[Federal Register Volume 83, Number 193 (Thursday, October 4, 2018)]
[Notices]
[Pages 50124-50127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21585]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84312; File No. SR-ICC-2018-009]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to ICC's Treasury Operations 
Policies and Procedures

September 28, 2018.

I. Introduction

    On July 31, 2018, ICE Clear Credit LLC (``ICC'') 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-ICC-2018-009) 
to revise the ICC Treasury Operations Policies and Procedures 
(``Treasury Policy'').\3\ The proposed rule change was published in the 
Federal Register on August 16, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Capitalized terms used herein but not otherwise defined have 
the meaning set forth in the ICC Rules or the Treasury Policy. 
Available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Rules.pdf.
    \4\ Securities Exchange Act Release No. 34-83819 (August 10, 
2018), 83 FR 40813 (August 16, 2018) (SR-ICC-2018-009) (``Notice'').
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II. Description of the Proposed Rule Change

    The proposed rule change would amend the Treasury Policy. In 
accordance with CFTC Regulation 1.25,\5\ the Treasury Policy currently 
prohibits ICC from investing both Euro-denominated and U.S. Dollar-
denominated cash posted by Clearing Participants (``CPs'') for their 
margin requirements related to client positions (``Customer Origin 
Cash'') in foreign sovereign debt. ICC may hold U.S. Dollar-denominated 
cash in its account at the Federal Reserve Bank of Chicago. ICC's 
default position is to hold U.S. Dollar-denominated cash, including 
both Customer Origin Cash and cash posted by CPs for their Guaranty 
Fund (``GF'') and margin requirements related to their own positions 
(``House Origin Cash'') in its Federal Reserve account. ICC cannot hold 
Euro-denominated Cash in its Federal Reserve account, however, and 
therefore holds such cash elsewhere. Specifically, Euro-denominated 
House Cash is either invested in certain sovereign debt (currently, 
German, French, Dutch, or Finnish debt) pursuant to ICC's current Euro 
Investment Guidelines or at commercial banks in unsecured demand 
deposit accounts subject to the credit risk of the commercial bank. 
Until recently, CFTC Regulation 1.25 prohibited Euro-denominated 
Customer Cash from being invested in foreign sovereign debt, and so was 
held exclusively at commercial banks in unsecured demand deposit 
accounts. However, the Commodities Futures Trading Commission 
(``CFTC'') recently issued an exemptive order \6\ (the ``CFTC Order'') 
permitting ICC to invest, subject to certain conditions, Euro-
denominated

[[Page 50125]]

Customer Origin Cash in French and German sovereign debt.\7\
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    \5\ 17 CFR 1.25.
    \6\ Order Granting Exemption From Certain Provisions of the 
Commodity Exchange Act Regarding Investment of Customer Funds and 
From Certain Related Commission Regulations, 83 FR 35241 (July 25, 
2018) (``CFTC Order'').
    \7\ Notice, 83 FR at 40814.
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    Accordingly, the proposed rule change would update the Treasury 
Policy in light of the CFTC Order. Specifically, as described in more 
detail below, the proposed rule change would, among other things, amend 
the Treasury Policy to permit ICC to invest Euro-denominated Customer 
Cash in certain foreign sovereign debt.

