[Federal Register Volume 84, Number 90 (Thursday, May 9, 2019)]
[Notices]
[Pages 20454-20456]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-09510]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85776; File No. SR-ICEEU-2019-006]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to Amendments to the CDS Risk 
Management Model Description

May 3, 2019.

I. Introduction

    On March 13, 2019, 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 to 
make certain amendments to its CDS Risk Model Description document to 
incorporate risk model enhancements related to the single name credit 
default swap (``CDS'') liquidity charge methodology. The proposed rule 
change was published for comment in the Federal Register on March 22, 
2019.\3\ 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\ Securities Exchange Act Release No. 85350 (March 18, 2019), 
84 FR 10869 (March 22, 2019) (SR-ICEEU-2019-006) (``Notice'').
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II. Description of the Proposed Rule Change

    ICE Clear Europe proposes a revised approach to computing single 
name CDS liquidity charges.\4\ ICE Clear Europe might incur additional 
costs to unwind positions in the event of a clearing member default. 
Therefore, the ICE Clear Europe CDS risk model includes a provision to 
account for the additional liquidation cost due to the exposure to Bid/
Offer Width (``BOW''). This provision is called a liquidation charge 
and such charges are computed separately for single names and indices.
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    \4\ Capitalized terms not otherwise defined herein shall have 
the meanings given to them in the CDS Policies or ICE Clear Europe 
Rulebook.
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    ICE Clear Europe proposes to introduce minimum instrument liquidity 
requirements independent of instrument maturities.\5\ ICE Clear 
Europe's current spread-based liquidity charge approach features 
instrument liquidity requirements that decay with time to maturity for 
fixed credit spread levels.\6\ The proposed rule change introduces 
minimum liquidity requirements for individual instruments, independent 
of time to maturity for the considered instruments, and thus 
establishes minimum liquidity charges that do not decay over time as 
contract maturity is approached.\7\ The proposed calculation for single 
name CDS liquidity charges at the instrument level incorporates a 
price-based bid-offer width floor component to provide stability and 
anti-procyclicality requirements, as well as a dynamic spread-based BOW 
component to reflect the additional risk associated with distressed 
market conditions.\8\ The values of such price-based BOW and spread-
based BOW are fixed factors, which are subject to at least monthly 
reviews and updates by ICE Clear Europe Risk Management Department with 
consultation with the Risk Working Group.\9\
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    \5\ Notice, 84 FR at 10869.
    \6\ Id.
    \7\ Id.
    \8\ Id.
    \9\ Id.
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    ICE Clear Europe proposes other enhancements to the liquidity 
charge calculation at the single name level.\10\ The current liquidity 
charge approach at the single name level accounts for the liquidation 
cost across the curve. All positions are aggregated and priced at each 
maturity interval separately as a synthetic forward CDS instrument. 
This current approach introduces potential sub-additivity at the single 
name level, as it may result in a higher liquidity charge than the sum 
of the single name instrument requirements.\11\
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    \10\ Id.
    \11\ Id.
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    Under the proposed calculation, liquidity charges at the single 
name level will be computed by first calculating the liquidity 
requirements for each individual instrument position in the portfolio, 
and then summing all instrument liquidity requirements for positions 
with the same directionality, i.e., bought or sold protection.\12\ The 
liquidity charge requirements at the single name level will be the 
greatest liquidity requirement associated with either the sum of all 
bought protection position liquidity requirements, or the sum of all 
sold protection position liquidity requirements.\13\ Under this 
proposed approach, the portfolios' liquidity charge cannot exceed the 
sum of the individual instrument's requirements.\14\ There are no 
changes to the liquidity charge calculation at the portfolio level.\15\
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    \12\ Id.
    \13\ Id.
    \14\ Id.
    \15\ Id.
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    ICE Clear Europe expects these enhancements will ensure more stable 
liquidity requirements for instruments across the curve and simplify 
ICE Clear Europe's liquidity charge methodology.\16\ As stated above, 
the current single name level liquidity requirements are based on 
forward CDS spread levels and are, in general, more difficult to 
calculate as forward spread levels are not observable across the 
curve.\17\ ICE Clear Europe, as part of its end-of-day price discovery 
process, provides end-of-day pricing data for instruments in which 
clients have open positions, which will, under the proposed approach, 
allow for easier replication for clients who wish to estimate liquidity 
charges for hypothetical and current positions.\18\
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    \16\ Id.
    \17\ Id.
    \18\ Id.
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III. 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.\19\ For the reasons given below, the Commission finds 
that the proposed

