[Federal Register Volume 83, Number 113 (Tuesday, June 12, 2018)]
[Notices]
[Pages 27356-27358]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-12553]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83389; File No. SR-ICEEU-2018-006]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to the ICE Clear Europe CDS 
End-of-Day Price Discovery Policy

June 6, 2018.

I. Introduction

    On April 5, 2018, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange

[[Page 27357]]

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-2018-006) to amend ICE 
Clear Europe's CDS End-of-Day Price Discovery Policy (``Price Discovery 
Policy'') to implement a revised methodology used to determine bid-
offer widths for credit defaults swap (``CDS'') contracts. The proposed 
rule change was published for comment in the Federal Register on April 
25, 2018.\3\ The Commission did not receive comments regarding the 
proposed changes. For the reasons discussed below, the Commission is 
approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-83072 (April 19, 
2018), 83 FR 18106 (April 25, 2018) (SR-ICEEU-2018-006) 
(``Notice'').
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II. Description of the Proposed Rule Change

    As part of its pricing process, on a daily basis, ICE Clear Europe 
uses intraday quotes submitted by its CDS Clearing Members to determine 
the bid-offer width (``BOW'') for each eligible CDS instrument. The BOW 
is then used in ICE Clear Europe's price discovery process as an input 
to determine, among other things, end-of-day price levels. These levels 
are, in turn, used for mark-to-market and risk management purposes.\4\ 
Under its current methodology, ICE Clear Europe begins its price 
discovery process by calculating a ``consensus BOW'' for each relevant 
CDS instrument based on specified averages of the quotes provided by 
CDS Clearing Members. ICE Clear Europe then compares this consensus BOW 
with three pre-defined BOWs that correspond to three specific market 
regimes, which ICE Clear Europe denotes as Regime 1, Regime 2, and 
Regime 3. The BOW for Regime 1 is the smallest, and the BOW for Regime 
3 is the largest. Depending on where the consensus BOW falls in 
comparison to the three predefined market regime BOWs, ICE Clear Europe 
selects one of the market regime BOWs as the end-of-day BOW for a given 
risk factor based on that risk factor's most actively traded instrument 
(``MATI'').\5\
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    \4\ Notice, 83 FR at 18106.
    \5\ Id. at 18106-07.
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    ICE Clear Europe's clearing risk department is permitted to make 
adjustments to the calculated end-of-day BOWs based on volatile or 
``fast-moving'' market conditions that may cause BOWs, according to ICE 
Clear Europe, to be temporarily wider than those observed in intraday 
quotes.\6\ In order to systematically capture the volatile market 
conditions and obviate the need for ICE Clear Europe's clearing risk 
department to make manual adjustments to the calculated BOWs, ICE Clear 
Europe proposes to revise its Price Discovery Policy to incorporate a 
new methodology that would automatically widen the selected BOWs based 
on observed market conditions. Specifically, ICE Clear Europe proposes 
to introduce a new ``variability level'' calculation.
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    \6\ Id. at 18106.
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    For index CDS instruments, this new calculation would take a time 
series of intraday mid-levels from member quotes and compare the last 
mid-level for the most actively traded instrument for a considered risk 
factor to the end-of-day level from the prior day.\7\ Under the 
proposed methodology, where the last mid-level of the time series for 
an index CDS instrument is below the prior day's end-of-day level by 
more than the pre-defined BOW for Regime 3 (i.e., by more than one 
Regime 3 BOW), ICE Clear Europe will calculate the variability level as 
the difference between the prior day's end-of-day level and the minimum 
mid-level of the time series, divided by the Regime 3 BOW. Where the 
last mid-level is above the prior day's end-of-day level by more than 
one Regime 3 BOW, ICE Clear Europe would calculate the variability 
level as the difference between the maximum mid-level of the time 
series and the prior day's end-of-day level, divided by the Regime 3 
BOW. In cases where the last mid-level in the time series is within one 
Regime 3 BOW of the prior day's end-of-day level, then ICE Clear Europe 
will set the variability level based on the range of intraday mid-
levels. Where the range of mid-levels is less than or equal to the 
Regime 3 BOW, the variability level would be set to 1. Where the range 
of mid-levels is greater than the Regime 3 BOW, ICE Clear Europe would 
set the variability level at 1.2.\8\
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    \7\ Id.
    \8\ Id.
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    In addition to proposing to implement a new variability level 
calculation, ICE Clear Europe also proposes to group CDS risk factors 
into ``market proxy groups.'' The market proxy groups for CDS index 
instruments would consist of CDX, which would cover North American 
Investment Grade and High Yield indices, and iTraxx, which could cover 
the iTraxx Main, Crossover, Senior Financial, Sub Financials, and High 
Volatility indices. In connection with establishing these market proxy 
groups, ICE Clear Europe also proposes to implement ``variability 
bands'' that would apply to the market proxy groups and correspond to 
specified ranges of variability level determined by the new variability 
level calculation described above. Under the proposed changes, the 
variability band applicable to a market proxy group would be equal to 
the largest variability band of the individual risk factors within the 
group. Depending on the market proxy group variability band, ICE Clear 
Europe would adjust the selected market Regime BOW by increasing it 
either one or two Regimes (i.e., from Regime 1 to Regime 2, from Regime 
2 to Regime 3, or from Regime 1 to Regime 3), with larger variability 
bands corresponding to the larger adjustment.\9\ The resulting Regime 
BOW (i.e., Regime 1, Regime 2, or Regime 3) will serve as the end-of-
day BOW.
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    \9\ Id. at 18106-07.
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    With respect to single name CDS instruments, ICE Clear Europe 
proposes to adopt a new scaling factor, denoted the ``SN variability 
factor,'' that would be applied to the consensus BOW for single name 
CDS instruments. The SN variability factor applied to the consensus BOW 
is determined using the same new variability calculation methodology 
described above, and the variability factor for single name instruments 
will range from 1 to 1.5 depending on the applicable market proxy 
variability band. As with the index instruments, ICE Clear Europe 
proposes to group single name instruments into market proxy groups (the 
CDX market proxy group for Standard North American Corporate Single 
Names, and the iTraxx market proxy group for European Corporate and 
Standard Western European Sovereign Single Names). ICE Clear Europe 
would then apply variability bands to the market proxy groups for 
single names in the same way that such variability bands are determined 
for index instruments.\10\
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    \10\ Id. at 18107.
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    ICE Clear Europe also proposes to make certain typographical 
corrections, as well as updates to cross-references, and other minor 
clarifications.\11\
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    \11\ 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

