[Federal Register Volume 83, Number 18 (Friday, January 26, 2018)]
[Notices]
[Pages 3821-3824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01357]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82542; File No. SR-ICC-2018-001]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change, Security-Based Swap Submission, or 
Advance Notice Relating to the ICC Rules, ICC Risk Management Model 
Description Document, ICC Risk Management Framework, ICC Stress Testing 
Framework, and ICC Liquidity Risk Management Framework

January 19, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ and Rule 19b-4,\2\ notice is hereby given that on January 16, 
2018, ICE Clear Credit LLC (``ICC'') 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 ICC. The Commission is publishing this notice to solicit comments on 
the proposed rule change.
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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 purpose of the proposed rule change is to make revisions to the 
ICC Clearing Rules (the ``Rules'') to support clearing of a new 
transaction type. ICC also proposes related loss given default 
enhancements to the ICC Risk Management Model Description Document, the 
ICC Risk Management Framework, the ICC Stress Testing Framework, and 
the ICC Liquidity Risk Management 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, ICC included statements 
concerning the purpose of and basis for the proposed rule change, 
security-based swap submission, or advance notice and discussed any 
comments it received on the proposed rule change, security-based swap 
submission, or advance notice. The text of these statements may be 
examined at the places specified in Item IV below. ICC has prepared 
summaries, set forth in sections (A), (B), and (C) below, of the most 
significant aspects of these 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
    ICC proposes revisions to its Rules, Risk Management Model 
Description Document, Risk Management Framework, Stress Testing 
Framework, and Liquidity Risk Management Framework. ICC believes such 
revisions will facilitate the prompt and accurate clearance and 
settlement of securities transactions and derivative agreements, 
contracts, and transactions for which it is responsible. The proposed 
revisions are described in detail as follows.
Proposed Amendments to the ICC Rules
    The purpose of the proposed changes to the ICC Rules is to support 
clearing of a new transaction type, Standard European Senior Non-
Preferred Financial Corporate, which was recently published by the 
International Swaps and Derivatives Association, Inc. (``ISDA''). ICC 
proposes amending its Rules to provide for the clearance of contracts 
referencing this new transaction type. ICC believes the addition of 
these contracts will benefit the market for credit default swaps by 
providing market participants the benefits of clearing, including 
reduction in counterparty risk and safeguarding of margin assets 
pursuant to clearing house rules.
    Specifically, ICC proposes amending Rule 26H-102 (Definitions), 
`List of Eligible Standard European Financial Corporate (``STEFC'') 
Reference Entities' to include Standard European Senior Non-Preferred 
Financial Corporate in the list of Eligible STEFC Reference Entities to 
be cleared by ICC. ICC also proposes amending Rule 26H-102 
(Definitions), `STEFC Contract Reference Obligations' to note that in 
the case of a STEFC Reference Entity where the transaction type is 
Standard European Senior Non-Preferred Financial Corporate, the STEFC 
Contracts Reference Obligation shall be determined in accordance with 
the Additional Provisions for Senior Non-Preferred Reference 
Obligations, as published by ISDA. ICC also proposes conforming changes 
to Rule 26H-303 (STEFC Contract Adjustments) and Rule 26H-315 (Terms of 
the Cleared STEFC Contract), to incorporate reference to the new 
transaction type.
Proposed Loss Given Default Enhancements
    ICC's risk management methodology incorporates considerations of 
idiosyncratic credit events and the associated potential losses. These 
credit event losses are termed Loss-Given-Default (``LGD''). In order 
to support clearing of the new transaction type, ICC proposes certain 
LGD enhancements to its risk model. A description of these changes is 
set forth below.
    ICC first proposes Risk Factor (``RF'') level LGD enhancements. 
These proposed RF level enhancements are designed to better capture the 
LGD risk associated with the issuance of new debt structures by 
European banks, and provide a consistent recovery rate scenario 
approach to different sub-factors.
    Under ICC's risk model, every Single Name (``SN'') reference entity 
is deemed a RF. Each combination of definition, doc-clause, tier, and 
currency for a given SN RF determines a SN Risk Sub-Factor (``RSF''). 
Currently, ICC measures losses associated with credit events (``LGD'') 
by means of a stress-based approach, which utilizes three recovery rate 
(``RR'') scenarios: Minimum RR, expected RR, and maximum RR. Outright 
and index-derived RSF exposures are combined at each RR scenario.
