[Federal Register Volume 84, Number 138 (Thursday, July 18, 2019)]
[Notices]
[Pages 34455-34457]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15252]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86364; File No. SR-ICEEU-2019-013]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Changes Related to the ICE Clear Europe Revised 
Recovery Plan

July 12, 2019.

I. Introduction

    On May 10, 2019, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission, pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act''),\1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change related to its 
recovery plan. The proposed rule change was published for comment in 
the Federal Register on May 28, 2019.\3\ The Commission did not receive 
comments regarding the proposed rule change. For the reasons discussed 
below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 85907 (May 21, 2019), 84 FR 24549 
(May 28, 2019) (``Notice'').
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II. Description of the Proposed Rule Change

    As a ``covered clearing agency,'' \4\ ICE Clear Europe is required 
to, among other things, ``establish, implement, maintain and enforce 
written policies and procedures reasonably designed to . . . maintain a 
sound risk management framework for comprehensively managing legal, 
credit, liquidity, operational, general business, investment, custody, 
and other risks that arise in or are borne by the covered clearing 
agency, which . . . includes plans for the recovery and orderly wind-
down of the covered clearing agency necessitated by credit losses, 
liquidity shortfalls, losses from general business risk, or any other 
losses.'' \5\ The Commission has previously clarified that it believes 
that such recovery and wind-down plans are ``rules'' within the meaning 
of Exchange Act Section 19(b) and Rule 19b-4 thereunder because such 
plans would constitute changes to a stated policy, practice, or 
interpretation of a covered clearing agency.\6\ Accordingly, a covered 
clearing agency, such as ICE Clear Europe, is required to file its 
plans for recovery and orderly wind-down with the Commission.\7\
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    \4\ The term ``covered clearing agency'' is defined in Rule 
17Ad-22(a)(5), 17 CFR 240.17Ad-22(a)(5).
    \5\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \6\ Standards for Covered Clearing Agencies, Exchange Act 
Release No. 78961 (Sep. 28, 2016), 81 FR 70786, 70809 (Oct. 13, 
2016) (``CCA Standards Adopting Release'').
    \7\ The description of the Revised Recovery Plan is 
substantially excerpted from the Notice. Moreover, capitalized terms 
not otherwise defined herein have the meanings assigned to them in 
ICE Clear Europe Clearing Rules (``Rules'') or the Revised Recovery 
Plan.
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    ICE Clear Europe's current recovery plan (``Existing Recovery 
Plan'') was approved by the Commission on July 17, 2018.\8\ Recently, 
ICE Clear Europe has proposed changes to its rules concerning, among 
other things, its recovery tools.\9\ ICE Clear Europe has proposed to 
adopt a revised recovery plan to incorporate these proposed rule 
changes as well as make other changes (``Revised Recovery Plan'' or 
``Plan''). The Revised Recovery Plan would supersede the Existing 
Recovery Plan.
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    \8\ Exchange Act Release No. 34-83651 (July 17, 2018), 83 FR 
34891 (July 23, 2018) (SR-ICEEU-2017-016).
    \9\ Exchange Act Release No. 34-85848 (May 13, 2019), 84 FR 
22530 (May 17, 2019) (SR-ICEEU-2019-003).
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    ICE Clear Europe's Revised Recovery Plan, among other things, (a) 
identifies the critical services that ICE Clear Europe provides; (b) 
outlines recovery scenarios that may result in significant financial 
losses, a liquidity shortfall, suspension or failure of its critical 
services and related functions and systems, and damage to other 
financial market infrastructures; and (c) describes the recovery tools, 
mechanisms, and options that ICE Clear Europe may use to address a 
recovery scenario and continue to provide its critical services.\10\ 
Notably, the Revised Recovery Plan is based on, and intended to be 
consistent with, the ICE Clear Europe Rules, Procedures, and existing 
risk management frameworks, policies, and procedures,\11\ several 
aspects of which ICE Clear Europe recently revised.\12\ The elements of 
the Revised Recovery Plan are described in further detail below.
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    \10\ In the Recovery Plan, ICE Clear Europe refers to its 
recovery tools, mechanisms, and options as ``Recovery Options.'' The 
Commission has generally referred to these items as ``recovery 
tools.'' See CCA Standards Adopting Release, 81 FR at 70810. For the 
purposes of this Order, the term ``recovery tools'' is used to refer 
to Recovery Options.
    \11\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
    \12\ Exchange Act Release No. 34-86259 (July 1, 2019), 84 FR 
32483 (July 8, 2019) (SR-ICEEU-2019-003).
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    Critical Services, Service Providers, and Interdependencies. ICE 
Clear Europe's prior determination that its futures and options 
(``F&O'') and credit default swap (``CDS'') product category clearing 
services, as well as its related treasury and banking services, are 
critical services remains in the Revised Recovery Plan. The Revised 
Recovery Plan identifies entities that depend on ICE Clear Europe's 
critical services, the service providers supporting ICE Clear Europe's 
critical services, and the interdependencies between ICE Clear Europe 
and other financial market infrastructures. ICE Clear Europe states 
that it mitigates risk from these relationships through various 
mechanisms, including, for example, by using multiple substitute 
providers where possible and practical. The Revised Recovery Plan 
further identifies technology systems that support critical services 
and states how risks associated with these systems are mitigated.
    Recovery Scenarios, Triggers, and Early Warning Indicators. The 
Revised Recovery Plan analyzes two recovery scenarios. The first is 
default losses, where financial losses or liquidity shortfalls arise 
from a clearing member default or multiple clearing member defaults. 
The trigger for the Plan in this scenario would be when the ICE Clear 
Europe guaranty fund is exhausted, or is likely to exhausted, and 
uncovered losses remain. The second recovery scenario is non-default 
losses, where financial losses or liquidity shortfalls arise from 
investments, operational incidents, or other business activities not 
involving a clearing member default. The Plan would be triggered in 
this scenario when ICE Clear Europe's Base Capital is, or is likely to 
be, breached.
    The Revised Recovery Plan also distinguishes between ``business as 
usual'' risk management (e.g., margin, guaranty fund, liquid resources) 
and recovery scenarios, stating that recovery scenarios are where ICE 
Clear Europe is unable to cover losses within its business as usual 
risk management processes. The Revised Recovery Plan also describes the 
early warning indicators of a recovery trigger that ICE Clear Credit 
would monitor as part of its business as usual risk management.

