[Federal Register Volume 84, Number 136 (Tuesday, July 16, 2019)]
[Notices]
[Pages 33996-33999]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15022]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86340; File No. SR-ICEEU-2019-014]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change Relating to the ICE Clear Europe CDS 
Default Management Framework (the ``Framework'')

July 10, 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 June 25, 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 primarily 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

    ICE Clear Europe Limited (``ICE Clear Europe'' or the ``Clearing 
House'') proposes to revise its CDS Default Management Framework (the 
``Framework'') to make certain updates and enhancements, including 
changes to be consistent with amendments proposed to the ICE Clear 
Europe Clearing Rules (the ``Rules'') to address default management, 
recovery and wind-down for the CDS Contract Category. The revisions 
would not involve any changes to the ICE Clear Europe Rules or 
Procedures. The revisions do not involve any changes to the ICE Clear 
Europe Clearing Rules or 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 (the 
``Rules'').
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, ICE Clear Europe included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. ICE Clear Europe has prepared summaries, 
set forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.

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

(a) Purpose
    ICE Clear Europe is proposing to adopt the amendments to the 
Framework in order to ensure that the Framework remains consistent with 
the Rules in light of the proposed Recovery Rule Amendments to address 
default management, recovery and wind-down for the CDS Contract 
Category. Consistent with the Recovery Rule Amendments, the proposed 
changes to the Framework primarily relate to implementation of auction 
procedures, reduced gains distribution, partial contract tear-up, 
Clearing Member withdrawal and termination, clearing service 
termination and the role of the CDS Default Committee, CDS Risk 
Committee and Board during a default event. The proposed amendments 
would also include certain other enhancements and clarifications.
(I) Overall Framework
    The amendments clarify the overall purposes and content of the 
Framework, to include explicitly the porting of client positions and 
assets, conducting auctions and associated processes, implementing 
reduced gain distributions, calls for assessments from Clearing Members 
and partial tear-up of positions.
(II) Auction Procedures
    Several aspects of the Framework addressing default auctions would 
be amended in light of the Recovery Rule Amendments, which would adopt 
a new set of CDS initial and secondary auction procedures (the 
``Proposed Auction Procedures''):
     The amendments would clarify that in determining the 
auction portfolios, the Clearing House would consider wrong-way risk to 
non-defaulting Clearing Members, among other listed factors;
     The amendments would clarify that upon completion of the 
auction, submission of resulting trade to the Trade Information 
Warehouse would be done under normal Clearing House practices;
     Clearing Members would no longer be required to confirm to 
the Default Management Committee their intention to bid in a particular 
auction (in light of the mandatory bidding requirements of under the 
Proposed Auction Procedures);
     Consistent with the Proposed Auction Procedures, the 
Framework

[[Page 33997]]

