[Federal Register Volume 84, Number 96 (Friday, May 17, 2019)]
[Notices]
[Pages 22530-22540]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10227]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85848; File No. SR-ICEEU-2019-003]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change, Security-Based Swap Submission or 
Advance Notice Relating to amendments to the ICE Clear Europe Clearing 
Rules (the ``Rules'')

May 13, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 29, 2019, ICE Clear Europe Limited (``ICE Clear Europe'' or 
the ``Clearing House'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule changes described in 
Items I, II and III below, which Items have been prepared by ICE Clear 
Europe. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change, Security-Based Swap Submission, or Advance Notice

    ICE Clear Europe proposes to modify certain provisions of its Rules 
relating to default management, Clearing House recovery and wind-down 
for CDS Contracts, and to adopt certain related default auction 
procedures.\3\
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    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the ICE Clear Europe Clearing Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change, Security-Based Swap Submission or 
Advance Notice

    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 such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change, Security-Based Swap Submission or 
Advance Notice

(a) Purpose
    ICE Clear Europe submits proposed amendments to the ICE Clear 
Europe Rules relating to Clearing House default management, recovery 
and wind-down to address the risk of uncovered losses from a Clearing 
Member default or series of defaults, among other risks. The amendments 
largely extend certain existing default management, recovery and wind-
down rules currently available for the F&O Category to apply to the CDS 
Contract Category, with certain modifications appropriate to that type 
of contract.\4\ ICE Clear Europe is also proposing to make certain 
other clarifications and improvements to these rules for all Contract 
Categories. ICE Clear Europe also proposes to adopt new default auction 
procedures for CDS Contracts.
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    \4\ ICE Clear Europe adopted its rules relating to Clearing 
House recovery and wind-down for the F&O and FX Contract Categories 
in 2014 (the ``F&O Recovery Rule Amendments''). See Exchange Act 
Release No. 34-71450 (Jan. 31, 2014), 79 FR 7250 (Feb. 6, 2014), for 
a discussion of the terms of those rule amendments and the basis for 
them.
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I. Summary of Proposed Amendments
    The amendments would extend certain existing F&O default 
management, recovery and wind-down tools to the CDS Contract Category. 
In particular, the amendments would, for CDS Contracts, enhance 
existing tools and establish new tools and procedures (and an order of 
priority for using such tools and procedures) to manage a Clearing 
Member or Sponsored Principal default or series of defaults and return 
to a matched book. Certain other improvements would be made to the 
default management procedures for F&O and FX Contracts.\5\ The 
amendments would, among other matters:
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    \5\ The default management, recovery and wind-down rules 
applicable to the F&O Contract Category also apply to the FX 
Contract Category. Since ICE Clear Europe does not currently clear 
any contracts in the FX Contract Category, the following discussion, 
for simplicity, generally does not refer to the FX Contract 
Category.
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    (i) Establish default auction procedures for CDS contracts, 
including:
    (A) Initial default auctions for CDS, to be conducted in accordance 
with a new defined set of CDS default auction procedures; and
    (B) if such initial default auctions are not fully successful, 
conducting a secondary auction of all remaining CDS positions, to be 
conducted in accordance with a defined set of CDS secondary auction 
procedures; and
    (ii) in relation to the CDS Contract Category, if a secondary 
auction is unsuccessful, or, in relation to the F&O Contract Category, 
if an auction is unsuccessful, permit partial tear-up of positions of 
non-defaulting Clearing Members and Sponsored Principals corresponding 
to the defaulter's remaining portfolio; (Rule 915)
    (iii) in connection with the new default management steps described 
in (i) and (ii) above, eliminate forced allocation for CDS Contracts as 
a default management tool; (Deletion of former Rule 905(c) and Rule 
401(a)(x))
    (iv) in connection with these default management steps, provide the 
ability to implement reduced gains distributions (a.k.a. variation 
margin haircutting) for CDS Contracts following exhaustion of other 
financial resources, for up to five business days; (Rule 914(o))
    (v) extend to the CDS Contract Category the concept of a ``Cooling-
off Period'' (based on that used for F&O Contracts), which would be 
triggered by certain Clearing Member or Sponsored Principal defaults 
with respect to CDS Contracts that result in Guaranty Fund depletion. 
During a Cooling-off Period, the aggregate liability of a CDS Clearing 
Member for replenishments of the Guaranty Fund and assessments would be 
capped at ``3x'' its required Guaranty Fund Contribution for all 
defaults during that period. Certain conforming amendments would be 
made to the Cooling-off Periods applicable under the current Rules for 
F&O Contracts; (Rule 917)
    (vi) clarify the process under which a CDS Clearing Member or 
Sponsored Principal may withdraw from the Clearing House during a 
Cooling-off Period, related procedures for unwinding all positions of 
such a CDS Clearing Member or Sponsored Principal and capping its 
continuing liability to ICE Clear Europe and rights of ICE Clear Europe 
to call for margin from withdrawing CDS Clearing Members; (Rules 917-
918)
    (vii) clarify the procedures for full clearing service termination, 
particularly for CDS Contracts, where that is determined to be 
appropriate by ICE Clear Europe (Rule 916); and
    (viii) in connection with the foregoing, eliminate the Continuing 
CDS Rule Provisions currently applicable to CDS Contracts and CDS 
Clearing Members as instead, the document called ``Clearing Rules'' 
will apply to

[[Page 22531]]