A. Changes Relating to Customer Origin Cash and House Origin Cash

    To implement the change described above in response to the CFTC 
Order, the proposed rule change would (1) allow ICC to invest Customer 
Origin Cash in accordance with the Treasury Policy's guidelines for 
investing House Origin Cash; (2) revise those investment guidelines to 
provide for the investment of Euro-denominated Customer Origin Cash in 
French and German sovereign debt in accordance with the requirements of 
CFTC Regulation 1.25 \8\ and the CFTC Order; (3) separate the `ICC 
Investment of Guaranty Fund and Margin Cash' subsection into USD and 
Euro headings and make additional edits under those headings; and (4) 
amend provisions regarding ICC's use of its Federal Reserve Account.
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    \8\ 17 CFR 1.25.
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    First, the proposed rule change would allow ICC to invest Customer 
Origin Cash in the same manner as House Origin Cash in accordance with 
the Treasury Policy's investment guidelines (proposed changes to 
treatment of House Origin Cash are described below) by adding a new 
`Investment of Client Margin Cash' subsection within the `Treasury 
Management for Client Business' section, which would state that ICC 
will invest Customer Origin Cash in accordance with Sections III.B.2 
and III.B.3 of the Treasury Policy, which describe how ICC invests 
House Origin Cash.\9\ The proposed rule change would specify that any 
such investment will be executed in compliance with CFTC Regulation 
1.25 \10\ and any applicable exemptive orders, including, without 
limitation, the conditions in CFTC Regulation 1.25 \11\ related to the 
investment of Customer Origin Cash in non-U.S. sovereign debt.\12\
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    \9\ Notice, 83 FR at 40814.
    \10\ 17 CFR 1.25.
    \11\ Id.
    \12\ Notice, 83 FR at 40814.
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    Second, the proposed rule change would revise the Treasury Policy's 
Euro investment guidelines to allow ICC, or an Investment Manager 
acting on its behalf, to invest Euro-denominated Customer Origin 
Cash.\13\ Currently, the Euro investment guidelines only provide for 
the investment of Euro-denominated House Origin Cash. In light of the 
fact that the CFTC Order would permit ICC to now invest Euro-
denominated Customer Origin Cash in French and German sovereign debt, 
the proposed rule change would apply the Euro investment guidelines to 
Customer Origin Cash to allow for such investment.\14\
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    \13\ Id.
    \14\ CFTC Order, 83 FR at 35244-35245.
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    In accordance with the CFTC Order,\15\ the proposed rule change 
would amend the Euro investment guidelines to limit permissible 
investment, directly and through reverse repurchase agreements 
(``reverse repo''), to French and German sovereign debt.\16\ If 100% of 
the allocated cash cannot be placed in overnight reverse repo, the 
investment guidelines would provide for backup investments in term 
reverse repo \17\ and then direct investment in the sovereign debt.\18\ 
The proposed rule change would apply these changes to both Euro-
denominated Customer Origin Cash and Euro-denominated House Origin 
Cash. Previously the Euro investment guidelines permitted investment of 
Euro-denominated House Origin Cash in Dutch and Finnish sovereign debt, 
in addition to French and German. To be consistent with ICC's treatment 
of Customer Origin Cash, the proposed rule change would also limit 
investment of House Origin Cash to French and German sovereign debt.
