[Federal Register Volume 83, Number 56 (Thursday, March 22, 2018)]
[Notices]
[Pages 12630-12633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05793]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82890; File No. SR-ICEEU-2018-002]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Granting Accelerated Approval of Proposed Rule Change Relating to the 
ICE Clear Europe Limited CDS Procedures, CDS Risk Policy, and CDS Risk 
Model Description

March 16, 2018.

I. Introduction

    On February 6, 2018 ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change (SR-
ICEEU-2018-002) to revise: (i) Its CDS Procedures to support the 
clearing of a new transaction type; and (ii) its CDS Risk Policy, and 
CDS Risk Model Description document to incorporate certain 
modifications to its risk management methodology.\3\ The proposed rule 
change was published for comment in the Federal Register on February 
15, 2018.\4\ The Commission did not receive comments on the proposed 
rule change. 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\ Capitalized terms used in this order, but not defined 
herein, have the same meaning as in the ICE Clear Europe Rules, CDS 
Procedures, CDS Risk Policy, or CDS Risk Model Description.
    \4\ Securities Exchange Act Release No. 34-82678 (February 9, 
2018), 83 FR 6909 (February 15, 2018) (SR-ICEEU-2018-002) 
(``Notice'').
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II. Description of the Proposed Rule Change

    ICE Clear Europe proposed revisions to its CDS Procedures, CDS Risk 
Policy, and Risk Model Description document in order to provide for the 
clearing of a new transaction type, the Standard European Senior Non-
Preferred Financial Corporate, and to provide for revised risk 
management practices.

A. Changes to ICE Clear Europe CDS Procedures

    ICE Clear Europe proposed amending Paragraph 4.3(c)(ii) of its CDS 
Procedures, which sets forth the requirements for Trade Particulars for 
CDS that are submitted for Clearing, to reference the Standard European 
Senior Non-Preferred Financial Corporate transaction type.\5\
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    \5\ Notice, 83 FR at 6909.
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    ICE Clear Europe also proposed amending Paragraph 11.3(i) to revise 
the definition of ``Non-STEC Single Name Contract'' to include the 
Standard European Senior Non-Preferred Financial Corporate transaction 
type in the list of Reference Entities eligible to be cleared by ICE 
Clear Europe, and also proposed amending Paragraph 11.3(j) to remove a 
requirement providing that the relevant obligation must be ``Senior 
Level'' and replace it with a requirement that the relevant obligation 
be of the ``applicable seniority level.'' \6\
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    \6\ Id. at 6909-10.
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B. Changes to ICE Clear Europe's Risk Model Description

