
[Federal Register Volume 83, Number 243 (Wednesday, December 19, 2018)]
[Notices]
[Pages 65195-65197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27405]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84810; File No. SR-ICEEU-2018-021]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change Relating 
to the F&O Stress Testing Policy \1\

December 13, 2018.
     
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    \1\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
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    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that 
on December 6, 2018, ICE Clear Europe Limited (``ICE Clear Europe'' or 
``The Clearing House'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by ICE Clear 
Europe. ICE Clear Europe filed the proposed rule change pursuant to 
Section 19(b)(3)(A) of the Act,\4\ and Rule 19b-4(f)(4)(ii) 
thereunder,\5\ so that the proposal was immediately effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(4)(ii).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    ICE Clear Europe proposes to update and formalize its Futures and 
Options Stress Testing Policy (the ``F&O Stress Testing Policy'').

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    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 these statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(a) Purpose
    ICE Clear Europe proposes to update and formalize its F&O Stress 
Testing Policy. The Clearing Risk Department is the owner of the F&O 
Stress Testing Policy and is responsible for ensuring that it remains 
up-to-date and that it is reviewed in accordance with policy 
requirements. The policy is to be reviewed annually by the F&O Risk 
Committee and the Board Risk Committee.
    The objective of the F&O Stress Testing Policy is to ensure the F&O 
Guaranty Fund is adequate to cover at least the two largest Clearing 
Member uncollateralised losses (i.e., losses over Clearing Member 
account's requirements). The F&O Guaranty Fund protects the Clearing 
House against losses over and above margin that may be experienced 
during periods of extreme market volatility. Stress tests are used to 
test the adequacy of the F&O Guaranty Fund size.
    The F&O Stress Testing Policy describes ICE Clear Europe's stress 
test principles, including frequency and reporting. The stress test 
results of Clearing Member portfolios are calculated daily and reported 
internally on a daily basis. The F&O Risk Committee reviews historical 
daily stress test results on a bi-monthly basis. The Clearing House 
will review internally the stress scenarios on a regular basis and 
inform the F&O Risk Committee where additions or changes to the 
scenarios employed have a material impact on the stress results. The 
F&O Stress Testing Policy also provides an overview of ICE Clear 
Europe's stress loss calculation and stress shock calibration 
methodologies.
    The F&O Stress Testing Policy describes and defines the types of 
F&O stress testing scenarios and their application. The Clearing House 
has two types of scenarios used to size the F&O Guaranty Fund: 
Historical and theoretical scenarios. The historical stress scenarios 
aim to select the most significant historic events in terms of extreme 
price movement of the relevant underlyings, and then replicate as 
accurately as possible the historic event that has been selected across 
the full range of cleared products and apply these stress tests to 
contemporary positions. Theoretical scenarios are constructed using 
plausible combinations of extreme price moves that are not contained 
within the set of historical scenarios, including group or sector 
specific stresses. The development of these hypothetical and extreme 
scenarios is tailored to the specific risks of the products and markets 
served. They are designed to measure the response of Clearing Members' 
portfolios to extreme conditions, and to assess the sufficiency of the 
available Guaranty Fund. Additionally, for other theoretical scenarios, 
ICE Clear Europe constructs theoretical scenarios, which are 
constructed of changes to macroeconomic events that are considered 
plausible given qualitative analysis of current market and geopolitical 
conditions. These scenarios are labelled ``hypothetical''.
    The policy also describes ICE Clear Europe's reverse stress testing 
practices, which act as a tool to supplement existing stress analysis. 
Such scenarios follow the similar frequency and reporting as the 
standard stress test scenarios. Rather than sizing the F&O Guaranty 
Fund, these scenarios examine the magnitude of the stress required to 
exhaust the F&O Guaranty Fund size. Both historical reverse stress 
tests and theoretical reverse stress tests are performed. Reverse 
stress test scenarios results are reviewed and presented monthly to the 
F&O Risk Committee.
    The F&O Stress Testing Policy describes how ICE Clear Europe 
aggregates stress test results. The uncollateralised stress losses 
across all scenarios per Clearing Member and sub-account \6\ are 
calculated. The worst case result for each Clearing Member, by sub-
account including segregated sponsored principal accounts, is then 
compared with the margin account's requirements in respect of the 
Clearing Member. Where the stress testing result is greater than the 
margin account's requirements, by sub-account, this modelled loss above 
requirement or shortfall is recorded as an uncollateralised stress 
testing loss. In order to derive the two largest uncollateralised 
losses, individual uncollateralised stress loss at each Clearing Member 
account is aggregated into the financial institution group.
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    \6\ Sub-account refers to the definition of Margin Account as 
per the Rules.
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    The F&O Stress Testing Policy also describes how stress test 
results are reviewed and escalated. As noted above, daily stress 
testing results must be