    The results of these RR scenarios are used as an input into the 
Profit/Loss-Given-Default (``P/LGD'') calculations at both the RSF and 
RF levels. For each RSF, P/LGD is calculated as the worst credit event 
outcome, and for each RF, P/LGD is calculated as the sum of the worst 
credit outcomes per RSF. These final P/LGD results are used as part of 
the determination of risk requirements.
    ICC proposes enhancements to the RF level LGD calculation. 
Specifically, ICC proposes a change to the calculation by incorporating 
a more consistent approach in the calculation of the P/LGD by using the 
same RR scenarios applied to the different RSFs which part of the 
considered RF.
    For each RF, ICC will continue to calculate an ``extreme outcome'' 
as the sum of the worst RSF P/LGDs across all scenarios. ICC will also, 
for each RF, calculate an ``expected outcome'' as the worst sum of all 
the RSF P/LGDs across all of the same scenarios. Under the proposed 
approach, ICC will then combine the results of the ``extreme outcome'' 
calculation and the ``expected outcome'' calculation to compute the 
total LGD for each RF.
    ICC also proposes to expand its LGD analysis to Risk Factor Groups 
(``RFG''). Under the proposed changes, a collection of related RFs will 
form a RFG. These related RFs will be defined as a RFG based on either 
(1) having a common majority parental sovereign ownership (e.g. quasi-
sovereigns and sovereigns), or (2) being a majority

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owned subsidiary of a common parent entity according to the Bloomberg 
Related Securities Analysis. A RFG can consist of only one RF. This 
change will better capture the risk exposure dynamics of related RFs, 
and will allow ICC the ability to provide limited LGD benefits across 
RFs with opposite exposures, as well as allow for the ability to 
capture accumulation of directional exposure for related RFs.
    Under the proposed approach, the total quantity LGD will be 
calculated on a RFG level, and account for the exposure due to credit 
events associated with the reference entities within a given RFG. If a 
RFG contains only one RF, the LGD will continue to be computed as the 
risk exposure due to a credit event for a given underlying reference 
entity. Under the proposed approach, ICC will sum the P/LGDs for each 
RF in a given RFG, with limited offsets in the event RFs exhibit 
positive PLGD. Using the results of the above calculation, ICC will 
obtain the RFG level LGD. The proposed approach also includes a 
calculation which allows for the RFG level LGD to be attributed to each 
RF within the considered RFG.
    ICC proposes changes to the `Loss Given Default Risk Analysis' 
section of the Risk Management Model Description Document to reflect 
the described RF and RFG LGD calculation changes. ICC also proposes 
conforming changes to other sections of the Risk Management Description 
Document to incorporate these methodology changes and reflect the RFG 
analysis.
    ICC proposes a revision to the `Uncollateralized Loss Given 
Default' calculation in order to incorporate the RFG level LGD 
attribution calculation mentioned above.
    ICC proposes changes to the `Idiosyncratic Jump-to-Default 
Requirements' section of the Risk Management Model Description 
document. Currently, the portfolio JTD approach collateralizes the 
worst uncollateralized LGD (``ULGD'') exposure among all RFs. Under the 
proposed approach, the portfolio JTD approach will collateralize, 
through the portfolio JTD IM requirement that accounts for the RFG-
specific LGD collateralization, the worst ULGD exposure among all RFGs. 
The ULGD exposure for a given RFG will be calculated as a sum of the 
associated RF ULGDs.
    ICC also proposes minor edits to the `Portfolio Level Wrong-Way 
Risk and Contagion Risk Analysis' section to update language and 
calculation descriptions to accommodate the introduction of the RFG to 
the `Idiosyncratic Jump-to-Default Requirements' section.
    ICC proposes changes to the `Guaranty Fund Methodology' section. 
ICC's risk management approach establishes GF to provide for the 
mutualization of losses under extreme credit market scenarios. 
Specifically, the ICC GF is designed to provide adequate funds to cover 
losses associated with the default of the two CP affiliate groups that 
would potentially cause the largest aggregate credit exposure to ICC 
under extreme but plausible market conditions. ICC's current GF 
methodology includes, among other assumptions and adverse market 
conditions, the assumption that up to three credit events, different 
from the ones associated with CPs, occur during the established risk 
horizon. ICC proposes expanding this analysis to the RFG level. Under 
this proposed approach, it will be assumed that credit events 
associated with up to three RFGs, different from the ones associated 
with the CPs and the RFs that are in the RFGs as the CPs, occur during 
the established risk horizon. As such, the uncollateralized losses, 
used in the Guaranty Fund analysis, reflect the proposed expansion to 
the RFG level.