    As currently constructed, ICE Clear Europe's risk management 
methodology takes into consideration the potential losses associated 
with idiosyncratic credit events, which ICE Clear Europe refers to as 
``Loss-Given Default'' or ``LGD.'' ICE Clear Europe deems each Single 
Name (``SN'') reference entity a Risk Factor, and each combination of 
definition, doc-clause, tier, and currency for a given SN Risk Factor 
as a SN Risk Sub-Factor. ICE Clear Europe currently measures losses 
associated with credit events through a stress-based approach 
incorporating three recovery rate scenarios: a minimum recovery rate, 
an expected recovery rate, and maximum recovery rate. ICE Clear Europe 
combines exposures for Outright and index-derived Risk Sub-Factors at 
each recovery rate scenario.\7\
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    \7\ Id. at 6910.
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    ICE Clear Europe currently uses the results from the recovery rate 
scenarios as an input into the Profit/Loss-Given-Default (``P/LGD'') 
calculations at both the Risk Sub-Factor and Risk Factor levels. For 
each Risk Sub-Factor, ICE Clear Europe calculates the P/LGD as the 
worst credit event outcome, and for each Risk Factor, ICE Clear Europe 
calculates the P/LGD as the sum of the worst credit outcomes per Risk 
Sub-Factor. These final P/LGD results are used as part of the 
determination of risk requirements.\8\
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    \8\ Id.
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    ICE Clear Europe proposed changes to its LGD framework at the Risk 
Factor level with respect to the LGD calculation. Specifically, ICE 
Clear Europe proposed a change to its approach by incorporating more 
consistency in the calculation of the P/LGD by using the same recovery 
rate scenarios applied to the different Risk Sub-Factors which are part 
of the considered Risk Factor. For each Risk Factor, ICE Clear Europe 
would continue to calculate an ``extreme outcome'' as the sum of the 
worst Risk Sub-Factor P/LGDs across all scenarios and also would, for 
each Risk Factor, calculate an ``expected outcome'' as the worst sum of 
all the Risk Sub-Factors P/LGDs across all of the same scenarios. Under 
the proposed changes, ICE Clear Europe would then combine the results 
of the ``extreme outcome'' calculation and the ``expected outcome'' 
calculation to compute the total LGD for each Risk Factor.\9\ ICE Clear 
Europe proposed to apply a weight of 25% to the extreme outcome 
component in order to implement certain requirements of relevant 
regulatory technical standards arising under the European Market 
Infrastructure Regulation.\10\
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    \9\ Id.
    \10\ See Commission Delegated Regulation (EU) No 153/2013 
supplementing Regulation (EU) No 648/2012 of the European Parliament 
and of the Council with regard to regulatory technical standards on 
requirements for central counterparties. ICE Clear Europe is 
authorized as a central counterparty under the European Market 
Infrastructure Regulation and is subject to the requirements 
thereof.
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    ICE Clear Europe also proposed to expand its LGD analysis to 
incorporate a new ``Risk Factor Group'' level. Under the proposed 
changes, a set of related Risk Factors would form a Risk Factor Group 
based on either (1) having a common majority parental sovereign 
ownership (e.g. quasi-sovereigns and sovereigns), or (2) being a 
majority owned subsidiary of a common parent entity according to the 
Bloomberg Related Securities Analysis. ICE Clear Europe noted that a 
Risk Factor Group could consist of only one Risk Factor.\11\
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    \11\ Notice, 83 FR at 6910.
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    Under the proposed revisions, ICE Clear Europe would calculate the 
total quantity LGD on a Risk Factor Group level, and account for the 
exposure due to credit events associated with the reference entities 
within a given Risk Factor Group. Where a Risk Factor Group contains 
only one Risk Factor, ICE Clear Europe would compute the LGD as the 
risk exposure due to a credit event for a given underlying reference

[[Page 12631]]

entity. Moreover, under the proposed approach, ICE Clear Europe would 
sum the P/LGDs for each Risk Factor in a given Risk Factor Group, with 
limited offsets in the event the Risk Factors exhibit positive P/LGD. 
Using the results of the above calculation, ICE Clear Europe would 
obtain the Risk Factor Group level LGD. The proposed approach would 
also include a calculation which allows for the Risk Factor Group level 
LGD to be attributed to each Risk Factor within the considered Risk 
Factor Group.\12\
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    \12\ Id.
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    In addition to these changes, ICE Clear Europe also proposed 
changes to the ``Loss Given Default Risk Analysis'' section of its Risk 
Model Description document to incorporate the Risk Factor and Risk 
Factor Group LGD calculation changes described above, as well as to 
incorporate certain conforming changes to other sections of the Risk 
Model Description document to reflect the proposed Risk Factor Group 
analysis.\13\
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    \13\ Id.
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    ICE Clear Europe also proposed further changes with respect to the 
``Idiosyncratic Jump-to-Default Requirements'' section of the Risk 
Model Description document. As currently constructed, the portfolio 
jump-to-default approach collateralizes the worst uncollateralized LGD 
(``ULGD'') exposure among all Risk Factors. Under the proposed changes, 
the portfolio jump-to-default (``JTD'') approach would collateralize, 
through the portfolio JTD initial margin requirement that accounts for 
the Risk Factor Group-specific LGD collateralization, the worst ULGD 
exposure among all Risk Factor Groups. The ULGD exposure for a given 
Risk Factor Group would be calculated as a sum of the associated Risk 
Factor ULGDs.\14\
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    \14\ Id.
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    ICE Clear Europe also proposed certain minor edits to the Specific 
Wrong-Way Risk and General Wrong Way Risk sections of the Risk Model 
Description document to update language and calculation descriptions to 
accommodate the introduction of the Risk Factor Group to the 
``Idiosyncratic Jump-to-Default Requirements'' section.\15\
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    \15\ Id.
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    In addition, ICE Clear Europe proposed changes to the ``Guaranty 
Fund Methodology'' section of the Risk Model Description document. ICE 
Clear Europe's current guaranty fund methodology includes, among other 
things, the assumption that up to three credit events, different from 
the ones associated with Clearing Members, occur during the considered 
risk horizon. ICE Clear Europe proposed expanding this approach to the 
Risk Factor Group level by assuming that credit events associated with 
up to three Risk Factor Groups, different from the ones associated with 
the Clearing Members and the Risk Factors that are in the Risk Factor 
Groups as the Clearing Participants, occur during the considered risk 
horizon.\16\
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    \16\ Id.
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    Additional amendments to ICE Clear Europe's Risk Model Description 
document include minor typographical and technical corrections and 
clarifications.\17\
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    \17\ Id. at 6911.
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C. Changes to ICE Clear Europe's CDS Risk Policy