CDS Clearing Members in the same way as it applies to F&O Clearing 
Members.\6\
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    \6\ The Continuing CDS Rule Provisions are certain provisions of 
the Rules as they were in effect prior to the adoption of the F&O 
Recovery Rule Amendments, and which continued in effect with respect 
to the CDS Contract Category, as provided in ICE Clear Europe 
Circular C14/012 of 31 January 2014 and in the definition thereof in 
the Rules. Specifically, the Continuing CDS Rule Provisions include 
prior Rules 105(c), 209 and 912 and certain aspects of Rules 910 and 
1102 as they relate to the CDS Contract Category and/or CDS Clearing 
Members. Following adoption of the proposed Rule amendments relating 
to the CDS Contract Category, the Continuing CDS Rule Provisions 
will no longer be applicable, ICE Clear Europe will no longer 
maintain a document called ``Continuing CDS Rule Provisions'' on its 
website, and the published Rules (as amended) will fully apply to 
CDS Clearing Members as well as F&O Clearing Members. As a result, 
various references to the Continuing CDS Rule Provisions in the 
Rules would be removed. Note further that Exhibit 5A to this Form 
19b-4 shows the deletion of the Continuing CDS Rule Provisions only.
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    The proposed amendments are described in more detail in the 
following sections:
II. Revisions to Default Management Tools and Steps
    Part 9, which specifies ICE Clear Europe's remedies upon a Clearing 
Member or Sponsored Principal default, would be revised to implement 
the additional recovery tools for CDS Contracts discussed herein. The 
changes would replace forced allocation for CDS with default auctions, 
reduced gains distribution and partial tear up. Changes would also be 
made to harmonize default management tools across the F&O and CDS 
Contract Categories and improve overall clarity.
Overall Structure of Revised Default Management Provisions
    Rule 905 would establish the overall default management tools and 
procedures available to the Clearing House to terminate and close out 
contracts of a Defaulter. Rule 905(b) would be revised to contemplate 
initial CDS default auctions, as discussed below. Paragraph (c), which 
provided for forced allocation in the context of CDS Contracts, would 
be eliminated (along with a corresponding provision in Rule 401(a)(x) 
and related cross-references throughout the Rules). The amendments 
would add a new paragraph (d), addressing default management where the 
Clearing House does not resolve a default through the use of its 
standard default management remedies under Rules 905(a)-(c). Rule 
905(d)(i) would address CDS Contracts, and set out circumstances for 
the use of reduced gains distribution, secondary CDS auctions, partial 
tear-up and certain other remedies not inconsistent with the other 
provisions of the Rules. Rule 905(d)(ii) would address F&O Contracts, 
and set out circumstances for the use of reduced gains distribution, 
partial tear-up and certain other remedies not inconsistent with the 
other provisions of the Rules. Certain other provisions of Rule 905 
would be renumbered, and certain conforming and clarifying changes 
would be made.
Initial CDS Auctions
    As revised, Rule 905(b)(i) would provide for ICE Clear Europe to 
run one or more Initial CDS Auctions for the CDS Contract Category with 
respect to the remaining portfolio of the Defaulter.
    Initial CDS Auctions would be conducted in accordance with Part 1 
of a new defined set of Auction Terms for CDS Default Auctions (the 
``CDS Default Auction Procedures''). Under those procedures, ICE Clear 
Europe may break the portfolio into one or more lots, each of which 
would be auctioned separately. CDS Clearing Members would have an 
obligation to bid for each lot in a minimum amount determined by ICE 
Clear Europe. A CDS Clearing Member could transfer or outsource its 
minimum bid requirement to an affiliated CDS Clearing Member, and 
similarly a CDS Clearing Member could aggregate its own minimum bid 
requirement with that of its affiliated CDS Clearing Member. A minimum 
bid requirement would not apply where the bid would be in breach of 
applicable law or the Rules, such as if a self-referencing CDS Contract 
would arise from an accepted bid, or where ICE Clear Europe, after 
written notification that a minimum bid requirement is inappropriate in 
the current circumstances, reasonably determines that the requirement 
should not apply.
    Customers would be able to bid indirectly through a CDS Clearing 
Member. In addition, a Customer, including a Sponsored Principal 
invited by ICE Clear Europe to participate in an Initial CDS Auction, 
would have the option to bid directly in the auction (a ``Direct 
Participating Customer''), provided that (i) a Clearing Member has 
confirmed that it will clear any of its resulting transactions; (ii) it 
makes a minimum deposit of [euro]7.5 million which may generally be 
applied by ICE Clear Europe in the same manner as CDS Clearing Members' 
Guaranty Fund Contributions (e.g., subject to ``juniorization'' as 
described below); and (iii) it has entered into an agreement with ICE 
Clear Europe pursuant to which it agrees to the auction terms and 
confidentiality requirement as they apply to Direct Participating 
Customers. If an auction for any lot or lots fails, as determined in 
accordance with the default auction procedures, ICE Clear Europe would 
be able to determine to have a subsequent Initial CDS Auction or 
Auctions.
    The auction for each lot would be conducted as a modified Dutch 
auction. Where there are multiple winning bidders, all would pay or 
receive the auction clearing price.
    Under Rule 908, all available default resources (including pre-
funded CDS Guaranty Fund Contributions of CDS Clearing Members, 
assessment contributions of CDS Clearing Members and ICE Clear Europe 
contributions to the CDS Guaranty Fund) could be used to pay the cost 
of an Initial CDS Auction. Guaranty fund and assessment contributions 
of non-defaulting CDS Clearing Members would be subject to 
``juniorization'' under Rule 908(i) and would be applied using a 
defined default auction priority set out in the CDS Default Auction 
Procedures based on the competitiveness of their bids. A portion of 
each CDS Clearing Member's Guaranty Fund Contributions would be 
allocated to the auction cost of each lot. The CDS Guaranty Fund would 
be further divided into three tranches. The lowest (and first-used) 
tranche would consist of contributions of CDS Clearing Members that 
failed to bid in the required amount in the relevant auction. The 
second, or subordinate, tranche would include contributions of CDS 
Clearing Members whose bids were less competitive than a defined 
threshold based on the auction clearing price. The final, or senior, 
tranche includes contributions of CDS Clearing Members whose bids would 
be competitive as compared to a second threshold. (For CDS Clearing 
Members who bid in the band between the two thresholds, their 
contributions would be allocated between the senior and subordinate 
tranches based on a formula.) Thus, contributions of CDS Clearing 
Members who fail to bid would be used before those who bid, and 
contributions of those who bid uncompetitively would be used before 
those who bid competitively. A parallel juniorization approach would 
apply to the use of assessment contributions, and a similar 
juniorization approach also applies to contributions of Direct 
Participating Customers. With this design, ICE Clear Europe believes 
that the CDS Default Auction Procedures would give CDS Clearing Members 
a strong incentive to bid competitively, with the goal of reaching an 
efficient auction clearing price that would permit the Clearing House 
to close out the Defaulter's portfolio within the resources of the 
Clearing House.

[[Page 22532]]

Additional Default Measures
    New Rule 905(d) would address the default management tools of the 
Clearing House where initial Default Auctions are not successful in 
closing out the positions of the defaulter. Subclause (i) would apply 
to CDS Contracts, and provides that the Clearing House could engage in 
reduced gains distribution, Secondary CDS Auctions and partial tear-up, 
among other actions, as discussed below. Subclause (ii), which applies 
to F&O Contracts, would clarify that the Clearing House could engage in 
reduced gains distribution or partial tear-up, as discussed below.
Secondary CDS Auction
    If one or more Initial CDS Auctions are not fully successful in 
closing out the defaulting CDS Clearing Member's CDS portfolio, ICE 
Clear Europe would be able to proceed to conduct a Secondary CDS 
Auction with respect to the Defaulter's remaining portfolio under Rule 
905(d)(i)(B) and the CDS Default Auction Procedures. (As discussed 
below, under Rule 905(d)(i)(A) ICE Clear Europe would be able to in 
certain circumstances invoke reduced gains distributions in connection 
with such an auction.)
    The Secondary CDS Auction would be conducted pursuant to Part 2 of 
the CDS Default Auction Procedures. The Secondary CDS Auction would 
also use a modified Dutch auction format, with all winning bidders 
paying or receiving the auction clearing price. A Secondary CDS Auction 
for a lot would be deemed successful if it results in a price for the 
lot that is within ICE Clear Europe's remaining CDS default resources, 
which would be allocated to each lot for this purpose based on the 
initial margin requirements for the lot. The Secondary CDS Auction 
procedures contemplate that Customers could bid directly in the 
Secondary CDS Auction (without need for a minimum deposit, but provided 
that a CDS Clearing Member has confirmed that it will clear any 
resulting transactions of the Non-Clearing Member), or could bid 
through a CDS Clearing Member.
    Under Rule 908(i), in the case of a Secondary CDS Auction, ICE 
Clear Europe would apply all remaining CDS default resources. Guaranty 
Fund and assessment contributions of non-defaulting CDS Clearing 
Members, to the extent remaining, would be subject to ``juniorization'' 
in a Secondary CDS Auction, similar to that described above for initial 
default auctions, in accordance with the secondary auction priority set 
forth in the secondary auction procedures.
    If a Secondary CDS Auction is unsuccessful for any lot, ICE Clear 
Europe would be able to run another Secondary CDS Auction for that lot. 
ICE Clear Europe could repeat this process as necessary. However, 
pursuant to Rule 914(o), if ICE Clear Europe invoked reduced gains 
distributions, the last attempt at a Secondary CDS Auction (if needed) 
would occur on the last day of the five-business-day reduced gains 
distribution period. On that last day, the Secondary CDS Auction for 
each lot would be successful if it results in a price that is within 
the default resources for such lot. ICE Clear Europe could also 
determine, for a Secondary CDS Auction on that last day, that an 
auction for a lot would be partially filled. With respect to any lot 
that is not successfully auctioned, in whole or in part, ICE Clear 
Europe could proceed to partial tear-up under Rule 915, as described 
below.
F & O Default Auction
    The proposed amendments would also clarify in Rule 908(b)-(d) that 
where a Default Auction is held in respect of the F&O Contract 
Category, any applicable juniorization approach (through modifications 
to Rule 908) could be set out by the Clearing House by Circular. 
Certain other drafting clarifications, corrections and conforming 
changes would be made to Rule 908 as well. Rule 908(f) is being amended 
to provide for notice of relevant default amount calculations to all 
affected Clearing Members, rather than publication by Circular, to 
allow ICE Clear Europe greater flexibility with respect to the manner 
of notice to affected Clearing Members.
Partial Tear-Up
    The amendments would add partial tear-up as an additional default 
remedy, for all Contract Categories. If, in relation to the CDS 
Contract Category, the Secondary CDS Auction, or, in relation to the 
F&O Contract Categories, the default auction does not result in the 
close out of all of the Defaulter's remaining portfolio within the 
Clearing House's remaining resources, then ICE Clear Europe would 
proceed to a partial tear-up with respect to remaining positions under 
Rule 915. Under Rule 915(a), ICE Clear Europe would be permitted to use 
partial tear-up, in relation to the CDS Contract Category, only after 
it has attempted one or more Initial CDS Auctions or Secondary CDS 
Auctions, and, in relation to the F&O Contract Categories, only after 
it has attempted a default auction.
    Pursuant to Rule 915(b), in a partial tear-up, ICE Clear Europe 
would terminate positions of non-defaulting Clearing Members and 
Sponsored Principals that exactly offset those in the Defaulter's 
remaining portfolio (i.e., positions in the identical contracts and in 
the same aggregate notional amount) (``Tear-Up Positions''). ICE Clear 
Europe would terminate Tear-Up Positions across both the house and 
customer origin accounts of all non-defaulting Clearing Members and 
Sponsored Principals that have such positions, on a pro rata basis. 
Within the customer origin account of a non-defaulting Clearing Member, 
Tear-Up Positions of customers would be terminated on a pro rata basis. 
Where ICE Clear Europe has entered into hedging transactions relating 
to the defaulter's positions that would not themselves be subject to 
tear-up, ICE Clear Europe could offer to assign or transfer those 
transactions to Clearing Members with related Tear-Up Positions.
    ICE Clear Europe would determine a termination price for all Tear-
Up Positions, in accordance with Rule 915(f), for a CDS Contract based 
on the last established end-of-day mark-to-market settlement price, and 
for an F&O Contract based on the last established exchange end-of-day 
settlement price, subject to a specified fallback price procedure. 
Under Rule 915(c), the date and time as of which Partial Tear-Up would 
occur would be set out in a Partial Tear-Up Circular published by the 
Clearing House. For the CDS Contract Category, tear-up would occur 
contemporaneously with the determination of the termination price at 
end of day. Because the termination price would equal the current mark-
to-market or other applicable settlement value as determined pursuant 
to the applicable exchange or ICE Clear Europe end-of-day settlement 
price process (and would be satisfied by application of mark-to-market 
margin posted (or that would have been posted but for reduced gains 
distribution) under Rule 915(e)), no additional amount would be owed by 
ICE Clear Europe in connection with the tear-up.
Reduced Gains Distributions
    As an additional secondary default management action, ICE Clear 
Europe would extend a modified version of its variation margin 
haircutting rules in Rule 914 to the CDS Contract Category. ICE Clear 
Europe would rename the prior provisions for margin haircutting, which 
only applied to the F&O Contract Categories, as ``reduced gains 
distribution.'' Certain clarifications would be made to the provisions 
as they