[[Page 65196]]

reviewed daily by Senior Clearing Risk Department staff. A bi-monthly 
summary of any significant events in the stress testing will be 
presented to the F&O Risk Committee. Further, trigger levels will be 
set to flag certain events, e.g. when a Clearing Member's stressed 
losses exceed a predetermined percentage of its Original Margin 
requirement (but the change is not affecting the Guaranty Fund). In the 
event of a trigger of such event, Senior Clearing Risk Department staff 
will determine what action to follow, dependent on the nature of the 
event and Clearing Member to which it applies. The F&O Stress Testing 
Policy contains a non-exhaustive list of available actions.
    The F&O Stress Testing Policy also includes reference to the Board 
risk appetite, and lists the escalation and notification protocols for 
each risk appetite metric. Each risk appetite metric is calculated as 
per its predetermined frequency, has a defined threshold in accordance 
with the latest calibration process, and is routinely reported to the 
Board and its committees as part of the Risk Appetite Metric Dashboard.
(b) Statutory Basis
    ICE Clear Europe believes that the proposed rule change is 
consistent with the requirements of Section 17A of the Act \7\ and the 
regulations thereunder applicable to it, including the standards under 
Rule 17Ad-22.\8\ Section 17A(b)(3)(F) of the Act \9\ 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. 
The F&O Stress Testing Policy sets forth the methodology by which ICE 
Clear Europe ensures that the Guaranty Fund is adequate to cover at 
least the two largest Clearing Member uncollateralised losses (i.e. 
losses over Clearing Member account's requirements), in order to 
identify any potential deficiencies. Such testing ensures that ICE 
Clear Europe maintains the appropriate level of risk management 
resources to cover losses in the case of a default. As such, the 
proposed changes enhance ICE Clear Europe's ability to manage risk, and 
therefore enhance ICE Clear Europe's ability to promote the prompt and 
accurate clearance and settlement of securities transactions, 
derivatives agreements, contracts, and transactions and contribute to 
the safeguarding of securities and funds in ICE Clear Europe's custody 
or control, within the meaning of Section 17A(b)(3)(F) of the Act.\10\
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    \7\ 15 U.S.C. 78q-1.
    \8\ 17 CFR 240.17Ad-22.
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ Id.
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    In addition, the proposed rule change is consistent with the 
relevant requirements of Rule 17Ad-22,\11\ and in particular Rule 17Ad-
22(e)(4).\12\ Rule 17Ad-22(e)(4)(ii) \13\ 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. The F&O Stress Testing Policy contains stress 
testing practices designed to test the sufficiency of ICE Clear 
Europe's F&O Guaranty Fund, and ensure that ICE Clear Europe maintains 
sufficient financial resources to withstand a default by the two 
Clearing Member families to which it has the largest aggregate exposure 
in extreme, but plausible market conditions, in accordance with Rule 
17Ad-22(e)(4)(ii).\14\
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    \11\ 17 CFR 240.17Ad-22.
    \12\ 17 CFR 240.17Ad-22(e)(4).
    \13\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \14\ Id.
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    Rule 17Ad-22(e)(4)(vi)(A) \15\ requires, in relevant part, that a 
covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to test the 
sufficiency of its total financial resources available to meet the 
minimum financial resource requirements under Rule 17Ad-22(e)(4)(i) 
through (iii) \16\ by conducting stress testing of its total financial 
resources once each day using standard predetermined parameters and 
assumptions. The F&O Stress Testing Policy describes and defines the 
types of F&O stress testing scenarios and their application. ICE Clear 
Europe uses the results of the stress testing scenarios to determine 
the sufficiency of its financial resources on a daily basis. Thus, the 
proposed rule change is consistent with the requirement of Rule 17Ad-
22(e)(4)(vi)(A).\17\
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    \15\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
    \16\ 17 CFR 240.17Ad-22(e)(4)(i)-(iii).
    \17\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
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    Rules 17Ad-22(e)(4)(vi)(B) through (D) \18\ require, in relevant 
part, that a covered clearing agency establish, implement, maintain and 
enforce written policies and procedures reasonably designed to: (i) 
Conduct a comprehensive analysis on at least a monthly basis of the 
existing stress testing scenarios, models, and underlying parameters 
and assumptions, and consider modifications to ensure they are 
appropriate for determining the covered clearing agency's required 
level of default protection in light of current and evolving market 
conditions; (ii) conduct a comprehensive analysis of stress testing 
scenarios, models, and underlying parameters and assumptions more 
frequently than monthly when the products cleared or markets served 
display high volatility or become less liquid, or when the size or 
concentration of positions held by the covered clearing agency's 
participants increases significantly; and (iii) report the results of 
the analyses described above to appropriate decision makers at the 
covered clearing agency, including but not limited to, its risk 
management committee or board of directors.
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    \18\ 17 CFR 240.17Ad-22(e)(4)(vi)(B)-(D).
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    Specifically, the F&O Stress Testing Policy contains certain 
requirements regarding routine review of the policy, including a 
requirement that the policy be kept up-to-date and annual review by ICE 
Clear Europe's F&O Risk Committee and the Board Risk Committee. The F&O 
Stress Testing Policy also includes a notification and escalation 
process, which could, depending on the extent of the breach of pre-
established thresholds could require a particular response and review 
of the response by the Executive Risk Committee or the Board Risk 
Committee. Further, the F&O Stress Testing Policy describes how stress 
test results are reviewed and escalated. Daily stress testing results 
must be reviewed daily by Senior Clearing Risk Department staff, and 
stress testing results are reported to the F&O Risk Committee. The F&O 
Stress Testing Policy also includes reference to Board escalation and 
notification protocols, based on pre-defined risk appetite metrics. As 
described above, the F&O