    ICE Clear Europe proposed conforming edits to its CDS Risk Policy 
in order to incorporate the changes described above. Specifically, ICE 
Clear Europe proposed to amend the definition of Risk Sub-Factor, as 
set forth in the CDS Risk Policy, so that it is defined as a particular 
combination of single-name reference, tier, currency, and documentation 
clause.\18\ In addition, ICE Clear Europe proposed to amend the CDS 
Risk Policy to provide that the worst LGD associated with a Risk Factor 
Group will be used to determine the JTD requirement, instead of the 
worst single-name LGD, and also proposed amendments that would clarify 
that a Risk Factor Group would consist of a set of Risk Factors related 
by a common parental ownership.\19\
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    \18\ Id.
    \19\ Id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the 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 
Act and the rules and regulations thereunder applicable to such 
organization.\20\ For the reasons given below, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the Act, 
and Rules 17Ad-22(b)(2), (b)(3), (e)(4)(ii), and (e)(6)(i).
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    \20\ 15 U.S.C. 78s(b)(2)(C).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    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, to assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible and, in general, to protect investors and the public 
interest.\21\ The proposed rule change will provide for the clearance 
and settlement of the Standard European Senior Non-Preferred Financial 
Corporate, a new type of transaction that is similar to contracts 
already cleared by ICE Clear Europe.
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    \21\ 15 U.S.C. 78q-1(b)(3)(F).
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    Separately, as described above, the proposed rule change would also 
provide for certain revisions to ICE Clear Europe's risk management 
methodology with respect to its LGD methodology. These changes entail 
(i) incorporating a more consistent approach with respect to ICE Clear 
Europe's recovery rate scenarios through the application of the same 
recovery rate scenarios to risk factors that form part of the same Risk 
Factor Group, (ii) combining the results of the ``expected'' and 
``extreme'' P/LGD outcomes in order to calculate the total LGD for each 
Risk Factor, (iii) expanding ICE Clear Europe's LGD analysis to a new 
Risk Factor Group level, (iv) revising the calculation of the 
Uncollateralized Loss Given Default to incorporate the Risk Factor 
Group level LGD approach, and (v) modifying ICE Clear Europe's Guaranty 
Fund Methodology to expand the credit event analysis to include the 
Risk Factor Group approach.
    Based on a review of the Notice, the Commission believes that the 
Standard European Senior Non-Preferred Financial Corporate transaction 
type is substantially similar to other contracts cleared by ICE Clear 
Europe. As such, the Commission believes that ICE Clear Europe's 
existing clearing arrangements, and related financial safeguards 
(including as further modified by the proposed rule change), 
protections and risk management procedures will apply to this new 
product on a substantially similar basis to the other contracts 
currently cleared by ICE Clear Europe.
    Moreover, the Commission believes that the proposed changes to ICE 
Clear Europe's risk management framework described above will enhance 
the manner by which ICE Clear Europe considers and manages the risks 
particular to the range of contracts it clears, including the new 
Standard European Senior Non-Preferred Financial Corporate contract, 
because such changes will enable ICE Clear