[[Page 20455]]

rule change is consistent with Section 17A(b)(3)(F) of the Act \20\ and 
Rules 17Ad-22(e)(4)(i) and (ii) and (e)(6)(i) and (v) thereunder.\21\
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    \19\ 15 U.S.C. 78s(b)(2)(C).
    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ 17 CFR 240.17Ad-22(e)(4)(i) and (ii) and (e)(6)(i) and (v).
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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 ICE Clear Europe be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and, to 
the extent applicable, derivative agreements, contracts, and 
transactions, as well as to assure the safeguarding of securities and 
funds which are in the custody or control of ICE Clear Europe or for 
which it is responsible, and, in general, to protect investors and the 
public interest.\22\
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, the proposed rule change establishes minimum 
liquidity charges that do not decay over time as the contract maturity 
is approached. The Commission believes that this approach promotes a 
more conservative margin calculation approach by maintaining a minimum 
liquidity charge through an instrument's maturity. The Commission 
believes that this ensures that ICEEU requires clearing members to 
maintain sufficient margin to cover losses through the entire contract 
life rather than reducing these requirements as maturity approaches.
    Further, as discussed above, under the proposed enhancements to the 
liquidity charge calculation, the portfolios' liquidity charge cannot 
exceed the sum of the individual instrument's requirements, which is a 
possibility under the current approach discussed above. The Commission 
believes that this proposal will in turn ensure more stable liquidity 
requirements for instruments across the curve and not require higher 
margins than necessary. Further, by summing all instrument liquidity 
requirements for positions with the same directionality rather than 
across the curve, the Commission believes that ICEEU is simplifying the 
process for clearing members as the approach is considered easier to 
calculate than the current approach, which is based on forward spread 
levels and hence more difficult to observe. Consequently, the 
Commission believes that this in turn will promote more accurate margin 
calculation by clearing members.
    The Commission believes that the simplified and more conservative 
approach to calculating the liquidity charge for single name CDS 
discussed above will allow ICE Clear Europe's members to more easily 
calculate margin requirements in a way that promotes the prudent 
accumulation of financial resources.
    Therefore, the Commission finds that the proposed rule change would 
provide ICE Clear Europe with the financial resources to ensure the 
prompt and accurate clearance and settlement of securities transactions 
and to assure the safeguarding of securities and funds which are in 
their custody or control. For these same reasons, the Commission also 
finds that the proposed rule change would, in general, protect 
investors and the public interest.

B. Consistency With Rule 17Ad-22(e)(4)(i) and (ii)

    Rule 17Ad-22(e)(4)(i) and (ii) requires, in relevant part, that ICE 
Clear Europe 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 by 
maintaining sufficient financial resources to cover its credit exposure 
to each participant fully with a high degree of confidence and maintain 
financial resources to enable it to cover the default of the two 
participant families that would potentially cause the largest aggregate 
credit exposure for ICE Clear Europe in extreme but plausible market 
conditions.\23\
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    \23\ 17 CFR 240.17Ad-22(e)(4)(i) and (ii).
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    As discussed above, the Commission believes that the enhancements 
to the margin calculations related to single name CDS will help to 
maintain the soundness of ICE Clear Europe's margin requirements by 
promoting conservative, simple, and stable margin requirements that 
better capture the portfolio risks of single name CDS. The Commission 
believes that this in turn will help to ensure that ICE Clear Europe 
can 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.

C. Consistency With Rule 17Ad-22(e)(6)(i) and (v)

    Rule 17Ad-22(e)(6)(i) requires, in relevant part, that ICE Clear 
Europe 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\ Rule 17Ad-22(e)(6)(v) 
requires, in relevant part, that ICE Clear Europe cover its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum uses an appropriate method for measuring 
credit exposure that accounts for relevant product risk factors and 
portfolio effects across products.\25\
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    \24\ 17 CFR 240.17Ad-22(e)(6)(i).
    \25\ 17 CFR 240.17Ad-22(e)(6)(v).
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    As discussed above, the Commission believes that the enhancements 
to the risk model related to calculating the liquidity charges for 
single name CDS improves ICE Clear Europe's ability to avoid the losses 
that could result from the miscalculation of its credit exposures for 
particular products and thus produces margin levels more commensurate 
with the risks and particular attributes of each relevant product, 
portfolio, and market. In particular, by maintaining a minimum 
liquidity charge through an instrument's maturity, the Commission 
believes that clearing members will be better able to maintain 
sufficient margin to cover losses over time rather than reducing these 
requirements as maturity approaches. Moreover, as discussed above, by 
changing the liquidity charge requirements at the single name level so 
that the portfolios' liquidity charge cannot exceed the sum of the 
individual instrument's requirements, the Commission believes that this 
proposal will ensure more stable liquidity requirements for instruments 
and not require higher margins than necessary and that are commensurate 
with, the risks and particular attributes of each relevant product.
    Therefore, for these reasons discussed above, the Commission finds 
that the proposed rule change is consistent with is consistent with 
Rule 17Ad-22(e)(6)(i) and (v).\26\
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    \26\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
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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(b)(3)(F) of the 
Act \27\ and Rules 17Ad-22(e)(4)(i) and (ii) and (e)(6)(i) and (v) 
thereunder.\28\
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    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 17 CFR 240.17Ad-22(e)(4)(i) and (ii) and (e)(6)(i) and (v).

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[[Page 20456]]

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\29\ that the proposed rule change (SR-ICEEU-2019-006) be, and hereby 
is, approved.\30\
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    \29\ 15 U.S.C. 78s(b)(2).
    \30\ 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.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-09510 Filed 5-8-19; 8:45 am]
BILLING CODE 8011-01-P