would no longer provide that the last bid submitted by the Clearing 
Member is the only bid considered once the bidding window is closed;
     The amendments would set a range for the minimum bid 
requirement for Clearing Members, consistent with the Proposed Auction 
Procedures. The Framework provides examples of the calculation of the 
minimum bid requirement for Clearing Members, based on their respective 
CDS Guaranty Fund contributions as compared to the total CDS Guaranty 
Fund size;
     The Framework also provides several examples of the 
modified Dutch auction methodology used under the Proposed Auction 
Procedures;
     The Framework would reflect the two means by which 
Customers would be able to participate in auctions under the Proposed 
Auction Procedures: (i) Via Clearing Member following mutual agreement 
on participation terms; and (ii) via direct participation following 
(subject to Customer contribution of [euro]7.5 million to default 
resources (in the case of initial auctions) and certain other 
requirements);
     The Framework also summarizes key distinctions between 
initial auctions and secondary auctions under the Proposed Auction 
Procedures;
     The existing Clearing House approach to non-competitive 
bids would be deleted, in light of the three tier methodology approach 
to juniorization of the Guaranty Fund contribution provided for in the 
Recovery Rule Amendments;
     The existing auction schedule in the Framework would be 
removed, as it would be superseded by the Proposed Auction Procedures; 
and
     The provisions in the existing Framework for forced 
portfolio allocation for positions for which ICE Clear Europe does not 
receive a formal bid from any Non-Defaulting Clearing Members would be 
removed, consistent with the Recovery Rule Amendments.
(III) Reduced Gains Distribution
    The amendments would add a new section to the framework that 
describes the use of reduced gains distribution (``RGD'') as a recovery 
tool that the Clearing House could use in the event that its remaining 
default resources are insufficient to ensure solvency. The Framework 
incorporates and summarizes key aspects of the Recovery Rule Amendments 
relating to the use of RGD, including the methodology for applying RGD 
to both the house and customer accounts and the five consecutive 
business day limitation on the use of RGD (following which partial 
tear-up may be conducted). The Framework also provides examples of the 
use of RGD.
(IV) Clearing Member Withdrawal
    The proposed amendments to the Framework reflect the procedures for 
Clearing Member withdrawal as set out in the Recovery Rule Amendments, 
including both an ordinary course of business termination outside of a 
default and termination during a cooling off period.
(V) Partial Tear-Up
    The revised Framework would reflect the Recovery Rule Amendments 
that permit the Clearing House to proceed to partial tear-up as a final 
default tool where the Clearing House is unable to close out all of the 
defaulter's remaining positions through auctions within the Clearing 
House's remaining resources. In a partial tear-up, the Clearing House 
would terminate positions of non-defaulting Clearing Members that 
exactly offset those in the defaulting Clearing Member's remaining 
portfolio (``Tear-Up Positions''), in accordance with the Recovery Rule 
Amendments. This would be done across both house and customer accounts 
of all non-defaulting Clearing Members in accordance with the Rules. 
The Framework would also describe procedures for the timing of partial 
tear-up and determination of the relevant termination price, in 
accordance with the Recovery Rule Amendments.
(VI) Clearing Service Termination
    The amended Framework would also reflect the Clearing House's 
ability, under Rule 916 as proposed to be modified by the Recovery Rule 
Amendments, to terminate the CDS clearing service under specified 
circumstances.
(VII) Role of the CDS Risk Committee During a Default Event
    Pursuant to the proposed amendments, the CDS Risk Committee would 
be consulted on (i) establishing the terms of initial and secondary 
auctions (including defining different auction lots) and (ii) holding 
additional auctions and/or accepting a partial fill of an auction 
during the initial auction phase. The CDS Risk Committee would be 
consulted, with the ultimate decision to be made by the ICE Clear 
Europe Board (or their delegate), with respect to the following matters 
under the Rules:
     Whether to use CDS Guaranty Fund contributions of non-
defaulting Clearing Members to cover the cost of a direct liquidation 
outside of a default auction;
     Whether to determine that an initial default auction has 
failed due to insufficient default resources;
     Whether to invoke and/or continue RGD;
     Whether to hold a secondary auction, whether that auction 
has failed and in the event of failure, whether to hold additional 
secondary auctions;
     In a secondary auction, whether to reallocate default 
resources to a particular lot to permit a successful auction of that 
lot;
     In a final secondary auction, whether to accept a 
``partial fill'' to the extent of available default resources for the 
relevant lot;
     Whether to implement a partial tear-up;
     Whether to terminate the clearing service in full; and
     Whether to bypass an initial default auction or bypass 
secondary default management action(s).
(VIII) Additional Amendments
    The proposed amendments would include certain other clarifying and 
conforming changes and typographical corrections. In addition, the 
proposed amendments would remove as unnecessary a provision that 
hedging traders are responsible for ensuring all hedge trades are 
correctly reflected in the trade capture system by end of day (as the 
Clearing House is responsible for such matters in accordance with its 
current practices). Certain unnecessary details about computer support 
for CDS Default Committee Members would be removed. An outdated trade 
workflow chart would also be removed. With respect to liquidation of a 
defaulting Clearing Member's collateral, the amendments would clarify 
that the Head of Clearing Risk may postpone the collateral sale without 
seeking advice of the CDS Default Committee, which is consistent with 
current practice. The amendments would also clarify that the risk team 
also consults with the CDS Default Committee with respect to 
establishing hedging positions with the non-defaulting Clearing 
Members, in addition to the Head of Clearing Risk. Certain parts of 
Appendix A, including an itemized example of auction position data and 
a standard bidding template, as well as references thereto throughout 
the framework would be removed.
(b) Statutory Basis
    ICE Clear Europe believes that the proposed rule changes are 
consistent with the requirements of Section 17A of the Act \4\ and the 
regulations thereunder

[[Page 33998]]