[[Page 22533]]

apply to F&O Contracts. For example, Rule 914(b) would be revised to 
clarify that in the case of any Contract Category, ICE Clear Europe 
would determine at the close of business on each business day in the 
Loss Distribution Period whether the conditions for reduced gains 
distributions would be continuing. Clarifications have also been made 
for all Contract Categories to state explicitly that reduced gains 
distribution would only apply to variation or mark-to-market margin, 
and not initial or original margin. Additional changes in Rule 914(i) 
would clarify the obligations of the Clearing House upon termination of 
reduced gains distribution.
    The potential use of reduced gains distribution for CDS Contracts 
under the revised Rules would be narrower in certain respects than for 
the other Contract Categories, consistent with the use of reduced gains 
distribution for other swap clearing organizations.\7\ For CDS 
Contracts, reduced gains distribution could be invoked under Rule 914 
only where ICE Clear Europe has exhausted its remaining available 
default resources (including assessment contributions received). In 
addition, for the CDS Contract Category, pursuant to Rule 914(n), ICE 
Clear Europe could invoke reduced gains distribution only for up to 
five consecutive business days. Reduced gains distribution would allow 
ICE Clear Europe to reduce payment of variation, or mark-to-market, 
gains that would otherwise be owed to Clearing Members, during which 
time, in relation to the CDS Contract Category, it would attempt a 
Secondary CDS Auction or conduct a partial tear-up. Rule 914(a) and 
914(n) would specify certain conditions to the commencement of reduced 
gains distribution for CDS Contracts, including that ICE Clear Europe 
has exhausted all other available default resources and has determined 
that reduced gains distribution is appropriate in connection with a 
Secondary CDS Auction or partial tear-up.
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    \7\ See, e.g., ICE Clear Credit LLC Rule 808.
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    Pursuant to proposed Rule 914(o), for the CDS Contract Category, if 
ICE Clear Europe conducts a successful Secondary CDS Auction, that day, 
or if ICE Clear Europe so determines, the preceding business day, would 
be the last day for reduced gains distribution. If ICE Clear Europe is 
unable to conduct a successful Secondary CDS Auction by the end of the 
five business day reduced gains distribution period, ICE Clear Europe 
would proceed to conduct a partial tear-up under Rule 915 as of the 
close of business on such fifth business day.
    Pursuant to proposed Rule 914(p), if reduced gains distribution 
applies to CDS Contracts on any day, the net amount owed on such day to 
each Margin Account of each Contributor that is deemed to be a ``cash 
gainer'' in respect of its house or customer origin account (i.e., a 
Contributor that would otherwise be entitled to receive mark-to-market 
margin or other payments in respect of such account) would be subject 
to a percentage haircut, based on the incoming mark-to-market margin 
from other Clearing Members. Because reduced gains distribution would 
only be used following exhaustion of other resources, the Clearing 
House would only use incoming mark-to-market margin payments to pay 
mark-to-market margin gains. Haircuts are determined independently on 
each day of reduced gains distribution for CDS Contracts, and are 
applied separately for each margin account for each Contributor. For 
each day of reduced gains distribution, ICE Clear Europe would notify 
Clearing Members and the market more generally of the amount of the 
haircut and such other matters as ICE Clear Europe considers relevant, 
through a Circular.
    A proposed amendment in Rule 906(a) would also clarify that the 
calculation of a net sum on default will treat the payment or return of 
variation margin or mark-to-market margin as having been successfully 
and fully made even if reduced gains distributions have been applied, 
and therefore the defaulter will not pay or receive such variation 
margin or mark-to-market margin in the net sum on default.
Removal of Forced Allocation as a Default Management Tool
    Existing Rule 905(c), which allowed ICE Clear Europe to make a 
forced allocation of positions in the defaulter's portfolio, would be 
removed in light of the new default management tools described above.
Recoveries From Defaulting Clearing Members
    The amendments to Rule 907 would add a new subsection (c), which 
addresses the Clearing House's authority to seek recoveries from a 
defaulting Clearing Member on its own behalf and on behalf of Clearing 
Members, including through setoff or legal process. The rule would also 
be revised to state ICE Clear Europe's obligations with respect to 
seeking recoveries from a defaulting Clearing Member where the Guaranty 
Fund Contributions of non-defaulting Clearing Member have been applied, 
and provide that in such case ICE Clear Europe will exercise the same 
degree of care in enforcement and collection of any claims against the 
defaulter as it exercises with respect to its own assets that are not 
subject to allocation to Clearing Members and others. Certain contrary 
provisions of the Rules to the effect that the Clearing House has no 
obligation to pursue recoveries from defaulters, such as existing Rule 
914(m), would be removed.
Delay of Outbound Variation Margin
    The proposed amendments would extend the provisions of Rule 110(f) 
to the CDS Contract Category. Rule 110(f) would permit the Clearing 
House to delay making a variation margin or mark-to-market margin 
payment, solely on an intra-day basis, where a Clearing Member or 
Sponsored Principal has failed to make a corresponding payment to the 
Clearing House (including without limitation for technical or 
operational reasons), and the amount of the failure exceeds the initial 
or original margin posted by that Clearing Member or Sponsored 
Principal.
III. Clarifications of Guaranty Fund Requirements and Uses
    Various clarifications and conforming changes would be made to the 
provisions of Rule 908, which address contributions to and uses of the 
Guaranty Fund. Provisions in Rule 909 would also be moved and 
reorganized, and Rules 910-911 would be removed and reserved. These 
changes include the following:
     Changes to ICE Clear Europe's ability to modify the order 
of application of Guaranty Fund Contributions under the Auction 
Procedures to provide for juniorization based on bidding (Rule 908(i), 
and conforming cross-references throughout).
     Changes to produce in Rule 909 a single Powers of 
Assessment rule for all Contract Categories, eliminating 
inconsistencies across the default rules for different products. 
Various deletions and insertions would be made to remove duplication 
between the three Contract Categories. In addition, a certification 
requirement in connection with the application of claims under any 
default insurance policies for F&O Contracts would be removed as 
unnecessary (Rules 909--911).
     Rule 909(a) would permit assessments for CDS Contracts to 
be called in anticipation of any charge against the CDS Guaranty Fund 
following a default, rather than only after such a charge. This change 
would be consistent with the current treatment of assessments for F&O 
Contracts.