[[Page 27358]]

applicable to such organization.\12\ For the reasons given below, the 
Commission finds that the proposed rule change is consistent with 
Section 17A(b)(3)(F),\13\ and Rules 17Ad-22(e)(6)(iv) and 
(e)(17)(i).\14\
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    \12\ 15 U.S.C. 78s(b)(2)(C).
    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 17 CFR 240.17Ad-22(e)(6)(iv) and (e)(17)(i).
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A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a registered clearing be designed to promote the prompt 
and accurate clearance and settlement of securities transactions and, 
to the extent applicable, derivatives agreements, contracts and 
transactions, and 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.\15\ The Commission believes that the proposed 
changes, taken as a whole, should improve ICE Clear Europe's ability to 
determine appropriate end-of-day BOWs for its CDS instruments in a 
number of ways, including but not limited to (i) incorporating a new 
systematic method for evaluating market variability and automatically 
widening the selected BOWs for index CDS instruments; and (ii) 
incorporating a new variability scaling factor for single name 
instruments to account for greater variability in end-of-day BOWs than 
that which appears in intraday quotes.
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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    By automating the process for widening BOWs through applying pre-
determined and well-defined criteria for evaluating and responding to 
market volatility that will be consistently applied over time for each 
CDS instrument that ICE Clear Europe clears, the Commission believes 
that the proposed rule changes will reduce the risk of human error 
associated with ICE Clear Europe's determination of BOWs. As a result 
of the likely reduction in human error and the more consistent 
application over time and across CDS instruments of the BOW widening 
process, the Commission believes the proposed rule change will promote 
the prompt and accurate clearance and settlement of CDS instruments by 
ICE Clear Europe.
    Moreover, by systematically taking into account market variability 
and automatically widening BOWs in response, the Commission believes 
that the proposed changes will enhance ICE Clear Europe's ability to 
more consistently and efficiently determine appropriate end-of-day BOWs 
for the CDS instruments it clears. This improvement in determining end-
of-day BOWs for CDS instruments, in turn, should improve ICE Clear 
Europe's ability to determine more accurate end-of-day price levels for 
the purposes of mark-to-market and risk management of positions it 
clears in CDS instruments, thereby improving ICE Clear Europe's ability 
to safeguard the securities and funds which are in its custody or 
control or for which it is responsible. Therefore, the Commission finds 
that the proposed rule changes are consistent with the requirements of 
Section 17A(b)(3)(F) of the Act.

