 
Risk Department would provide a summary of historical liquidity 
analysis and liquidity stress testing analysis intended to demonstrate 
the adequacy of ICC's liquidity resources to cover Liquidity 
Obligations over N-days. Such analyses would also include any instance 
where Level Three resources were required to meet Liquidity Obligations 
in response to any of the considered historical liquidity or liquidity 
stress testing scenarios.
    Further, ICC proposed revisions to note that, when exceedances of 
funded and/or unfunded resources are identified, ICC's Risk Department 
would be required to report them to the senior management team and the 
ICC Risk Committee, and (i) demonstrate that the breaches do not 
highlight a significant liquidity risk management weaknesses or (ii) 
recommend specific liquidity risk management model enhancements that 
produce an adequate increase in funded and/or unfunded liquidity 
resources under the identified scenario(s). In addition to the 
reporting described above, ICC's Risk Department would also report to 
the ICC Risk Committee any instances where the Basel Traffic Light 
System categorizes the number of observed exceedances in its individual 
AG historical analysis as being in the predefined ``red zone.'' In 
these instances, ICC's Risk Department would discuss with ICC's Risk 
Committee the appropriateness of its liquidity thresholds, and if 
appropriate, make revisions.

B. Stress Testing Framework

    ICC proposed revisions to its Stress Testing Framework to unify the 
stress testing scenarios with the liquidity stress testing scenarios 
set forth in the Liquidity Risk Management Framework. ICC operates its 
stress testing and liquidity stress testing on a unified set of stress 
testing scenarios and systems. As such, revisions to the stress testing 
scenarios are necessary to ensure scenario unification following 
changes to the Liquidity Risk Management Framework. The proposed 
revisions are described in detail as follows.
    ICC proposed to introduce Risk Factor specific scenarios for all 
stress test scenarios. Previously, corporate single names were 
considered at the sector level, as opposed to the Risk Factor level. 
This change would be reflected throughout the framework.
    ICC also proposed to add clarifying language to note that the 
predefined stress testing scenarios set forth in its Stress Testing 
Framework would be applied to all cleared instruments, and that name-
specific scenarios would be applied to all sovereign and corporate 
reference entities.
    ICC proposed revisions to extend ICC's margin risk horizon up to 6-
days, to account for the risk associated with clearing Asia Pacific 
products. This change would apply throughout the framework.
    ICC also proposed to revise its description of the Historically 
Observed Extreme but Plausible Market Scenarios section to note that 
the stress spread changes considered as part of each

[[Page 37920]]

scenario are extracted from the market history of the most actively 
traded instrument for the considered Risk Factors.
    ICC proposed to revise the Hypothetically Constructed (Forward 
Looking) Extreme but Plausible Market Scenarios section to ensure 
consistency with the loss-given default stress scenario set forth in 
the Liquidity Risk Management Framework, which combines a given 
historically observed extreme but plausible market scenario with 
explicit Jump-to-Default events. The proposed revisions specify that 
there would be up to two reference entities selected for a hypothetical 
adverse credit event.
    Finally, ICC proposed to revise the description of the discordant 
scenarios (i.e., scenarios under which selected risk factors move in 
opposite directions) in the Stress Testing Framework to reflect the 
introduction of Risk Factor specific scenarios. According to ICC, the 
discordant scenarios are designed to reproduce significant discordant 
market outcomes observed during the considered historical period. ICC 
creates discordant scenarios for North American corporate single names 
and indices; European corporate single names and indices; and sovereign 
reference entities.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act 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 Exchange Act and the rules and regulations 
thereunder applicable to such organization.\15\ Section 17A(b)(3)(F) of 
the Exchange 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.\16\ Rule 17Ad-22(d)(11) requires, in relevant part, that 
a registered clearing agency establish default procedures that ensure 
that the clearing agency can take timely action to contain losses and 
liquidity pressures and to continue meeting its obligations in the 
event of a participant default.
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    \15\ 15 U.S.C. 78s(b)(2)(C).
    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds that the proposed rule change, which revises 
ICC's Liquidity Risk Management Framework and makes conforming changes 
to ICC's Stress Testing Framework, is consistent with Section 17A of 
the Exchange Act and Rule 17Ad-22(d)(11) thereunder. As represented by 
ICC, the various elements set forth in the Liquidity Risk Management 
Framework, and described above, ensure that ICC has sufficient 
liquidity resources to effectively measure, monitor, and manage its 
liquidity risk. Further, ICC represented the Liquidity Risk Management 
Framework supports ICC's ability to maintain sufficient liquid 
resources in all relevant currencies to effect same-day and, where 
appropriate, intraday and multiday settlement of payment obligations 
with a high degree of confidence under a wide range of potential stress 
scenarios. ICC represented that changes to the Stress Testing Framework 
were necessary following recent changes to the Liquidity Risk 
Management Framework, as ICC operates its stress testing and liquidity 
stress testing on a unified set of stress testing scenarios and 
systems. ICC stated that its stress testing practices will continue to 
ensure the adequacy of systemic risk protections. ICC represented that 
the revised stress test scenarios set forth in the Stress Testing 
Framework will continue to ensure that ICC maintains sufficient 
financial resources to withstand a default by the CP family to which it 
has the largest exposure in extreme but plausible market conditions. 
The Commission therefore believes that the proposed revisions to the 
ICC Liquidity Risk Management Framework and Stress Testing Framework 
are designed to promote the prompt and accurate settlement of 
securities transactions, derivatives agreements, contracts, and 
transactions for which ICC is responsible, consistent with Section 
17A(b)(3)(F) of the Exchange Act. Furthermore, for similar reasons, the 
Commission finds that the proposed revisions are consistent with the 
requirements of Rule 17Ad-22(d)(11).
    Section 19(b)(2)(C)(iii) of the Exchange Act allows the Commission 
to approve a proposed rule change earlier than 30 days after the date 
of publication of the notice of the proposed rule change in the Federal 
Register where the Commission finds good cause for so doing and 
publishes the reason for the finding.\17\ In its filing, ICC requested 
that the Commission approve the proposed rule change on an accelerated 
basis for good cause shown. ICC represented that the amendments to 
ICC's Liquidity Risk Management Framework and Stress Testing Framework 
set forth in the proposed rule change further ICC's compliance with 
CFTC regulations. The Commission also notes that the CFTC is the 
supervisory agency for ICC under Section 803(8)(A)(ii) of the Payment, 
Clearing, and Settlement Supervision Act of 2010.\18\ Based on the 
foregoing, the Commission finds that good cause exists to approve the 
proposed rule change on an accelerated basis pursuant to Section 
19(b)(2)(C)(iii) of the Exchange Act.
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    \17\ 15 U.S.C. 78s(b)(2)(C)(iii).
    \18\ 12 U.S.C. 5462(8)(A)(ii).
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IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act that the proposed rule change (SR-ICC-2017-011) be, and 
hereby is, approved on an accelerated basis.\19\
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    \19\ 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).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-17052 Filed 8-11-17; 8:45 am]
BILLING CODE 8011-01-P