[[Page 22534]]

     Certain changes would be made throughout Part 11 to align 
the process for return of Guaranty Fund Contributions following 
termination of Clearing Membership across all Contract Categories, 
align Guaranty Fund Contribution calculation methodology across 
Contract Categories and to clarify that separate Guaranty Fund 
Contribution amounts calculated in respect of Proprietary and Customer 
positions could be applied across any type of account. A change to Rule 
1101(e) would be made to better reflect current practice for the 
calculation of Guaranty Fund Contributions. In addition, Rule 1102(n) 
would be deleted because its content would be combined into Rule 
1102(m).
IV. Cooling-Off Period
    ICE Clear Europe would modify the Cooling-off Period concept in 
Rule 917 in order to apply it to CDS Contracts, to adjust the 
calculation of the relevant cap on contributions for all Contract 
Categories, and to reduce the length of the period. Cooling-off Periods 
could be designated, and would operate, separately in respect of 
different Contract Categories. A Cooling-off Period is triggered by 
certain calls for assessments for the relevant Contract Category or by 
sequential Guaranty Fund depletion in the relevant Contract Category 
within a specified period. The base length of the Cooling-off Period 
would be reduced from 30 Business Days to 30 calendar days, consistent 
with the approach of other clearing organizations,\8\ and in order to 
balance the goals of limited liability and certainty for Clearing 
Members with the need for the Clearing House to restore normal 
operations following recovery as quickly as possible. As under the 
current Rules, a Cooling-off Period could be extended as a result of 
subsequent defaults during the period.
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    \8\ See, e.g., ICE Clear Credit Rule 102 (definition of 
``Cooling-off Period'').
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    Rule 917(b) would also be revised to provide that the ``3x'' cap on 
relevant contributions during a Cooling-off Period applies to both 
Assessment Contribution and replenishments of the Relevant Guaranty 
Fund, in the aggregate, regardless of the number of defaults during the 
period. The foregoing cap is based on a Clearing Member's individual 
Guaranty Fund Contribution immediately prior to the default that 
triggered the Cooling-off Period. (As set out in Rule 917(b)(iii), the 
existing single-default cap on Assessment Contributions under Rule 909 
would also continue to apply in a Cooling-off Period.) The proposed 
amendments would also allow ICE Clear Europe to rebalance, reset and 
recalculate the Relevant Guaranty Fund during the Cooling-off Period, 
but such changes would not affect the aggregate 3x contribution limit. 
Under proposed Rule 917(e), Clearing Members that have made the maximum 
contribution during a Cooling-off Period could be required to provide 
additional proprietary initial margin during the period, which would 
facilitate ICE Clear Europe's ability to continue to satisfy its 
regulatory minimum financial resources requirements.
V. Clearing Member Withdrawal
    Existing Rules 209 and 918, which address withdrawals by Clearing 
Members (other than CDS Clearing Members), are proposed to be revised 
to apply to the CDS Contract Category, such that the Rules would apply 
to all ICE Clear Europe Clearing Members and Sponsored Principals. 
Under revised Rule 917(c), CDS Clearing Members (like other Clearing 
Members) and Sponsored Principals could withdraw from ICE Clear Europe 
during a Cooling-off Period by providing an irrevocable notice of 
withdrawal in the first 10 business days of the period (subject to 
extension in certain cases if the Cooling-off Period is extended). CDS 
Clearing Members could withdraw from ICE Clear Europe at other times by 
notice to ICE Clear Europe under Rule 209. Rule 209 would also permit 
ICE Clear Europe to terminate a CDS Clearing Member's membership on 30 
business days' notice, consistent with its authority with respect to 
Clearing Members in other Contract Categories. In case of withdrawal or 
termination, all outstanding positions would need to be closed out by a 
specified deadline, generally within 20 to 30 business days following 
notice of withdrawal under Rule 918(a) and 209(c). Withdrawal would not 
be effective, pursuant to Rule 918, until the Clearing Member or 
Sponsored Principal closed out all outstanding positions and satisfied 
any related obligations, and a withdrawing Clearing Member or Sponsored 
Principal would remain liable under Rule 918 with respect to charges 
and assessments resulting from defaults that occurred before such time. 
Under the proposed rule change, a CDS Clearing Member that seeks to 
withdraw other than during the first 10 business days of a Cooling-off 
Period could, at the direction of ICE Clear Europe under Rule 209(d), 
be required to make a deposit of up to three times its required 
Guaranty Fund Contribution (this provision already applies to F&O 
Clearing Members). Such a deposit would not impose new liabilities on 
the Clearing Member, but provide assurance that the withdrawing 
Clearing Member would continue to meet its obligations in respect of 
defaults and potential defaults before its withdrawal would be 
effective. It thus reduces the potentially destabilizing effect that 
Clearing Member withdrawal (or a series of Clearing Member withdrawals) 
could have on the Clearing House during a stressed situation. Rule 
918(a)(viii)(B) would also specify the timing for the return of 
Guaranty Fund Contributions to a withdrawing Clearing Member or 
Sponsored Principal. Rule 918(a)(vii) would be removed and reserved to 
reflect the amendments to Rule 917 discussed above permitting the 
Clearing House to rebalance the Relevant Guaranty Fund during a 
Cooling-off Period. A cross-reference to the relevant Settlement 
Finality Regulations would be added in Rule 918(a)(viii).
VI. Clearing Service Termination
    The amendments would extend the existing provisions of Rules 
105(c), 912 and 916, which provide for full clearing service 
termination for one or more Contract Categories, to the CDS Contract 
Category.
    Rule 105(c) would apply where the Clearing House determines to 
cease acting as a Clearing House, whether generally or in relation to a 
particular class of Contracts. It would provide for the application of 
the procedures and terms in specified sections of Rule 918 to effect 
termination of the relevant contracts, including the timing of 
termination and the determination of the termination price.
    Rule 916 would permit the Clearing House to terminate an entire 
Contract Category in certain circumstances following an Event of 
Default, including where there has been an Under-priced Auction or the 
Clearing House otherwise does not believe it will have sufficient 
assets to perform its obligations in respect of that Contract Category. 
Rule 916 would set out procedures for such termination, including 
notice of termination and calculation of the termination timing and 
price. Under the amendments, ICE Clear Europe would be permitted to use 
the procedures of Rule 916 in connection with the CDS Contract 
Category, in addition to the F&O Contract Categories currently covered 
by the Rule.
    In addition, Rule 912, which provides for contract termination upon 
Clearing House insolvency and failure to pay events, would be extended 
to apply to CDS Contracts as well as F&O Contracts.

[[Page 22535]]