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    \15\ Id.
    \16\ Notice, 83 FR at 40814.
    \17\ With respect to Customer Origin Cash, an investment in term 
reverse repo would only be permissible if the Client has the right 
of optional early termination upon demand.
    \18\ Notice, 83 FR at 40814.
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    With respect to Euro-denominated Customer Origin Cash only, 
however, the proposed rule change would require that investments comply 
with any applicable conditions or restrictions set forth in CFTC 
Regulation 1.25 \19\ including any applicable exemptive orders.\20\ The 
proposed rule change would also provide that should conditions change 
so that the French or German sovereign debt no longer meets the 
conditions or restrictions of CFTC Regulation 1.25,\21\ the outside 
investment manager shall discontinue making any additional investments 
in such sovereign debt issuers.\22\ These limitations would be 
necessary to comply with the terms of the CFTC Order.\23\ Because the 
CFTC Order only applies to Customer Origin Cash, it is not necessary to 
apply these changes to House Origin Cash.\24\
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    \19\ 17 CFR 1.25.
    \20\ Notice, 83 FR at 40814.
    \21\ 17 CFR 1.25.
    \22\ Notice, 83 FR at 40814.
    \23\ CFTC Order, 83 FR at 35244-35245.
    \24\ Id.
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    Third, in response to the exemptive relief permitting ICC to invest 
Euro-denominated customer funds in French and German sovereign debt, 
the proposed rule change would separate the `ICC Investment of Guaranty 
Fund and Margin Cash' subsection into USD and Euro headings. The 
proposed rule change would add a proposed `Euro' heading, which would 
permit ICC's Treasury Department to directly invest Euro-denominated 
Customer Origin Cash and House Origin Cash. Under the proposed rule 
change, Euro-denominated House Origin Cash and Customer Origin Cash 
would be (1) held in bank deposits, (2) allocated to outside investment 
managers, or (3) directly held/invested by the ICC Treasury 
Department.\25\ Under scenarios (2) and (3), the investment managers or 
the ICC Treasury Department, as applicable, would invest the Euro-
denominated House Origin Cash and Euro-denominated Customer Origin Cash 
pursuant to the Euro investment guidelines (changes to which are 
described above).
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    \25\ Notice, 83 FR at 40814.
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    Fourth, the proposed rule change would also move the reference to 
ICC's default position of holding U.S. Dollar-denominated Customer 
Origin Cash and House Origin Cash in its Federal Reserve Account from 
the `Investment Strategy' subsection to the amended `ICC Investment of 
Guaranty Fund and Margin Cash' subsection under the proposed USD 
heading.\26\ This change would allow ICC to consolidate, under the 
proposed USD heading, all of the provisions relating to ICC's use of 
the Federal Reserve Account for holding U.S. Dollar-denominated 
Customer Origin Cash and House Origin Cash. As described above, the 
proposed rule change would also apply this `ICC Investment of Guaranty 
Fund and Margin Cash' subsection to Customer Origin Cash.
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    \26\ Notice, 83 FR at 40814.
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    Further in the proposed `USD' heading, ICC would note that if it is 
unable to deposit U.S. Dollar-denominated Customer Origin Cash and 
House Origin Cash in its Federal Reserve Account, ICC's Treasury 
Department would be able to hold or invest such cash as specified 
within the Treasury Policy.\27\ The proposed rule