[[Page 12632]]

Europe to more accurately consider the particular risks of each type of 
product it clears, including security-based swap products. Therefore, 
the Commission finds that the proposed rule change is intended to 
promote the prompt and accurate clearance and settlement of securities 
transactions and derivatives agreements, contracts, and transactions, 
as well as to assure the safeguarding of securities and funds which are 
in the custody or control of the clearing agency or for which it is 
responsible and, in general, to protect investors and the public 
interest, and is therefore consistent with Section 17A(b)(3)(F) of the 
Act.\22\
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    \22\ Id.
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B. Consistency With Rules 17Ad-22(b)(2) and (e)(6)(i)

    The Commission further finds that the proposed rule change is 
consistent with Rules 17Ad-22(b)(2) and (e)(6)(i). Rule 17Ad-22(b)(2) 
requires, in relevant part, a registered clearing agency that performs 
central counterparty services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to use 
margin requirements to limit the registered clearing agency's credit 
exposures to participants under normal market conditions and use risk-
based models and parameters to set margin requirements.\23\ Rule 17A-
d22(e)(6)(i) requires, in relevant part, that a covered clearing agency 
that provides central counterparty services establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to cover its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum, considers, 
and produces margin levels commensurate with, the risks and particular 
attributes of each relevant product, portfolio, and market.\24\
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    \23\ 17 CFR 240.17Ad-22(b)(2).
    \24\ 17 CFR 240.17Ad-22(e)(6)(i).
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    As described above, the proposed changes would (i) amend the manner 
in which ICE Clear Europe calculates its Risk Factor-level LGD, (ii) 
expand the LGD analysis to the Risk Factor Group level, and (iii) amend 
the approach to calculating the Uncollateralized LGD to incorporate the 
Risk Factor Group level approach. Specifically, ICE Clear Europe would 
calculate, for each Risk Factor, an extreme outcome as the sum of the 
worst Risk Sub-factor P/LGDs across all scenarios, and an expected 
outcome as the worst sum of all Risk Sub-factor P/LGDs using the same 
scenarios, and then add the two components to determine the total LGD 
for each Risk Factor.
    The LGD analysis would also be modified to group individual Risk 
Factors into Risk Factor Groups, and would result in the total LGD 
being the sum of the P/LGDs for each Risk Factor within the Risk Factor 
Group. The Commission believes that by making these changes, ICE Clear 
Europe will augment its ability to more accurately consider the risks 
associated with the products it clears, including the Standard European 
Senior Non-Preferred Financial Corporate transaction type.
    As a result, the Commission believes that the proposed rule change 
will facilitate the establishment of a risk-based margin system that 
considers, and produces margin levels commensurate with, the risks and 
particular attributes of the relevant product, portfolio, and market, 
and will also enable ICE Clear Europe to more accurately determine and 
collect the amount of resources necessary to limit its credit exposures 
under normal market conditions, including credit exposures resulting 
from clearing the new transaction type, through the use of risk-based 
models. Therefore the Commission finds that the proposed rule change is 
consistent with Rules 17Ad-22(b)(2) and (e)(6).\25\
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    \25\ 17 CFR 240.17Ad-22(b)(2) and (e)(6)(i).
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C. Consistency With Rules 17Ad-22(b)(3) and (e)(4)(ii)