[[Page 34456]]

    Recovery Tools. The Revised Recovery Plan describes the key aspects 
of the recovery tools ICE Clear Europe may implement in a recovery 
scenario. Those tools include powers of assessment (Rule 909), reduced 
gains distribution (Rule 914), partial tear-ups (Rule 915), payment 
delays (Rule 110), investment loss allocation (Rule 919), invoicing 
back (Rule 104), and the Capital Replenishment Framework. The Revised 
Recovery Plan also describes the goals and procedures for designing the 
recovery tools, including that they are designed to be comprehensive, 
effective, transparent, measurable, manageable, and controllable. The 
Plan would specify that the recovery tools are intended to create 
appropriate incentives and minimize negative impact, and also would 
describe the governance process for development of the recovery tools 
that would impact Clearing Members, as well as the decision-making 
considerations for each recovery tool.
    Decision-Making, Governance, and Communications. The Revised 
Recovery Plan would require that ICE Clear Europe's President 
(``President'') attempt to convene the Board for approval of material 
recovery decisions and keep regulators informed in advance of material 
decisions, assuming this could be done in a timely manner. If the Board 
could not be convened in advance of such a decision, it would be 
convened thereafter to ratify or modify the decision. The President 
would be supported by the Default Management Committees in a default 
loss scenario and by the Executive Risk Committee in a non-default loss 
scenario. Consistent with the Rules and Procedures, exercising the 
recovery tools would not require the approval of Clearing Members, 
exchanges, or any other external stakeholders, however, in making 
decisions regarding the use of recovery tools, the President and the 
Board would be required to take into consideration the interests of ICE 
Clear Europe, Clearing Members, customers, other stakeholders, and the 
broader goal of providing safe and sound central counterparty services 
to reduce systemic risk in an efficient and legally compliant manner.
    The Revised Recovery Plan states that ICE Clear Europe's 
communication and coordination objectives in a recovery scenario are to 
provide Clearing Members, regulators, and the wider market with timely 
and accurate information, and to ensure effective coordination and 
escalation across affiliated ICE Group exchanges, clearing houses, and 
financial market infrastructures. ICE Clear Europe would endeavor to 
keep regulators informed in advance of triggering the Revised Recovery 
Plan or exercising recovery tools.
    Recovery Playbook. The Revised Recovery Plan would include a 
recovery playbook for both default loss and non-default loss scenarios. 
ICE Clear Europe does not intend the playbook to serve as a 
prescriptive instruction manual for all recovery scenarios, but rather 
as an example and a guide for how a recovery might progress. To that 
end, the playbook would identify key steps in the recovery process, 
such as declaring a default event and determining the likely scope of 
losses, Board consultation, triggering the Plan, communicating with 
regulators, and selecting particular recovery tools.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization.\13\ For the reasons given 
below, the Commission finds that the proposed rule change are 
consistent with Section 17A(b)(3)(F) of the Exchange Act \14\ and Rules 
17Ad-22(e)(2), and 17Ad-22(e)(3)(ii) thereunder.\15\
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    \13\ 15 U.S.C. 78s(b)(2)(C).
    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ 17 CFR 240.17Ad-22(e)(2); (e)(3)(ii).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of ICE Clear Europe be designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and, to the extent applicable, derivative agreements, contracts, and 
transactions, as well as to assure the safeguarding of securities and 
funds which are in the custody or control of ICE Clear Europe or for 
which it is responsible, and, in general, to protect investors and the 
public interest.\16\
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the Revised Recovery Plan would identify the 
steps that ICE Clear Europe could take in recovery and the governance 
framework applicable to taking such steps. It would analyze the 
anticipated impact of the recovery tools, the incentives created by 
such tools, and the risks associated with using such tools. The Revised 
Recovery Plan would also explain how the tools used in the Plan are 
transparent, measurable, manageable, and controllable. The Commission 
believes that by identifying the steps ICE Clear Europe could take and 
the tools it would use to bring about recovery in the face of losses, 
the Revised Recovery Plan would increase the likelihood that recovery 
would be orderly, efficient, and successful. By increasing the 
likelihood of an orderly, efficient, and successful recovery, the 
Commission believes that the Revised Recovery Plan would enhance ICE 
Clear Europe's ability to maintain the continuity of its critical 
services (including its clearance of CDS transactions) during, through, 
and following periods of extreme stress giving rise to the need for 
recovery, thereby promoting the prompt and accurate settlement of CDS 
transactions. The Commission also believes that the Revised Recovery 
Plan would help assure the safeguarding of securities or funds in the 
custody or control of ICE Clear Europe or for which it is responsible 
by reducing the likelihood of a disorderly or unsuccessful recovery 
that could disrupt access to such securities or funds. For the same 
reasons, the Commission believes the Revised Recovery Plan would be 
consistent with the protection of investors and the public interest.
    Therefore, the Commission finds that the proposed rule change would 
promote the prompt and accurate clearance and settlement of securities 
transactions, assure the safeguarding of securities and funds in ICE 
Clear Europe's custody and control, and, in general, protect investors 
and the public interest, consistent with the Section 17A(b)(3)(F) of 
the Exchange Act.\17\
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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(2)