B. Consistency With Rule 17Ad-22(e)(6)(iv)

    Rule 17Ad-22(e)(6)(iv) requires, in relevant part, that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover, if the covered 
clearing agency provides central counterparty services, its credit 
exposures to its participants by establishing a risk-based margin 
system that uses reliable sources of timely price data and uses 
procedures and sound valuation models for addressing circumstances in 
which pricing data are not readily available or reliable.\16\ As 
described above, ICE Clear Europe currently uses intra-day quotes to 
determine end-of-day BOWs for the CDS instruments that it clears. 
However, under certain volatile or fast moving market conditions BOWs 
may be wider than observed in intraday quotes.\17\ To address this 
issue, ICE Clear Europe proposes to implement a systematic approach for 
evaluating market volatility and automatically widening the selected 
end-of-day BOWs such that the end-of-day BOWs more reliably reflect 
current market conditions. As a result, the Commission finds that the 
proposed rule change is consistent with the requirements of Rule 17Ad-
22(e)(6)(iv).
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    \16\ 17 CFR 240.17Ad-22(e)(6)(iv).
    \17\ Notice, 83 FR at 18106.
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C. Consistency With Rule 17Ad-22(e)(17)(i)

    Rule 17Ad-22(e)(17)(i) requires a covered clearing agency, in 
relevant part, to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to manage the covered 
clearing agency's operational risk by, among other things, identifying 
the plausible sources of operational risk, both internal and external, 
and mitigating their impact through the use of appropriate systems, 
policies, procedures, and controls.\18\ As described above, ICE Clear 
Europe's clearing risk department currently is tasked with monitoring 
market conditions in order to assess volatility and, if appropriate, 
manually adjust the selected end-of-day BOWs to reflect such 
volatility. As described above, by implementing a systematic approach 
to assessing volatility and an automatic widening of BOWs in 
appropriate instances, the Commission believes that the proposed rule 
change will reduce the level of operational risk in ICE Cleary Europe's 
end-of-day pricing methodology because it will establish pre-determined 
and well-defined criteria that can be quickly and consistently applied 
to widen the BOWs with minimal human intervention. As a result, the 
Commission believes that the risk of error associated with observation 
of market volatility and manual adjustment of the end-of-day BOWs will 
be mitigated. Therefore, the Commission finds that the proposed rule 
change is consistent with the requirements of Rule 17Ad-22(e)(17)(i).
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    \18\ 17 CFR 240.17Ad-22(e)(17)(i).
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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 Section 17A 
of the Act,\19\ and Rules 17Ad-22(e)(6)(iv) and (e)(17)(i) \20\ 
thereunder.
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    \19\ 15 U.S.C. 78q-1.
    \20\ 17 CFR 240.17Ad-22(e)(6)(iv) and (e)(17)(i).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\21\ that the proposed rule change be, and hereby is, approved.\22\
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    \21\ 15 U.S.C. 78s(b)(2).
    \22\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-12553 Filed 6-11-18; 8:45 am]
 BILLING CODE 8011-01-P