    ICC also proposes clarifications to the calculation for the 
Specific Wrong Way Risk component of the Guaranty Fund. Currently, for 
a given CP, the Specific Wrong Way Risk component is based on self-
referencing positions arising from one or more RFs; ICC proposes 
clarifying this analysis to be based on the RFG level.
    ICC proposes conforming changes to its Risk Management Framework, 
Liquidity Risk Management Framework, and Stress Testing Framework, to 
reflect the LGD enhancements described above. For the Risk Management 
Framework, ICC proposes revisions to the `Jump-to-Default Requirements' 
section to note that the worst LGD associated with a RFG is selected to 
establish the portfolio idiosyncratic JTD requirements. ICC also 
proposes revisions to the `Guaranty Fund' section to reflect the RFG 
LGD enhancements related to ICC's Guaranty Fund calculation.
    With regards to the Stress Testing Framework, ICC proposes changes 
to its stress testing methodology to be based on the reference entity 
group level (also referred to as the RFG level). Currently, ICC 
utilizes scenarios based on hypothetically constructed (forward 
looking) extreme but plausible market scenarios augmented with adverse 
credit events affecting up to two additional reference entities per CP 
affiliate group; ICC proposes expanding its adverse credit event 
analysis to include up to two additional reference entity groups. ICC 
also proposes that the selected RFG for stress testing purposes must 
contain one or more reference entities displaying 500 bps or greater 1-
Y end-of-day spread level in order to be subjected to credit events. 
ICC also proposes changes to its reverse stress testing, general wrong 
way risk, and contagion stress testing analyses, to be at the RFG 
level. ICC proposes removing RF level references under its Recovery 
Rate Sensitivity analysis to be consistent with the proposed changes 
related to RFG.
    Finally, with regards to the ICC Liquidity Risk Management 
Framework, ICC proposes changes to its liquidity stress testing 
methodology to be based on the reference entity group level (also 
referred to as the RFG level). Currently (consistent with the stress 
testing methodology), ICC utilizes scenarios based on hypothetically 
constructed (forward looking) extreme but plausible market scenarios 
augmented with adverse credit events affecting up to two additional 
reference entities per CP affiliate group; ICC proposes expanding its 
adverse credit event analysis to include up to two additional reference 
entity groups. Similar to the Stress Testing Framework, ICC also 
proposes that the selected RFG for liquidity stress testing purposes 
must contain one or more reference entities displaying 500 bps or 
greater 1-Y end-of-day spread level in order to be subjected to credit 
events. Finally, ICC is adding additional language to the liquidity 
framework detailing the rationale behind the selection of the 500 bps 
threshold, to be consistent with Stress Testing Framework.
(b) Statutory Basis
    Section 17A(b)(3)(F) of the Act \3\ 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 and to comply with the provisions of the Act and the rules 
and regulations thereunder. ICC believes that the proposed rule changes 
are consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to ICC, in particular, to Section 
17(A)(b)(3)(F),\4\ because ICC believes that the proposed rule changes 
will promote the prompt and accurate clearance and settlement of 
securities

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transactions, derivatives agreements, contracts, and transactions.
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    \3\ 15 U.S.C. 78q-1(b)(3)(F).
    \4\ Id.