Certain other conforming changes would be made in Rule 912.
VII. Additional Changes
    ICE Clear Europe has proposed certain additional changes to the 
Rules that are generally in the nature of drafting improvements and 
updates, clarifications and conforming changes. In particular, Rule 101 
would be revised to add new defined terms that are used in the rule 
changes discussed above, such as those relating to Assessment Amounts, 
CDS Default Auction Procedures, Default Auctions, Default Auction 
Procedures, Initial CDS Auction, Relevant Contract Categories, 
Secondary CDS Auction and Under-priced Auction. Certain such defined 
terms would be moved from Rule 913 to Rule 101. ICE Clear Europe would 
also revise Rule 101 to include, for clarity, additional cross-
references to various terms that are defined in other parts of the 
Rules. Updates to the definitions relating to recovery provisions in 
Rule 913 would also be made, consistent with the changes discussed 
herein. Other updates to definitions and cross-references would be made 
throughout the Rules, including in Parts 4 and 11.
    Certain other conforming changes would be made throughout the Rules 
to reflect the new default management tools and provisions discussed 
above and related defined terms, including in Part 15 of the Rules. 
Rule 903(d) would be amended to align treatment of automatic default 
termination provisions for all Contract Categories. In Rule 906, ``OA'' 
would be revised to clarify that certain amounts payable to Clearing 
Members in respect of Guaranty Fund Contributions, assessments, reduced 
gains distribution, partial tear-up and collateral offset obligations 
are to be taken into account in that component of the net sum 
calculation. In addition, certain clarifications and conforming updates 
would be made in Part 12 of the Rules. Rule 1901(k) would be amended to 
provide that Sponsored Principals could be required to participate in 
Default Auctions. Certain other typographical and cross-reference 
corrections would be made throughout the Rules.
    ICE Clear Europe would also make an amendment to its Clearing 
Procedures to reflect the renaming of its risk model.
VIII. Governance
    Under the CDS Default Auction Procedures, ICE Clear Europe would be 
required to consult with its CDS Default Committee as to certain 
matters of auction design. These include the division of the relevant 
portfolio into lots, as well as decisions as to whether to hold 
additional auctions and/or accept a partial fill of any lot in any such 
auction. The CDS Default Committee is made up of personnel seconded 
from Clearing Members, who are required to act in the best interests of 
ICE Clear Europe in that capacity. The CDS Default Committee would be 
expected to work together with, and under the supervision of, the ICE 
Clear Europe risk department, and would be supported by ICE Clear 
Europe legal, compliance and other personnel.
    Based on its existing Board charter and practice, ICE Clear Europe 
expects that key decisions involving whether to hold a Secondary CDS 
Auction, invoke reduced gains distribution, implement a partial tear-up 
and/or terminate a clearing service would be made in consultation with 
the ICE Clear Europe Board. In this regard, it bears noting that the 
Board is independent of ICE Clear Europe management.
    In particular, upon an Event of Default with respect to a Clearing 
Member, the President of ICE Clear Europe has been delegated by the 
Board authority to take the relevant steps set out under the Rules, or 
to ensure that such steps are taken. Under the terms of delegation, the 
President is required to ensure that the Board is informed of the 
relevant circumstances, steps or actions taken or determinations made 
or approvals given, as soon as practicable subsequent to such Event of 
Default. The Board may, in its discretion, where possible and 
practical, rescind any steps or actions taken or determinations made or 
approvals given, or amend such actions, steps, determinations or 
approvals, as it determines appropriate. ICE Clear Europe believes that 
these arrangements, which are used for its existing F&O default 
management, recovery and wind-down tools, are also appropriate for the 
extension of those tools to the CDS Contract Category.
(b) Statutory Basis
    ICE Clear Europe believes that the proposed rule changes are 
consistent with the requirements of Section 17A of the Act \9\ and the 
regulations thereunder applicable to it, including the standards under 
Rule 17Ad-22.\10\ In particular, Section 17A(b)(3)(F) of the Act 
requires that that the rule change be consistent with the prompt and 
accurate clearance and settlement of securities transactions and 
derivative agreements, contracts and transactions cleared by ICE Clear 
Europe, the safeguarding of securities and funds in the custody or 
control of ICE Clear Europe or for which it is responsible, and the 
protection of investors and the public interest.\11\ As discussed 
herein, the proposed rule changes are principally designed to address 
the risks posed to ICE Clear Europe by a significant default by one or 
more Clearing Members or Sponsored Principals. Although ICE Clear 
Europe has established the level of its required financial resources in 
order to cover defaults in extreme but plausible market conditions, 
consistent with regulatory requirements, and has existing default 
management tools and procedures to address default losses, ICE Clear 
Europe nonetheless faces the risk of a loss scenario (however 
implausible) that exceeds such conditions (as a result of which its 
financial resources and tools may not be sufficient to enable it to 
cover the loss in full).
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78q-1.
    \10\ 17 CFR 240.17Ad-22.
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    ICE Clear Europe has previously adopted rules and procedures 
pursuant to the F&O Recovery Rule Amendments addressing such extreme 
loss scenarios (often referred to as ``recovery'' and ``wind-down'' 
scenarios) with respect to the F&O Contract Category. The proposed rule 
changes would extend these tools and procedures to the CDS Contract 
Category, with certain modifications that reflect the particular 
characteristics of the CDS product and the market participants who 
trade and clear it. ICE Clear Europe does not propose to change its 
existing risk methodology or margin framework for CDS Contracts, which 
are its initial lines of defense against losses from Clearing Member or 
Sponsored Principal default. However, as discussed herein, the 
amendments would provide additional default tools and procedures for 
addressing a default by a CDS Clearing Member, including initial and 
secondary CDS auction procedures and partial tear-up, that are designed 
to permit ICE Clear Europe to restore a matched book and limit its 
exposure to potential losses from a CDS Clearing Member or Sponsored 
Principal default in extreme scenarios that may not be able to be 
addressed by standard risk management and default procedures. The 
amendments would also make available the tool of reduced gains 
distribution for the CDS Contract Category in limited circumstances, 
where the Clearing House has exhausted its other funded financial 
resources. This tool could permit the Clearing House to continue 
operations for a limited number of days in order to facilitate a final 
auction or partial tear-up. The enhanced procedures for full CDS 
clearing service termination would also serve as a means of addressing

[[Page 22536]]

general business risk, operational risk and other risks that may 
otherwise threaten the viability of the Clearing House. Moreover, the 
amendments would clarify the ability of CDS Clearing Members and 
Sponsored Principals to withdraw from the Clearing House (and specify 
the responsibilities and liabilities of the Clearing House, the 
Clearing Member and the Sponsored Principal in such situations), 
thereby providing greater certainty for both the Clearing House and its 
Clearing Members and Sponsored Principals. Certain other clarifications 
and improvements would be made to the default management procedures for 
F&O Contracts, including the adoption of a partial tear-up tool for 
returning to a matched book.
    In the proposed rule changes, ICE Clear Europe has sought to 
develop default management tools that permit and incentivize 
involvement of CDS Clearing Members, Sponsored Principals and customers 
of CDS Clearing Members in a default management scenario. For example, 
the new CDS default auction procedures are designed to incentivize 
competitive bidding through the possibility of juniorization of 
Guaranty Fund and assessment contributions. The auction procedures 
further contemplate that customers may participate directly in default 
auctions at their election (subject to making the required clearing 
deposit), or alternatively may participate through a Clearing Member 
(without the need for such a deposit). ICE Clear Europe believes that 
such participation will lead to more effective and efficient auctions, 
and give customers of CDS Clearing Members the opportunity to protect 
against the possibility of partial tear-up (to the extent the 
consequences thereof are adverse to them) and reduced gains 
distribution through bidding competitively in the auction.
    The amendments also more clearly allocate certain losses as among 
ICE Clear Europe, CDS Clearing Members, Sponsored Principals and their 
customers. The amendments are designed to plan for a remote and 
unprecedented, but potentially extreme, type of loss event--a loss from 
one or more CDS Clearing Member or Sponsored Principal defaults that 
exhausts funded resources and requires additional recovery or wind-down 
steps. Such losses would necessarily and adversely affect some or all 
CDS Clearing Members, Sponsored Principals, customers or other 
stakeholders. In ICE Clear Europe's view, its current Rules applicable 
to CDS Contracts and CDS Clearing Members (including the Continuing CDS 
Rule Provisions), with the possibility of forced allocation, could 
force certain risks of loss only on CDS Clearing Members, in a way that 
is unpredictable and difficult to quantify in advance, and that CDS 
Clearing Members have strongly stated is undesirable from their 
perspective. ICE Clear Europe believes that the amendments take a more 
balanced approach that distributes potential losses more broadly, to 
Clearing Members, Sponsored Principals and customers that would 
otherwise have potential gains. Specifically, in the event of a partial 
tear-up, all market participants (Clearing Members, Sponsored 
Principals and customers) holding the relevant positions would be 
affected on a pro rata basis. Similarly, losses arising from reduced 
gains distribution would be shared on a pro rata basis by Clearing 
Members, Sponsored Principals and customers with gain positions. In the 
event of a full termination, any shortfall in resources would similarly 
be shared on a pro rata basis across all Sponsored Principals and 
Clearing Members and their customers. ICE Clear Europe also believes 
that the amendments would provide greater certainty as to the 
consequences of default and the resources that would be available to 
support clearing operations, to allow stakeholders to evaluate more 
fully the risks and benefits of clearing.
    In light of discussions with CDS Clearing Members, customers and 
other market participants, and the views expressed by industry groups 
and others, ICE Clear Europe believes that the amendments would provide 
an appropriate and equitable method to allocate the loss from an 
extreme CDS default scenario to CDS Clearing Members and their 
customers, and Sponsored Principals, on the basis of their respective 
positions. ICE Clear Europe further believes that the approach taken 
would facilitate the ability of the Clearing House to fully allocate 
the loss so that it can continue clearing operations and withstand and/
or recover from extreme loss events. The amendments therefore would 
further the prompt and accurate clearance and settlement of cleared 
transactions. The amendments would also support the stability of the 
clearing system, as part of the broader financial system, and would 
promote the protection of market participants from the risk of default 
by another market participant and the public interest more generally. 
In light of the importance of Clearing Houses to the financial markets 
they serve, the policies in favor of clearing of financial transactions 
as set out in the European Market Infrastructure Regulation (EMIR) \12\ 
and Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act,\13\ and the potential adverse consequences of a 
Clearing House failure for the financial markets, the amendments would 
support the public interest and the protection of investors. Through 
increasing the ability of ICE Clear Europe to withstand and recover 
from extreme loss events, the amendments may also enhance the 
safeguarding of securities and funds in the custody or control of the 
Clearing House or for which it is responsible, and avoid disruption of 
access to such assets.
---------------------------------------------------------------------------