    The Commission further finds that the proposed rule change is 
consistent with Rules 17Ad-22(b)(3) and (e)(4)(ii). Rule 17Ad-22(b)(3) 
requires, in relevant part, a registered clearing agency that performs 
central counterparty services to establish, implement, maintain and 
enforce written policies and procedures that are reasonably designed to 
maintain sufficient financial resources to withstand, at a minimum, a 
default by the two participant families to which it has the largest 
exposures in extreme but plausible market conditions.\26\ Rule 17Ad-
22(e)(4)(ii) requires, in relevant part, that a covered clearing agency 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively identify, measure, 
monitor, and manage its credit exposures to participants and those 
arising from its payment, clearing, and settlement processes, including 
by, for covered clearing agencies that are clearing agencies involved 
in activities with a more complex risk profile, maintaining additional 
financial resources at the minimum to enable it to cover a wide range 
of foreseeable stress scenarios that include, but are not limited to, 
the default of the two participant families that would potentially 
cause the largest aggregate credit exposure for the covered clearing 
agency in extreme but plausible market conditions.\27\
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    \26\ 17 CFR 240.17Ad-22(b)(3).
    \27\ 17 CFR 240.17Ad-22(e)(4)(ii).
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    As described above, the proposed rule change would amend certain 
assumptions in ICE Clear Europe's Guaranty Fund Methodology, and the 
calculation of the Specific Wrong Way Risk component of its guaranty 
fund, by incorporating the new Risk Factor Group level analysis. 
Specifically, ICE Clear Europe would expand its current approach to 
assume that credit events used in the guaranty fund analysis occur at 
the Risk Factor Group level, and would also base the specific wrong-way 
risk component of its Guaranty Fund Methodology on the Risk Factor 
Group approach.
    As with the changes to the LGD approach, the Commission believes 
that the proposed changes to ICE Clear Europe's Guaranty Fund 
Methodology will permit ICE Clear Europe to more accurately consider 
the particular risks associated with the products it clears, including 
the Standard European Senior Non-Preferred Financial Corporate 
transaction type, that will be cleared as a result of the proposed 
changes to ICE Clear Europe's CDS Procedures described above. As a 
result, the Commission believes that the proposed changes will enable 
ICE Clear Europe to more accurately measure the risks of associated 
with the products it clears and thereby improve ICE Clear Europe's 
ability to collect and maintain the level of financial resources 
necessary to cover a wide range of foreseeable stress scenarios that 
include, but are not limited to, the default of the two participant 
families that would potentially cause the largest aggregate credit 
exposure under extreme but plausible market conditions. Therefore, the 
Commission finds that the proposed rule change is consistent with Rules 
17Ad-22(b)(3) and (e)(4)(ii).\28\
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    \28\ 17 CFR 240.17Ad-22(b)(3) and (e)(4)(ii).
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    Section 19(b)(2)(C)(iii) of the 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 where the 
Commission finds good cause for so doing and publishes the reason for 
the finding.\29\ The Commission finds good cause, pursuant to Section 
19(b)(2)(C)(iii) of the Act, for approving the proposed rule change on 
an accelerated basis prior to the 30th day

[[Page 12633]]

after the date of publication of the notice in the Federal Register in 
order to facilitate the clearing of the Standard European Senior Non-
Preferred Financial Corporate transaction type, which the Commission 
understands market participants will commence trading beginning on 
March 20, 2018 \30\ and which are tied to European capital and 
resolution regulations.
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    \29\ 15 U.S.C. 78s(b)(2)(C)(iii).
    \30\ See IHS Markit iTraxx Europe Rule Announcement, February 6, 
2018 (stating that for iTraxx Europe Series 29, for French bank 
OpCos that qualify for inclusion in the index, the senior non-
preferred reference obligations will be selected if available).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act,\31\ and 
Rules 17Ad-22(b)(2), (b)((3), (e)(4)(ii), and (e)(6)(i) thereunder.\32\
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    \31\ 15 U.S.C. 78q-1.
    \32\ 17 CFR 240.17Ad-22(b)(2), (b)(3), (e)(4)(ii) and (e)(6)(i).
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    It Is Therefore Ordered pursuant to Section 19(b)(2) of the Act 
\33\ that the proposed rule change (SR-ICEEU-2018-002) be, and hereby 
is, approved on an accelerated basis.\34\
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    \33\ 15 U.S.C. 78s(b)(2).
    \34\ 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).
    \35\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-05793 Filed 3-21-18; 8:45 am]
 BILLING CODE 8011-01-P