[[Page 50126]]

change would also correct a typographical error by adding the verb 
``has'' to the phrase ``ICE Clear Credit arrangements.'' \28\
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    \27\ Id.
    \28\ Id.
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B. Changes Relating to Outside Investment Managements and Clean-Up 
Changes

    To reflect ICC's engagement of multiple outside investment managers 
the proposed rule change would remove reference to a specific outside 
investment manager in the `Outside Investment Management of Guaranty 
Fund and Margin Cash' subsection.\29\ The proposed rule change would 
also correct certain typographical errors in this section to improve 
readability, including removing the indefinite article ``an'' in the 
phrase ``an alternative or additional outside investment managers'', 
adding the definite article ``the'' to the phrase ``Investment 
Manager's investment'', and changing ``Directory of Treasury'' to 
``Director of Treasury'' in a footnote.\30\
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    \29\ Id.
    \30\ Notice, 83 FR at 40814.
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    The proposed rule change would also remove language from the 
`Treasury Management for Client Business' section that references the 
introduction of client trades to clarify that ICC has already commenced 
client clearing.\31\
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    \31\ 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.\32\ For the reasons given below, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the Act 
\33\ and Rules 17Ad-22(b)(2), 17Ad-22(b)(3), and 17Ad-22(d)(3) 
thereunder.\34\
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    \32\ 15 U.S.C. 78s(b)(2)(C).
    \33\ 15 U.S.C. 78q-1(b)(3)(F).
    \34\ 17 CFR 240.17Ad-22(b)(2), (b)(3), and (d)(3).
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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 ICC be designed to assure the safeguarding of securities 
and funds which are in the custody or control of ICC or for which it is 
responsible, and, in general, to protect investors and the public 
interest.\35\
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    \35\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, the proposed rule change would update the 
Treasury Policy in light of the CFTC Order permitting ICC to invest, 
subject to certain conditions, Euro-denominated Customer Origin Cash in 
French and German sovereign debt. Currently, ICC cannot hold Euro-
denominated cash in its Federal Reserve account. Therefore ICC invests 
Euro-denominated House Origin Cash in certain foreign sovereign debt, 
but holds Euro-denominated Customer Cash at commercial banks in 
unsecured demand deposit accounts. By providing ICC an alternative to 
holding Euro-denominated Customer Origin Cash at commercial banks, 
where such cash is subject to the credit risk of the commercial bank, 
the proposed rule change would help ICC ensure the reliable investment 
of assets in ICC's control while at the same time avoiding subjecting 
such cash to the credit risk of the commercial bank, thereby providing 
ICC with an important alternative for the protection and safeguarding 
of Customer Origin Cash and House Origin Cash. And permitting ICC to 
use multiple outside investment managers to invest Euro-denominated 
Customer Origin and House Origin Cash on behalf of ICC would further 
help facilitate the safeguarding of such cash by allowing ICC to employ 
as many managers as it may need to make its investments and remove 
investment managers who underperform, which would facilitate ICC's 
ability to invest such cash in accordance with the Treasury Policy. The 
Commission believes that, when compared to credit risk at commercial 
banks, French and German sovereign debt is a reasonably safe 
investment, and therefore investment by ICC in such debt provides a 
safe alternative to deposit in commercial banks and would help assure 
the safeguarding of Euro-denominated House Origin Cash and Customer 
Origin Cash.
    We note that, although permitting ICC to invest Customer Origin 
Cash through a reverse repo still exposes ICC to the credit risk of the 
counterparty to the reverse repo transaction, unlike placing the cash 
in an unsecured demand deposit account at a commercial bank, ICC would 
receive German and French Sovereign Debt as collateral against the repo 
counterparty's credit risk, thereby helping to mitigate the risk. 
Similarly, to the extent a custodian holding the collateral in 
connection with a reverse repo transaction entered insolvency 
proceedings, ICC would have a claim to specific securities rather than 
a general claim against the assets of the custodian, as it would have 
with respect to cash on deposit at a commercial bank account, which 
could put ICC in a better position to recover losses in case of 
insolvency proceedings. For these reasons, the Commission believes that 
ICC's investment of Euro-denominated Customer Origin Cash and House 
Origin Cash in French and German sovereign debt, under the conditions 
of the proposed rule change, would help ICC ensure the reliable 
investment of assets in ICC's control while at the same time helping to 
assure the safeguarding of such cash by reducing the exposure to 
counterparty credit risk from commercial banks.
    By helping to assure the safeguarding of Customer Origin Cash and 
House Origin Cash, which CPs post to satisfy their clients' margin 
requirements and their own margin and GF requirements, the Commission 
also believes the proposed changes could help reduce risks to ICC's 
margin system and Guaranty Fund, which in turn could help ensure that 
ICC is able to continue providing its critical central counterparty 
services in the event of a CP default. By ensuring that the assets that 
comprise the margin and Guaranty Fund collected by ICC, in the form of 
Customer Origin Cash and House Origin Cash, are safely invested and 
held in a manner that will allow ICC to access such assets when needed, 
the Commission believes that the propose rule change would help improve 
the overall effectiveness of ICC's margin system and Guaranty Fund as 
risk management tools. For the same reasons, the Commission believes 
the proposed rule change would, in general, help protect investors and 
the public interest.
    Therefore, the Commission finds that the proposed rule change would 
assure the safeguarding of securities and funds in ICC's custody and 
control, and, in general, protect investors and the public interest, 
consistent with the Section 17A(b)(3)(F) of the Act.\36\
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    \36\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rules 17Ad-22(b)(2) and 17Ad-22(b)(3)

    Rule 17Ad-22(b)(2) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed to use 
margin requirements to limit its credit exposures to participants under 
normal market conditions and use risk-based models and parameters to 
set margin requirements and review such margin requirements and the 
related risk-based models and parameters at least monthly.\37\ Rule 
17Ad-22(b)(3) requires that ICC establish, implement, maintain