    \12\ Regulation (EU) No 648/2012 of the European Parliament and 
of the Council of 4 July 2012 on OTC derivatives, central 
counterparties and trade repositories, as well as various 
implementing regulations and technical standards.
    \13\ P.L. 111-203 (July 21, 2010).
---------------------------------------------------------------------------

    The amendments would also satisfy the specific relevant 
requirements of Rule 17Ad-22,\14\ as set forth in the following 
discussion:
---------------------------------------------------------------------------

    \14\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

    Financial Resources. Rule 17Ad-22(b)(2)-(3) \15\ requires, in 
relevant part, a clearing agency for security-based swaps 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 maintain financial resources ``sufficient 
to withstand, at a minimum, a default by the two participant families 
to which it has the largest exposure in extreme but plausible market 
conditions.'' Rule 17Ad-22(e)(4)(ii) \16\ similarly requires a covered 
clearing agency involved in activities with a more complex risk profile 
(such as CDS) to maintain ``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.'' ICE Clear Europe's funded margin and Guaranty Fund 
resources are currently designed to be sufficient to meet ICE Clear 
Europe's financial obligations in respect of CDS Contracts to CDS 
Clearing Members notwithstanding a default by the two CDS Clearing 
Member families creating the largest combined loss, in extreme but 
plausible market conditions, consistent with these regulatory 
requirements. ICE Clear Europe does not

[[Page 22537]]

propose to reduce such funded resources. The amendments are intended to 
enhance and provide greater certainty as to the additional resources, 
beyond the funded margin and Guaranty Fund resources, that would be 
available to support CDS clearing operations in more extreme CDS 
Clearing Member and Sponsored Principal default scenarios.
---------------------------------------------------------------------------

    \15\ 17 CFR 240.17Ad-22(b)(2)-(3).
    \16\ 17 CFR 240.17Ad-22(e)(4)(ii).
---------------------------------------------------------------------------

    As set forth above, the amendments would maintain the existing 
limitation on assessment contributions per default, and impose a new 
limitation on CDS Guaranty Fund replenishments and assessments during a 
Cooling-off Period. The amendments would require that Clearing Members 
continue to replenish the Relevant Guaranty Fund and meet assessment 
obligations during the Cooling-off Period, subject to an aggregate 3x 
limit. In addition, in the event the 3x limit is reached, the amended 
rules would allow ICE Clear Europe to call on Clearing Members for 
additional initial margin in order to ensure that it maintains 
sufficient resources to comply with applicable minimum regulatory 
financial resources requirements. In ICE Clear Europe's view, these 
changes would provide an appropriate balance between several competing 
interests of the Clearing House and Clearing Members. Although the 
amendments could in theory limit the maximum resources available to the 
Clearing House (as compared to the absence of a cap), the changes would 
provide greater certainty for Clearing Members as to their maximum 
liability with respect to the relevant Guaranty Fund in the event of 
defaults (and thus their maximum amount of mutualized risk), in order 
to facilitate their own risk management, regulatory and capital 
considerations. This greater certainty is in turn intended to help 
stabilize the Clearing House during a period of significant stress, 
including where there are multiple defaults. In particular, a Cooling-
off Period and limit on assessments may reduce the risk of cascading 
defaults, where the financial demands placed on non-defaulting Clearing 
Members for repeated assessments or replenishments could cause such 
Clearing Members to themselves experience financial stress or even 
default, which could make the default management process more 
difficult. The Cooling-off Period thus would reduce the potential 
procyclical effect of requiring additional mutualized Guaranty Fund 
contributions in times of stress. The period is designed to give the 
Clearing House time to work out the default without exacerbating these 
stresses, while also allowing the Clearing House and Clearing Members 
time to assess whether the defaults would be able to be resolved and 
normal clearing would be able to resume.
    In addition, the amendments would ensure that ICE Clear Europe 
maintains sufficient resources to continue operations in compliance 
with minimum regulatory financial resources requirements, either 
through replenishment of the Relevant Guaranty Fund in the normal 
course, or in an extreme situation where the 3x cap is reached, by 
providing ICE Clear Europe the ability to call for additional initial 
margin. ICE Clear Europe recognizes that the ability to call for such 
additional initial margin, particularly in times of stress, could have 
a potential procyclical impact and potential liquidity impact on 
Clearing Members and their customers that is greater than guaranty fund 
replenishment, because initial margin is not subject to mutualization. 
As a result, the amount of additional initial margin required could 
exceed the amount of guaranty fund replenishment that would be required 
in the absence of the 3x cap. At the same time, ICE Clear Europe 
believes that these risks would be limited to a particular remote loss 
scenario, and would be mitigated by certain factors. ICE Clear Europe 
expects to limit the additional margin to the amount necessary to 
maintain minimum regulatory financial resources compliance, which may 
be less than the amount ICE Clear Europe would otherwise require under 
its Guaranty Fund methodology. ICE Clear Europe also expects that over 
the course of a Cooling-off Period, aggregate potential stress losses, 
and thus the need for additional financial resources, would generally 
decrease. In particular, Sponsored Principals and Clearing Members (and 
their customers) have the opportunity during the Cooling-off Period to 
reduce or rebalance the risk in their own portfolios, and thus mitigate 
potential stress loss and exposure to initial margin increases. 
Sponsored Principals and Clearing Members and their customers could 
also participate in default management (through participation in 
auctions), which would help them reduce their own risk profile. Greater 
involvement in default management could enhance competitive bidding, 
which in turn could reduce the likelihood that the 3x cap will be 
reached. In addition, and most importantly, additional initial margin 
posted by Sponsored Principals and Clearing Members would not be 
subject to mutualization and could not be used to cover defaults of 
other Sponsored Principals and Clearing Members. As a result, while 
Sponsored Principals and Clearing Members could be required to post 
more funds as additional initial margin than in a replenishment of a 
mutualized Guaranty Fund, the risk of loss to Sponsored Principals and 
Clearing Members of those additional margin funds is substantially less 
than for Guaranty Fund replenishment.
    The Clearing House would reduce the length of the Cooling-off 
Period to a duration of 30 calendar days (which is proposed to apply to 
all Contract Categories). The change reflects evolution in views among 
market participants and others as to the appropriate length of the 
period since the time of adoption of the F&O Recovery Rule Amendments. 
The period is intended to be long enough to provide the Clearing House 
and Sponsored Principals with a measure of stability and predictability 
as to the use of guaranty fund resources and avoid incentivizing 
Clearing Members and Sponsored Principals to withdraw from the Clearing 
House following a default. In the case of CDS Contracts, this period 
would also be consistent with the timeframe for the normal, periodic 
recalculation of ICE Clear Europe's guaranty fund under Part 11 of the 
Rules and the Finance Procedures (which is done on a monthly basis), a 
period that ICE Clear Europe has found appropriately balances stable 
Guaranty Fund requirements with the ability to make changes as 
necessary. ICE Clear Europe also believes, based on its analysis of the 
relevant derivatives markets and historical default scenarios involving 
a large market participant, that 30 days has historically been an 
adequate period for the market to stabilize following a significant 
default event. (This was, for example, observed in the interest rate 
swap market following the Lehman insolvency.) ICE Clear Europe 
similarly believes that in the context of a Cooling-off Period, 30 
calendar days is an appropriate time horizon to seek to stabilize the 
Clearing House, in light of the products cleared by ICE Clear Europe, 
and reduce stress on non-defaulting Sponsored Principals and Clearing 
Members (and their customers) as the Clearing House conducts its 
default management.
    In ICE Clear Europe's view, the 30-day Cooling-off Period and 
assessment and replenishment limits balance the interests of the 
Clearing House, Sponsored Principals and Clearing Members and in the 
aggregate enhance the likelihood that the Clearing House can withstand 
a default. In ICE Clear Europe's view, the proposed amendments are thus 
consistent with