applicable to it, including the standards under Rule 17Ad-22.\5\ 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.\6\ As discussed herein, the proposed 
rule changes are principally designed to conform the Framework to the 
provisions of the proposed Recovery Rule Amendments, which address the 
risks posed to ICE Clear Europe by a significant default by one or more 
Clearing Members.\7\ The proposed amendments add to the Framework 
internal procedures and processes for using the additional default 
tools that would be made available by the Recovery Rule Amendments, 
including initial and secondary CDS auction procedures, RGD and partial 
tear-up. These tools are designed to permit ICE Clear Europe to restore 
a matched book and limit its exposure to potential losses from a CDS 
Clearing Member default in extreme scenarios that may not be able to be 
addressed by standard risk management and default procedures. The 
amendments would also reflect in the Framework the updated procedures 
for CDS Clearing Members to withdraw from the Clearing House, as 
proposed in the Recovery Rule Amendments. The amendments would also 
describe the procedures for full CDS clearing service termination, 
which would be a tool to address general business risk, operational 
risk and other risks that may otherwise threaten the viability of the 
Clearing House. The amendments also clarify certain governance 
arrangements during a default event, by specifying the circumstances in 
which the CDS Risk Committee would be consulted with respect to key 
decisions involving the use of recovery tools.
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    \4\ 15 U.S.C. 78q-1.
    \5\ 17 CFR 240.17Ad-22.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ For a discussion of the statutory basis of the Recovery Rule 
Amendments themselves, see Exchange Act Release No. 34-85848, SR-
ICEEU 2019-003.
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    The amendments to the Framework would thus enhance the ability of 
the Clearing House to deal with significant loss events, and in turn 
further prompt and accurate clearance and settlement of cleared 
transactions and the public interest in the continued operation of the 
clearing system in light of such events. 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.
    The amendments would also satisfy the relevant specific 
requirements of Rule 17Ad-22,\8\ as set forth in the following 
discussion:
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    \8\ 17 CFR 240.17Ad-22.
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    Default Procedures. Rule 17Ad-22(e)(13) \9\ 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 enhance 
ICE Clear Europe's internal procedures to implement to the Recovery 
Rule Amendments. The amendments will facilitate use of the new default 
management and recovery tools included in the Recovery Rule Amendments, 
including the new procedures for CDS auctions, juniorization of 
Guaranty Fund and assessment contributions in the context of auctions, 
procedures for secondary auctions, RGD, and the option to invoke a 
partial tear-up of positions to restore a matched book in the event 
that it would be unable to auction the defaulter's remaining portfolio. 
ICE Clear Europe believes that this revised set of tools would 
strengthen the Clearing House's ability to efficiently, fairly and 
safely manage extreme default events. The amendments thus are designed, 
in conjunction with the Recovery Rule Amendments, to permit ICE Clear 
Europe to fully allocate losses arising from default by one or more 
Clearing Members, with the goal of permitting the Clearing House to 
resume normal operations. 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).
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    \9\ 17 CFR 240.17Ad-22(e)(13).
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    Governance. Rule 17Ad-22(e)(2) \10\ 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,'' and ``specify clear 
and direct lines of responsibility.'' ICE Clear Europe believes that 
the proposed amendments to the Framework provide further clarity as the 
governance process for default management and recovery, consistent with 
these standards. Specifically, the amendments would address the 
circumstances in which the CDS Risk Committee would be consulted on key 
decisions involving the use of recovery tools. The amendments also 
clarify that key decisions will ultimately be made by the ICE Clear 
Europe Board (or its delegate). ICE Clear Europe believes that the 
amendments would thus specify appropriate lines of responsibility and 
involvement of the CDS Risk Committee and Board, in furtherance of the 
safety and efficiency of ICE Clear Europe in a default scenario.
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    \10\ 17 CFR 240.17Ad-22(e)(2).
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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 
would apply uniformly to all CDS Clearing Members (and customers of 
Clearing Members). The amendments are intended to provide additional 
implementing procedures and governance relating to the use of the 
default management and recovery tools in the Recovery Rule Amendments, 
which are designed to address the risk of extreme loss events. As a 
result, ICE Clear Europe does not anticipate that the amendment would 
affect the day-to-day operation of the Clearing House under normal 
circumstances. 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. As with the Recovery Rule Amendments more generally, in the 
case of an extreme default scenario, the application of the Framework 
in the conduct of default management could impose certain costs and 
loses on Clearing Members or their customers, as well as ICE Clear 
Europe. ICE Clear Europe believes that this potential result is 
consistent with the Rules and is appropriate in light of the default 
management goals of the Clearing House, the goal of promoting orderly 
recovery of the Clearing House and the broader public interest in the 
ability of the clearing system to withstand default events. As a 
result, ICE Clear Europe does not believe that the proposed amendments 
impose any burden on

[[Page 33999]]

competition that is not appropriate in furtherance of the purposes of 
the Act.

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

    Written comments relating to the proposed amendments have not been 
solicited or received by ICE Clear Europe. ICE Clear Europe will notify 
the Commission of any written comments received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change

    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.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ICEEU-2019-014 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-2019-014. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings will also be available for inspection 
and copying at the principal office of ICE Clear Europe and on ICE 
Clear Europe's website at https://www.theice.com/clear-europe/regulation.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ICEEU-2019-014 and should be 
submitted on or before August 6, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-15022 Filed 7-15-19; 8:45 am]
BILLING CODE 8011-01-P