[[Page 50127]]

and enforce written policies and procedures 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.\38\
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    \37\ 17 CFR 240.17Ad-22(b)(2).
    \38\ 17 CFR 240.17Ad-22(b)(3).
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    As discussed above, the Commission believes that the proposed 
changes facilitating the investment of Euro-denominated Customer Origin 
Cash and House Origin Cash in French and German sovereign debt would 
improve the safeguarding of such cash, and would thereby help reduce 
risks to ICC's margin system and GF. As described above, the proposed 
rule change would provide ICC two reasonably safe investments for such 
cash--French and German sovereign debt--which ICC could use to maintain 
and preserve the cash in ICC's margin system and GF, which in turn 
could help ICC to maintain margin requirements to limit its credit 
exposures to participants under normal market conditions. Likewise, by 
improving the safeguarding and investment of the cash in the GF, which 
ICC collects from CPs to maintain such sufficient financial resources, 
the Commission believes the proposed rule change would help ICC 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.
    Therefore, for these reasons, the Commission finds that the 
proposed rule change is consistent with Rules 17Ad-22(b)(2) and 17Ad-
22(b)(3).\39\
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    \39\ 17 CFR 240.17Ad-22(b)(2), (b)(3).
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C. Consistency With Rule 17Ad-22(d)(3)

    Rule 17Ad-22(d)(3) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed to hold 
assets in a manner that minimizes risk of loss or of delay in its 
access to them and invest assets in instruments with minimal credit, 
market and liquidity risk.\40\
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    \40\ 17 CFR 240.17Ad-22(d)(3).
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    As described above, the proposed rule change would allow the 
investment of Euro-denominated Customer Origin Cash and House Origin 
Cash in French and German sovereign debt, allowing ICC to avoid holding 
such cash in demand deposits at commercial banks. Moreover, the 
proposed rule change would prohibit investment in French and German 
sovereign debt when such investment would not comply with the 
conditions and restrictions set forth in CFTC Regulation 1.25,\41\ the 
CFTC Order, and any other applicable exemptive orders. Such conditions 
and restrictions would, among other things, prohibit investment if the 
two year credit default spread of France or Germany exceeds 45 basis 
points (which the CFTC considered to approximate the risk level of the 
United States).\42\ Finally, the Treasury Policy's Euro investment 
guidelines would set a target of 100% of investment through overnight 
reverse repos, meaning a reverse repo transaction for which the agreed 
upon repurchase date is the business day immediately following the 
purchase date.
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    \41\ 17 CFR 1.25.
    \42\ CFTC Order, 83 FR at 35243-35245.
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    For all the reasons discussed above, the Commission believes that 
in facilitating investment in French and German sovereign debt with 
minimal credit risk and creating risk controls surrounding such 
investments, the proposed rule change would allow ICC to hold Customer 
Origin Cash and House Origin Cash in a manner that minimizes risk of 
loss or of delay in ICC's access to them and would allow ICC to invest 
such funds in instruments with minimal credit, market and liquidity 
risk.
    Therefore, for these reasons, the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(d)(3).\43\
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    \43\ 17 CFR 240.17Ad-22(d)(3).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act, and in 
particular, with the requirements of Section 17A(b)(3)(F) of the Act 
\44\ and Rules 17Ad-22(b)(2), 17Ad-22(b)(3), and 17Ad-22(d)(3) 
thereunder.\45\
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    \44\ 15 U.S.C. 78q-1(b)(3)(F).
    \45\ 17 CFR 240.17Ad-22(b)(2), (b)(3), and (d)(3).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\46\ that the proposed rule change (SR-ICC-2018-009) be, and hereby is, 
approved.\47\
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    \46\ 15 U.S.C. 78s(b)(2).
    \47\ 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.\48\
Eduardo A. Aleman,
Assistant Secretary.
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    \48\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-21585 Filed 10-3-18; 8:45 am]
 BILLING CODE 8011-01-P