[[Page 22538]]

the financial resources requirements of Rule 17Ad-22(b)(2)-(3) and 
(e)(4)(ii).\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 240.17Ad-22(b)(2)-(3) and (e)(4)(ii).
---------------------------------------------------------------------------

    Settlement Process and Reduced Gains Distribution. Rules 17Ad-
22(e)(8) \18\ requires that a covered clearing agency ``define the 
point at which settlement is final to be no later than the end of the 
day on which the payment or obligation is due and, where necessary or 
appropriate, intraday or in real time.'' The amendments contemplate 
that as a secondary default management step, in extreme cases, ICE 
Clear Europe could implement reduced gains distributions for CDS 
Contracts for up to five business days where it has exhausted all other 
financial resources (including assessment contributions). In such case, 
ICE Clear Europe would continue to collect mark-to-market margin owed 
to it from all non-defaulting Clearing Members, but would reduce 
outbound payments of mark-to-market margin owed to Sponsored Principals 
and Clearing Members to reflect available resources. ICE Clear Europe 
would calculate the haircut amount for CDS Contracts on a daily basis 
for each day of reduced gains distribution, without consideration of 
reductions on prior days. As a result, settlement on any day of reduced 
gains distributions for CDS Contracts would be final, as ICE Clear 
Europe would not have any ability to reverse or unwind the settlement. 
As a result, in ICE Clear Europe's view, the amendments are consistent 
with the settlement finality requirements noted above.
---------------------------------------------------------------------------

    \18\ 17 CFR 240.17Ad-22(e)(8).
---------------------------------------------------------------------------

    Default Procedures. Rule 17Ad-22(e)(13) \19\ requires the covered 
clearing agency to ensure that it ``has the authority and operational 
capacity to take timely action to contain losses and liquidity 
demands'' in the case of default. The proposed amendments would clarify 
and augment the Rules and procedures relating to default management, 
with the goal of enhancing the ability of the Clearing House to 
withstand extreme default events, particularly for CDS Contracts (which 
were not covered by the F&O Recovery Rule Amendments). For CDS 
Contracts, the amendments more clearly distinguish between standard 
default management events, largely covered by its existing default 
rules and procedures, and more extreme default management scenarios, 
for which recovery tools may be appropriate. The amendments include a 
new set of procedures for Initial CDS Auctions, designed to facilitate 
liquidation of the defaulter's portfolio through a multi-lot modified 
Dutch auction. The auction procedures require participation of all CDS 
Clearing Members (unless outsourced to another Clearing Member in 
accordance with the Rules), and permit direct participation in the 
auction by customers as well as Clearing Members and Sponsored 
Principals. The procedures also provide incentives for competitive 
bidding through juniorization of Guaranty Fund and assessment 
contributions, as discussed above. The amendments further include a set 
of procedures for Secondary CDS Auctions, intended to provide for an 
effective final auction of the entire remaining portfolio, prior to the 
exercise of other recovery tools such as partial tear-up.
---------------------------------------------------------------------------

    \19\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

    Following consultation with Clearing Members, ICE Clear Europe is 
proposing to remove the existing CDS default management tool of forced 
allocation, in light of concerns that the tool could result in 
unpredictable and unquantifiable liability for CDS Clearing Members. 
Instead, ICE Clear Europe would have the option to invoke a partial 
tear-up of CDS positions to restore a matched book in the event that it 
would be unable to auction the defaulter's remaining portfolio. The 
amendments would also permit the use of partial tear-up for other 
Contract Categories. Partial tear-up, if used, would occur at the most 
recent mark-to-market or settlement price determined by ICE Clear 
Europe, contemporaneously with such determination. As a result, partial 
tear-up would not result in additional loss to Clearing Members or 
Sponsored Principals as compared to the most recent mark to market 
settlement (and if reduced gains distribution is invoked, partial tear-
up will not entail additional loss beyond that resulting from such 
reduced gains distribution). ICE Clear Europe believes that this 
revised set of tools would maximize the Clearing House's ability to 
efficiently, fairly and safely manage extreme default events. The 
amendments further provide for the allocation of losses that exceed 
funded resources, through assessments and replenishments to the 
Guaranty Fund, as described herein, and the use of reduced gains 
distributions when necessary, following the exhaustion of all other 
resources. The amendments thus are designed to permit ICE Clear Europe 
to fully allocate losses arising from default by one or more Clearing 
Members or Sponsored Principals, with the goal of permitting the 
Clearing House to resume normal operations. Furthermore, ICE Clear 
Europe contemplates testing of the use of the new tools and procedures 
as part of its regular default management exercises, in order to 
identify and manage any related operational risks. The results of such 
testing would be shared with appropriate ICE Clear Europe risk and 
governance committees and regulators, consistent with the treatment of 
the results of other default management testing.
    As a result, in ICE Clear Europe's view, the amendments would allow 
it to take timely action to contain losses and liquidity pressures, 
within the meaning of Rule 17Ad-22(e).
    Risk and Operational Resources. Rule 17Ad-22(e)(3) \20\ requires 
that a covered clearing agency ``maintain a sound risk management 
framework for comprehensively managing'' risks, including credit and 
operational risks, that arise in or are borne by the covered clearing 
agency. This includes adopting plans for the recovery and orderly wind-
down of the covered clearing agency necessitated by credit losses, 
among other losses. As set forth herein, ICE Clear Europe believes the 
amendments would facilitate its ability to effect recovery or wind-
down, if necessary, in connection with extreme loss events, and in 
particular extend its existing recovery and wind-down tools and 
procedures to the CDS Contract Category. ICE Clear Europe further 
anticipates that it would revise its existing recovery and wind-down 
plans, as filed with the Commission, to reflect the rule amendments set 
forth herein upon their approval and implementation.
---------------------------------------------------------------------------

    \20\ 17 CFR 240.17Ad-22(e)(3).
---------------------------------------------------------------------------

    ICE Clear Europe further believes that its operational systems and 
capabilities are sufficient to support the proposed rule changes and 
new default management tools that would be implemented under those 
amendments. For the most part the changes extend to the CDS Contract 
Category Rules, procedures and tools that already apply to the F&O 
Contract Category. Accordingly, ICE Clear Europe has developed various 
systems relating to the default management process, and has done 
significant work to incorporate its F&O recovery tools and procedures 
in those systems. Once the rule amendments become effective, ICE Clear 
Europe would complete the incorporation of those tools into its systems 
for CDS Contracts, and test such systems as part of its regular system 
testing process.
    Well-Founded Legal Framework. Rule 17Ad-22(e)(1) \21\ requires that 
a covered clearing agency have rules and policies

[[Page 22539]]

reasonably designed to ``provide for a well-founded, clear, transparent 
and enforceable legal basis for each aspect of its activities in all 
relevant jurisdictions.'' ICE Clear Europe believes that the amendments 
would provide a clearer and more transparent set of default management 
procedures for addressing extreme loss events in the CDS Contract 
Category, in a manner that is largely consistent with the approach 
already used for the F&O Contract Category. These changes (including 
the elimination of the Continuing CDS Rule Provisions), and the greater 
harmonization among product categories, would provide greater certainty 
to the Clearing House, Clearing Members, Sponsored Principals and other 
market participants as to the various tools available to the Clearing 
House and the potential liabilities of Clearing Members, Sponsored 
Principals and others in such events. ICE Clear Europe further believes 
that the amendments would facilitate the Clearing House's ability to 
conduct an orderly recovery or, if necessary, wind-down process, in 
accordance with the requirements of applicable regulations. ICE Clear 
Europe has in addition considered legal advice of internal and external 
counsel with respect to the implementation of the amendments. As a 
result, ICE Clear Europe believes the amendments are consistent with 
the requirements of Rule 17Ad-22(e)(1).
---------------------------------------------------------------------------