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Stress Testing Policy sets forth ICE Clear Europe's processes for 
review of the policy and stress testing results, and oversight by ICE 
Clear Europe's Board and certain of its committees. As such, the 
proposed rule change is consistent with the requirement of Rule 17Ad-
22(e)(4)(vi)(B) through (D).\19\
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    \19\ Id.
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    Rule 17Ad-22(e)(2) \20\ requires, in relevant part, that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide for governance 
arrangements that are clear and transparent and that specify clear and 
direct lines of responsibility. As detailed above, the F&O Stress 
Testing Policy sets forth the governance process for changes to the 
policy, as well as details the oversight by ICE Clear Europe's Board 
and certain of its committees of the stress testing results. As such, 
ICE Clear Europe believes the changes are reasonably designed to meet 
the requirements of 17Ad-22(e)(2).\21\
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    \20\ 17 CFR 240.17Ad-22(e)(2).
    \21\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed rule changes would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The F&O Stress 
Testing Policy applies uniformly across all F&O Clearing Members. ICE 
Clear Europe does not believe that the formalization of the F&O Stress 
Testing Policy will otherwise impact competition among Clearing Members 
or other market participants, or affect the ability of market 
participants to access clearing generally. Therefore, ICE Clear Europe 
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 
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 and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act and paragraph (f) of Rule 19b-4 thereunder. At 
any time within 60 days of the filing of the proposed rule change, the 
Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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 rule-comments@sec.gov. Please include 
File Number SR-ICEEU-2018-021 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-ICEEU-2018-021. 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 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 Europe and on ICE 
Clear Europe's website at https://www.theice.com/clear-europe/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-ICEEU-2018-021 and should be 
submitted on or before January 9, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2018-27405 Filed 12-18-18; 8:45 am]
BILLING CODE 8011-01-P