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    In regards to the proposed amendments to the ICC Rules, contracts 
referencing the Standard European Senior Non-Preferred Financial 
Corporate transaction type are similar to the STEFC contracts currently 
cleared by ICC, and will be cleared pursuant to ICC's existing clearing 
arrangements and related financial safeguards, protections and risk 
management procedures. Clearing of these contracts will allow market 
participants an increased ability to manage risk and ensure the 
safeguarding of margin assets pursuant to clearing house rules. ICC 
believes that acceptance of these contracts, on the terms and 
conditions set out in the Rules, is consistent with the prompt and 
accurate clearance of and settlement of securities transactions and 
derivative agreements, contracts and transactions cleared by ICC, the 
safeguarding of securities and funds in the custody or control of ICC, 
and the protection of investors and the public interest, within the 
meaning of Section 17A(b)(3)(F) of the Act.\5\
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    Clearing of contracts referencing the Standard European Senior Non-
Preferred Financial Corporate transaction type will also satisfy the 
requirements of Rule 17Ad-22.\6\ In particular, in terms of financial 
resources, ICC will apply its existing initial margin methodology to 
the contracts. ICC believes that this model will provide sufficient 
initial margin requirements to cover its credit exposure to its 
clearing members from clearing such contracts, consistent with the 
requirements of Rule 17Ad-22(b)(2).\7\ In addition, ICC believes its 
Guaranty Fund, under its existing methodology, will, together with the 
required initial margin, provide sufficient financial resources to 
support the clearing of the contracts consistent with the requirements 
of Rule 17Ad-22(b)(3).\8\ ICC also believes that its existing 
operational and managerial resources will be sufficient for clearing of 
the contracts, consistent with the requirements of Rule 17Ad-
22(d)(4),\9\ as the new contracts are substantially the same from an 
operational perspective as existing contracts. Similarly, ICC will use 
its existing settlement procedures and account structures for the new 
contracts, consistent with the requirements of Rule 17Ad-22(d)(5), (12) 
and (15) \10\ as to the finality and accuracy of its daily settlement 
process and avoidance of the risk to ICC of settlement failures. ICC 
determined to accept the contracts for clearing in accordance with its 
governance process, which included review of the contracts and related 
risk management considerations by the ICC Risk Committee and approval 
by its Board. These governance arrangements are consistent with the 
requirements of Rule 17Ad-22(d)(8).\11\ Finally, ICC will apply its 
existing default management policies and procedures for the contracts. 
ICC believes that these procedures allow for it to take timely action 
to contain losses and liquidity pressures and to continue meeting its 
obligations in the event of clearing member insolvencies or defaults in 
respect of the additional single names, in accordance with Rule 17Ad-
22(d)(11).\12\
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    \6\ 17 CFR 240.17Ad-22.
    \7\ 17 CFR 240.17Ad-22(b)(2).
    \8\ 17 CFR 240.17Ad-22(b)(3).
    \9\ 17 CFR 240.17Ad-22(d)(4).
    \10\ 17 CFR 240.17Ad-22(d)(5), (12) and (15).
    \11\ 17 CFR 240.17Ad-22(d)(8).
    \12\ 17 CFR 240.17Ad-22(d)(11).
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    With regards to the LGD enhancements, the proposed risk model 
revisions enhance ICC's risk methodology and are expected to impose 
more conservative requirements, which would enhance the financial 
resources available to ICC and thereby facilitate its ability to 
promptly and accurately clear and settle its cleared CDS contracts. In 
addition, the proposed revisions are consistent with the relevant 
requirements of Rule 17Ad-22.\13\ In particular, the LGD related 
amendments will enhance the financial resources available to the 
clearing house, and continue to ensure that ICC maintains sufficient 
financial resources to withstand a default by the Clearing Participant 
(``CP'') family to which it has the largest exposure in extreme but 
plausible market conditions, and are therefore reasonably designed to 
meet the margin and financial resource requirements of Rule 17Ad-
22(b)(2-3).\14\
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    \13\ 17 CFRSec.  240.17Ad-22.
    \14\ 17 CFRSec.  240.17Ad-22(b)(2-3).
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(B) Clearing Agency's Statement on Burden on Competition

    ICC does not believe the proposed rule changes would have any 
impact, or impose any burden, on competition. Contracts referencing the 
Standard European Senior Non-Preferred Financial Corporate transaction 
type will be available to all ICC participants for clearing. The 
clearing of these contracts by ICC does not preclude the offering of 
the contracts for clearing by other market participants. Additionally, 
the LGD enhancements apply uniformly across all CPs. Therefore, ICC 
does not believe the proposed rule changes 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, Security-Based Swap Submission, or Advance Notice Received From 
Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. ICC will notify the Commission of any written 
comments received by ICC.

III. Date of Effectiveness of the Proposed Rule Change, Security-Based 
Swap Submission, or 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 such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-ICC-2018-001 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-ICC-2018-001. 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

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submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
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 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 Credit and on ICE 
Clear Credit's website at https://www.theice.com/clear-credit/regulation.
    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-ICC-2018-001 and should be 
submitted on or before February 16, 2018.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-01357 Filed 1-25-18; 8:45 am]
 BILLING CODE 8011-01-P