    \21\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

    Governance. Rule 17Ad-22(e)(2) \22\ requires that a covered 
clearing agency provide for governance arrangements that, among other 
matters, are ``clear and transparent,'' ``clearly prioritize the safety 
and efficiency of the covered clearing agency,'' ``specify clear and 
direct lines of responsibility'' and ``consider the interests of 
relevant stakeholders of the covered clearing agency.'' ICE Clear 
Europe believes that its governance around the use of the recovery and 
wind-down tools and procedures set out in the Rule amendments, and in 
particular the extension of existing tools and procedures to CDS 
Contracts, is consistent with these requirements. Under the proposed 
CDS Default Auction Procedures, ICE Clear Europe would consult with its 
CDS Default Committee with respect to the terms for Initial CDS 
Auctions and Secondary CDS Auctions, including as to the definitions of 
relevant lots in the auction and decisions as to whether to hold 
additional auctions and/or accept a partial fill of a lot in any 
auction. Consistent with its existing Board charter and practice, ICE 
Clear Europe expects that key decisions relating to recovery and wind-
down considerations, such as invoking reduced gains distributions, 
holding a Secondary CDS Auction, implementing a partial tear-up and/or 
terminating a relevant clearing service, would be made in consultation 
with ICE Clear Europe's Board. Those procedures provide, among other 
matters, for notice to the Board of relevant actions, and contemplate 
the Board's ability to rescind or modify actions taken by management. 
In this regard, the ICE Clear Europe Board is independent of ICE Clear 
Europe management. In ICE Clear Europe's view, the proposed 
arrangements would involve appropriate consultation with Clearing 
Members through the CDS Default Committee, and with the Board, which is 
the governing body best placed to take into account the interests of 
the Clearing House and all relevant stakeholders. ICE Clear Europe 
further believes that these arrangements, which are used for its 
existing F&O default management, recovery and wind-down tools, are also 
appropriate for the extension of those tools to the CDS Contract 
Category.
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    \22\ 17 CFR 240.17Ad-22(e)(2).
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    For the foregoing reasons, ICE Clear Europe believes that the 
proposed rule changes would be consistent with the requirements of 
Section 17A of the Act \23\ and the regulations thereunder applicable 
to it, including the applicable standards under Rule 17Ad-22.\24\
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    \23\ 15 U.S.C. 78q-1.
    \24\ 17 CFR 240.17Ad-22.
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed amendments would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purpose of the Act. The amendments 
will would apply uniformly to all CDS Clearing Members (and customers 
of Clearing Members), and generally serve to harmonize the treatment of 
CDS Clearing Members with other Clearing Members in the case of extreme 
loss events. ICE Clear Europe does not anticipate that the amendments 
would affect the day-to-day operation of the Clearing House under 
normal circumstances, or even in typical default management scenarios. 
ICE Clear Europe is not proposing to alter the standards or 
requirements for becoming or remaining a Clearing Member, or otherwise 
using the clearing services it provides. ICE Clear Europe also does not 
propose to change its methodology for calculation of margin or guaranty 
fund contributions. The amendments are intended to address instead the 
risk of extreme loss events, and provide the Clearing House additional 
tools and resources to withstand and/or recover from extreme loss 
events, particularly for the CDS Contract Category, so that it can 
restore a matched book, fully allocate any losses, and resume normal 
clearing operations. The amendments are consistent with requirements 
for clearing organizations to implement such procedures under 
applicable law and regulation, and relevant international standards. As 
a result, ICE Clear Europe does not believe the amendments would 
adversely affect the ability of Clearing Members or other market 
Clearing Members to continue to clear contracts, including CDS 
Contracts. ICE Clear Europe also does not believe the enhancements 
would limit the availability of clearing in CDS or other products for 
Clearing Members or their customers or otherwise limit market Clearing 
Members' choices for selecting clearing services in CDS and other 
products.
    In the case of an extreme default scenario, as discussed herein, 
the proposed rules and default management procedures could impose 
certain costs and losses on Clearing Members or their customers, as 
well as ICE Clear Europe. ICE Clear Europe has sought to appropriately 
balance the allocation of such costs and losses, with appropriate 
techniques (such as competitive auctions) through which Clearing 
Members and customers can mitigate the risks of such losses. The 
amendments would also remove the tool of forced allocation, which 
potentially forced CDS Clearing Members to face uncertain and 
unquantifiable liability in certain default scenarios. The amendments 
would extend to CDS Contracts features such as Cooling-off Periods, 
that provide appropriate and transparent limits on the potential 
liability faced by Clearing Members. As a result, in ICE Clear Europe's 
view, while the proposed amendments could impose certain costs and 
losses on market participants, that allocation is appropriate in light 
of the default management goals of the Clearing House, the goals of 
promoting orderly Clearing House recovery, and the broader public 
interest in the strengthening of the clearing system to withstand 
significant default events. As a result, ICE Clear Europe does not 
believe that the proposed rule changes impose any burden on competition 
that is not appropriate in furtherance of the purpose of the Act.

[[Page 22540]]

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    The proposed rule changes have been discussed with Clearing Members 
(individually and as a group). The changes have been developed over the 
course of several years, and throughout that time ICE Clear Europe has 
consulted with Clearing Members on both the overall design and the 
detailed drafting of the amendments. Several aspects of the amendments 
reflect requests and concerns identified by Clearing Members, as 
discussed above (both through direct discussions and from public 
statements by Clearing Members and other market participants concerning 
recovery and wind-down issues for clearing generally), including the 
removal of forced allocation, introduction of a Cooling-off Period for 
CDS Contracts and establishment of aggregate limitations on assessments 
and replenishments. The introduction of partial tear-up and reduced 
gains distributions as recovery tools have also been discussed with 
Clearing Members, and have been drafted to take into account 
suggestions raised by Clearing Members, including to define the 
circumstances in which those tools may be used and to limit the adverse 
impact of such tools on netting, regulatory capital and other matters. 
Certain CDS Clearing Members have expressed concern in particular with 
the potential use of reduced gains distribution as a recovery tool. 
While ICE Clear Europe believes reduced gains distribution is an 
important tool for ensuring its ability to fully allocate losses, ICE 
Clear Europe has, in light of such concerns, limited the use of reduced 
gains distribution for CDS Contracts to scenarios in which all other 
funded financial resources of the Clearing House have been exhausted. 
ICE Clear Europe has also consulted with CDS Clearing Members on the 
details of the Initial CDS Auctions and Secondary CDS Auction 
procedures, and has taken into account comments and suggestions 
concerning such matters as minimum bid requirements, use of a Dutch 
versus other auction methodologies, degree and triggers for 
juniorization and participation by customers. ICE Clear Europe has 
shared drafts of the amendments with Clearing Members, and informally 
sought (and received) comment from Clearing Members and Clearing 
Members' internal and external counsel on such drafts, which ICE Clear 
Europe has taken into consideration in the drafting of the amendments.
    ICE Clear Europe has also conducted a public consultation with 
respect to the proposed rule amendments.\25\ ICE Clear Europe received 
one written comment on the proposed rule changes as set out in the 
consultation, which questioned whether reduced gains distribution for 
CDS Contracts is appropriate prior to the exhaustion of assessment 
contributions. ICE Clear Europe believes the approach it has taken is 
appropriate, as Rule 914(n) requires both that (1) all available 
resources other than assessment contributions have been exhausted, and 
(2) assessments have been called and have become due and payable, 
before ICE Clear Europe can implement reduced gain distribution for CDS 
Contracts. The approach reflects the risk that unfunded assessments may 
not be paid when due, and further provides that any reduced gains 
distributions made will be reimbursed through assessments when 
received.
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    \25\ Circular C17/107 (22 September 2017), available on the ICE 
Clear Europe website at https://www.theice.com/publicdocs/clear_europe/circulars/C17107.pdf.
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    ICE Clear Europe will notify the Commission of any written comments 
on the proposed rule changes received by ICE Clear Europe.

III. Date of Effectiveness of the Proposed Rule Change, Security-Based 
Swap Submission and Advance Notice and Timing for Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, security-based swap submission or advance notice 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-2019-003 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-2019-003. 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, security-based 
swap submission or advance notice that are filed with the Commission, 
and all written communications relating to the proposed rule change, 
security-based swap submission or advance notice 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-2019-003 and should be 
submitted on or before June 7, 2019.
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    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10227 Filed 5-16-19; 8:45 am]
 BILLING CODE 8011-01-P


