[Federal Register Volume 83, Number 13 (Friday, January 19, 2018)]
[Notices]
[Pages 2855-2858]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00853]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82496; File No. SR-ICEEU-2017-016]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Proposed Rule Change, Security-Based Swap Submission or Advance 
Notice Relating to the ICE Clear Europe Recovery Plan

January 12, 2018.
    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 December 29, 2017, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule changes described in Items I, II and III below, which 
Items have been prepared 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

    Consistent with its obligations under applicable laws and 
regulations,\3\ ICEU has adopted a Recovery Plan identifying certain 
critical clearing services it provides and addressing its tools, 
mechanisms and options for addressing scenarios that threaten its 
ability to continue to provide such services.
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    \3\ As discussed in further detail herein, ICE Clear Europe is 
required to establish a recovery plan under relevant provisions of 
the UK Financial Services and Markets Act 2000 (Recognition 
Requirements for Investment Exchanges and Clearing Houses) 
Regulations 2001 (SI/2001/1995) and Commission Rule 17Ad-
22(e)(3)(ii), 17 CFR 240.17Ad-22(e)(3)(ii).
    The Plan is also designed to be consistent with the Committee on 
Payments and Market Infrastructures (``CPMI'')--International 
Organization of Securities Commissions (``IOSCO'') Principles for 
Financial Market Infrastructures (``PFMIs''), including supplemental 
guidance from CPMI-IOSCO which includes its report on ``Recovery of 
financial market infrastructures'' published in October 2014 and 
revised July 2017 (the ``Recovery Guidance'').
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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.

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

(a) Purpose
    Consistent with its obligations under applicable laws and 
regulations, ICE Clear Europe has adopted a Recovery Plan. The Recovery 
Plan is based on, and is intended to be consistent with, ICEU's 
Clearing Rules (the ``Rules'') \4\ and Procedures, as well as its 
existing risk management frameworks, policies and procedures.
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    \4\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
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Overview of the Recovery Plan
    The Recovery Plan identifies the critical services that ICEU 
provides, and the business functions that support those services. In 
ICEU's view, its clearing services (for both the F&O and CDS product 
categories), and its related treasury and banking services, represent 
its critical services. The Recovery Plan outlines a number of firm-
specific and market-wide stress scenarios that, in ICEU's 
determination, may result in significant losses or liquidity shortfall, 
suspension or failure of its critical services and related functions 
and systems, and damage to other market infrastructure, with resulting 
uncertainty in the markets for which ICEU clears. These include both 
losses from Clearing Member default and non-default loss scenarios. The 
Recovery Plan further evaluates different impact categories and 
severity levels of these stress scenarios. The Recovery Plan then 
addresses the tools, mechanisms and options (``Recovery Options'') upon 
which ICEU may draw (based on its existing Rules, Procedures and 
policies and frameworks) in order to address a stress scenario and 
continue to provide its critical services, and the actions to implement 
those options (including appropriate escalation and early warning 
procedures). The Recovery Plan also addresses communication with 
regulators and other relevant stakeholders and related governance 
issues. The Recovery Plan further considers the implications of certain 
situations that may be beyond its control, such as interdependencies 
with other institutions.
    The Recovery Plan also addresses the roles and responsibility of 
ICEU Board, management and other personnel, including with respect to 
development, review and approval, testing and maintenance and liaison 
with relevant regulatory authorities. The Recovery Plan also includes a 
description of ICEU, its organizational structure, its applicable 
regulatory regime and the standards and guidelines that have informed 
the Recovery Plan. The Recovery Plan is based on the Rules and 
Procedures of the clearing house as they are in effect, and does not 
itself change the rights and obligations of the clearing house or its 
Clearing Members thereunder.
Critical Services and Functions
    As noted above, ICEU has determined that both its F&O and CDS 
product category clearing services, as well as its related treasury and 
banking services, are critical services. The Recovery Plan sets out the 
methodology used by the clearing house in assessing the criticality of 
services for this purpose. ICEU has also identified the front-end 
business functions and support areas

[[Page 2856]]

(including IT services) that support these critical services. In 
particular, the Recovery Plan identifies the particular IT systems and 
services used by ICEU in providing its clearing services (including 
trade management systems, collateral management systems, risk systems 
and delivery systems). The Recovery Plan notes the locations from which 
these services are provided and, in cases where the services are 
provided by an affiliate or other third party, identifies that party. 
The Recovery Plan also identifies other key service providers on which 
ICEU relies, including custodians, concentration banks, other approved 
payment banks, investment managers and delivery services providers. The 
Recovery Plan considers the key services provided by ICE affiliates in 
support of the ICEU clearing activities, including information 
technology and risk management services.
Stress Scenarios
    The Recovery Plan analyzes different stress scenarios that may 
affect ICEU's ability to continue to provide its critical services. The 
two relevant categories of stress scenarios are default losses and non-
default losses. Default losses for this purpose are losses suffered by 
ICEU as a result of the default of one or more Clearing Member(s). Non-
default losses are those suffered by ICEU from identified general 
business and operational risk events, investment losses, system outages 
or world-wide or regional political or macroeconomic events. In both 
categories, ICEU also considers losses resulting from liquidity risks 
and from the risk of contagion. ICEU uses a risk-based approach to 
scenario analysis, consisting of different impact categories and 
severity levels. Specifically, ICEU looks at impacts in five areas: 
Financial and operational impacts (affecting ICEU's own finances), 
Clearing Members and their customers (affecting their financial 
viability), other group infrastructure (affecting the efficiency or 
effectiveness of other related ICE entities (including exchanges 
cleared by ICEU), legal and regulatory considerations and macroeconomic 
(affecting market operations and market stability).
    In terms of impact severity, ICEU assesses scenarios in categories 
of low, moderate, high, very high and severe. In the context of a 
default loss, a low severity impact would include a loss contained to 
the financial resources of the defaulting Clearing Member. By contrast, 
an event with a severe impact level would be expected to exhaust the 
funded resources of the clearing house (including ICEU's contribution 
and the Guaranty Fund contributions of non-defaulting Clearing 
Members). Other intermediate severity levels will involve corresponding 
levels of resource consumption and impact on the clearing house. For 
non-default losses, a low severity is generally defined as a loss of 
less than 25% of capital resources or a loss having no direct impact on 
Clearing Members. By contrast, a severe non-default loss would be one 
in excess of 75% of capital resources are used, or one that otherwise 
involves a severe degradation of operations. The Recovery Plan 
contemplates that the range of responses to a loss scenario, including 
the potential Recovery Options used, will depend on the severity level 
(with low severity loss events involving limited or no use of Recovery 
Options, and severe loss scenarios requiring use of all of the 
available Recovery Options). The Recovery Plan also contemplates 
different levels of coordination with other CCPs, market participants, 
regulators and others depending on the severity of the event.
Recovery Options
    The Recovery Plan sets out the likely Recovery Options that ICEU 
may implement depending upon the severity of the impact of the 
scenario, as discussed above. The Recovery Options are based on the 
rights and obligations of the clearing house under the Rules, 
Procedures, Risk Management Framework, Default Management Framework, 
Liquidity Risk Management Framework and other relevant policies and 
procedures.
    The Recovery Plan considers a non-exhaustive list of available 
Recovery Options in terms of a number of factors, including the speed 
with which each option can be implemented, the impact on the clearing 
house, the impact on Clearing Members and their customers, and the 
effect on other market infrastructure. The Recovery Plan analyzes loss 
impact and the use of Recovery Tools separately for F&O defaults, CDS 
defaults and non-default losses. In general, in the case of default 
losses, relevant Recovery Options include, consistent with the Rules, 
powers of assessment, use of a default auction in accordance with 
auction procedures to fully unwind the defaulter's portfolio (for F&O 
contracts), forced allocation, to the extent the defaulter's positions 
cannot otherwise be unwound (for CDS contracts), variation margin gains 
haircutting (for F&O contracts), porting of client positions and 
clearing service termination (for F&O contracts).\5\ In terms of non-
default losses, Recovery Options include emergency liquidity 
facilities, investment loss allocation to Clearing Members to the 
extent permitted by the Rules and service closure. The Plan contains 
greater detail regarding how each tool assists with the recovery 
process. Consistent with the Default Management Framework, the Recovery 
Plan is intended to be flexible and provide a structure and guidance to 
management. It is not designed to be prescriptive and it recognizes 
that the actions to be taken by the clearing house may vary depending 
on the prevailing circumstances which lead to the default rules being 
implemented. The Recovery Plan also examines the reliability, 
timeliness and legal basis of different Recovery Options.
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    \5\ ICEU notes that it is preparing to propose certain 
amendments to its Rules relating to Recovery Options with respect to 
CDS contracts, to provide for auctions and variation margin gains 
haircutting and to eliminate forced allocation, among other changes.
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Recovery Option Application
    The Recovery Plan outlines the situations (and sequence) in which 
each of the Recovery Options is likely to be used, recognizing that the 
clearing house has discretion as to the particular actions to take in a 
default or non-default loss scenario. In general, use of Recovery 
Options is expected in extreme circumstances where losses exceed pre-
funded resources of the clearing house. The Recovery Plan specifies the 
expected bases for using Recovery Options, such as powers of assessment 
and variation margin gains haircutting. It further specifies the 
decision-making process for the use of such options, separately for 
default and non-default loss scenarios. These arrangements generally 
specify a particular scenario in which a Recovery Option may be used, 
along with the key decision-makers involved. In most cases, under the 
Rules and the default management frameworks, the decision will be made 
by the ICEU president and managing director pursuant to the authority 
delegated by the Board, for both default and non-default loss events. 
In the case of default events, such actions would be taken having 
regard to the advice of the default management committee. In practice, 
the president, where appropriate and time permitting, would be expected 
to consult with the Board or with individual Board members before 
taking significant actions. The president may also call an emergency 
Board meeting or make Board members aware of the current position. The 
president will

[[Page 2857]]

report decisions to the Board at the next formal Board meeting. If the 
President is absent, the Chief Operating Officer will act in his stead.
    The Recovery Plan recognizes the importance of clear communications 
and contemplates that use of Recovery Options would be expected to be 
implemented through close discussions with the ICEU Board, ICEU Board 
Risk Committee, Clearing Members, regulators, shareholders and other 
stakeholders. The Recovery Plan recognizes the risk that ICEU's actions 
could cause contagion and envisages communication with regulators and 
other financial market infrastructures to mitigate such effects.
    The Recovery Plan also sets out a series of early warning 
indicators and tools intended to notify ICEU management that use of 
Recovery Options may be required, and where possible, avoid the need 
for such actions. These include liquidity forecasting and monitoring, 
use of a conservative approach to counterparty credit analyses and 
establishment of margin and Guaranty Fund requirements, use of 
comprehensives risk metrics to monitor Clearing Member financial 
performance, back-testing and stress testing, and other assessments. 
The clearing house also retains the mechanisms and resources to take 
prompt decisions, and allow an immediate response to an emerging 
situation. The Recovery Plan sets out detailed lists of potential early 
warning indications of a potential loss scenario, such as repeated non-
compliance by a Clearing Member with membership or other requirements, 
actions taken by regulators or other governmental authorities with 
respect to a Clearing Member, certain quantitative factors, 
restructuring and similar events. The Recovery Plan outlines particular 
means of monitoring for potential loss scenarios following such 
indications.
Limitations of the Recovery Plan and Related Monitoring
    The Recovery Plan has set out arrangements for identifying and 
responding to structural weaknesses in governance and risk management 
that may be identified in a default event or non-default event. ICEU's 
tools to address such potential weaknesses include: Default tests, 
operational risk measures (including for business continuity and 
disaster recovery purposes), an operational oversight committee, 
internal audit and consultation with external legal counsel.
    The Recovery Plan also notes certain potential limitations of the 
Recovery Plan, including the risk of potential legal uncertainty (such 
as a challenge by Clearing Members or other market participants to the 
use of Recovery Options, notwithstanding the protections available to 
ICEU under applicable law and the legal diligence conducted by the 
clearing house with respect to its Rules and policies and procedures). 
The Recovery Plan also identifies risks of reliance on third party 
market infrastructures, and notes that the risk of such infrastructure 
being unavailable is contemplated in stress scenarios. The Recovery 
Plan also notes ICEU's reliance on the continued support of 
Intercontinental Exchange, Inc., including as to technology, 
replenishment of capital resources and business continuity and disaster 
recovery.
Governance
    The overall accountability for the Recovery Plan lies with the ICEU 
President. The Recovery Plan was prepared with the active involvement 
of the management of ICEU. The Recovery Plan is reviewed and approved 
by the ICEU Board. The Head of Regulation is responsible for 
facilitating the overall production and implementation of the Recovery 
Plan as well as its maintenance. The ICEU Board Audit Committee, Chief 
Risk Officer, Chief Operating Officer and Executive Risk Committee also 
have roles in the implementation of the Recovery Plan.
    Second line functions are responsible for ensuring that the 
Recovery Plan remains up-to-date and reviewed in accordance with 
internal review and governance control arrangements. On an annual 
basis, the owner will revise the Recovery Plan and present the revised 
version to the ICEU Board. Material changes to the Recovery Plan must 
be reviewed by ICEU management and be subject to governance control. 
Minor changes can be incorporated as part of the routine review 
process.
    As part of governance control, the Recovery Plan is subject to 
annual review by the ICEU Board Audit Committee. Recommendations and 
discussions by the ICEU Board Audit Committee are recorded and 
submitted to the Board in a timely manner. The scenarios and actions 
that support the Recovery Plan are subject to ICEU Board approval 
annually. Ad hoc reviews may be commissioned if the business materially 
changes, for example upon the introduction of a new service. Material 
changes to the Recovery Plan or the scenarios, including those brought 
about by market events, are subject to ICEU Board approval, following 
their review and discussion by the ICEU Board Audit Committee. 
Deviations from the Recovery Plan must be reported to the ICEU Board. 
Elements of the Recovery Plan are tested as part of normal operations 
and risk management procedures.
(b) Statutory Basis
    ICEU believes that the proposed amendments are consistent with the 
requirements of Section 17A of the Act \6\ and the regulations 
thereunder applicable to it, including the standards under Rule 17Ad-
22.\7\
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    \6\ 15 U.S.C. 78q-1.
    \7\ 17 CFR 240.17Ad-22.
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    Section 17A(b)(3)(F) of the Act \8\ 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 or for which it is responsible, and 
the protection of investors and the public interest. In addition, Rule 
17Ad-22(e)(3)(ii) \9\ requires that each covered clearing agency shall 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, maintain a sound risk 
management framework for comprehensively managing legal, credit, 
liquidity, operational, general business, investment, custody, and 
other risks that arise in or are borne by the covered clearing agency, 
which includes plans for the recovery and orderly wind-down of the 
covered clearing agency necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The Recovery Plan is designed to meet the requirements of Rule 
17Ad-22(e)(3)(ii), and is further consistent with the requirements of 
the Act. The Recovery Plan sets out ICEU's plan for recovering from 
severe loss events, including from credit losses resulting from 
Clearing Member default, liquidity shortfalls, losses from general 
business risk, and other types of losses. The Recovery Plan outlines 
different loss scenarios of these types that ICEU considers as part of 
its planning process. The Recovery Plan further builds on the 
provisions of the Rules, and other risk management frameworks, to set 
out the different Recovery Options that the clearing house has 
available to it to address loss scenarios, and restore or maintain 
normal clearing operations. The Recovery Plan outlines triggers for

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the use of Recovery Tools, as well as the governance process around the 
use of Recovery Options. The Recovery Plan also provides greater 
transparency to market participants, including Clearing Members and 
their customers, about the expected sequence and scope of recovery 
actions that ICEU may take in a loss scenario. In ICEU's view, the 
Recovery Plan thus meets the requirements of Rule 17Ad-22(e)(3)(ii). 
Furthermore, ICEU views the Recovery Plan as a key aspect of its 
general risk management framework, which furthers its ability to 
maintain the prompt and accurate clearance and settlement of 
transactions, including in severe loss scenarios, and thereby promote 
the protection of investors and the public interest, within the meaning 
of Section 17A(b)(3)(F) of the Act.
    ICEU further notes the requirement in Rule 17Ad-22(e)(15) \10\ to 
hold sufficient liquid net assets funded by equity to cover potential 
general business losses so that the covered clearing agency can 
continue operations and services as a going concern if those losses 
materialize, including by (i) determining the amount of liquid net 
assets funded by equity based upon its general business risk profile 
and the length of time required to achieve a recovery or orderly wind-
down, as appropriate, of its critical operations and services if such 
action is taken, and (ii) holding liquid net assets funded by equity 
equal to the greater of either (x) six months of the covered clearing 
agency's current operating expenses, or (y) the amount determined by 
the board of directors to be sufficient to ensure a recovery or orderly 
wind-down of critical operations and services of the covered clearing 
agency, as contemplated by the recovery and wind-down plans established 
under Rule 17Ad-22(e)(3)(ii).
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    \10\ 17 CFR 240.17Ad-22(e)(15).
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    ICEU has determined that it holds equity capital at least 
sufficient to cover the costs of a recovery of its critical clearing 
services under the Recovery Plan, consistent with the requirements of 
Rule 17Ad-22(e)(15).\11\
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    \11\ 17 CFR 240.17Ad-22(e)(15).
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(B) Clearing Agency's Statement on Burden on Competition

    ICEU does not believe the proposed Recovery Plan would have any 
impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The Recovery 
Plan does not itself change the rights or obligations of the clearing 
house or Clearing Members, and reflects the Recovery Options set out in 
existing Rules and risk management policies. The Recovery Plan has been 
designed to meet specific regulatory requirements concerning recovery 
planning, and is applicable to all clearing activities. ICEU does not 
believe the amendments will impact competition among Clearing Members 
or other market participants, or affect the ability of market 
participants to access clearing generally. While implementation of the 
Recovery Plan, and in particular use of the Recovery Plan in a severe 
loss scenario, would likely impose costs on Clearing Members or other 
market participants, such costs are consistent with the existing Rules, 
and are, in ICEU's view, appropriate in light of the goals of recovery 
and maintenance of critical clearing service in accordance with 
applicable regulations.

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

    Written comments relating to the proposed amendments have not been 
solicited or received by ICE Clear Europe. ICE Clear Europe will notify 
the Commission of any comments received with respect to the proposed 
rule change.

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 [email protected]. Please include 
File Number SR-ICEEU-2017-016 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ICEEU-2017-016. 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 website (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 website viewing and printing in the Commission's Public Reference 
Section, 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 website 
at https://www.theice.com/notices/Notices.shtml?regulatoryFilings.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ICEEU-2017-016 and should be 
submitted on or before February 9, 2018].

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00853 Filed 1-18-18; 8:45 am]
BILLING CODE 8011-01-P