    Rule 17Ad-22(e)(2) requires that ICE Clear Europe establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to provide for governance arrangements that are 
clear and transparent and support the public interest requirements in 
Section 17A of the Exchange Act applicable to clearing agencies, and 
the objectives of owners and participants.\18\
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    \18\ 17 CFR 240.17Ad-22(e)(2).
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    The Revised Recovery Plan would enhance the level of detail 
provided regarding the decision-making process for material recovery 
decisions. Specifically, the Plan states that, when possible to be done 
in a timely manner, the President would be required to attempt to 
convene the Board and obtain its approval prior to any material

[[Page 34457]]

recovery decisions. In the event that the Board could not be convened 
in advance of such decisions, the Plan would require the President to 
convene the Board to ratify or modify the material recovery decision 
thereafter. By specifying the President's decision-making authority 
related to material recovery decisions and clarifying the process for 
the making of such material recovery decisions, the Commission believes 
that the Plan would enhance the overall transparency regarding material 
recovery decisions, which in turn would contribute to establishing, 
implementing, maintaining, and enforcing clear and transparent 
governance arrangements that support the public interest requirements 
in Section 17A of the Exchange Act applicable to clearing agencies, and 
the objectives of owners and participants.
    Therefore, the Commission finds that the proposed rule change would 
establish clear and transport governance arrangements for the Revised 
Recovery Plan, consistent with Rule 17Ad-22(e)(2).\19\
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    \19\ 17 CFR 240.17Ad-22(e)(2).
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C. Consistency With Rule 17Ad-22(e)(3)(ii)

    Rule 17Ad-22(e)(3)(ii) requires that ICE Clear Europe establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to maintain a sound risk management framework for 
comprehensively managing legal, credit, liquidity, operational, general 
business, investment, custody, and other risks that arise in or are 
borne by ICE Clear Europe, which includes plans for the recovery and 
orderly wind-down of ICE Clear Europe necessitated by credit losses, 
liquidity shortfalls, losses from general business risk, or any other 
losses.\20\
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    \20\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The Commission believes that the information the Revised Recovery 
Plan would provide about the steps that ICE Clear Europe would take, 
and the tools it would use, to effectuate a recovery of ICE Clear 
Europe would enhance ICE Clear Europe's ability to recover from credit 
losses, liquidity shortfalls, general business risk losses, or other 
losses, consistent with Rule 17Ad-22(e)(3)(ii).\21\ Specifically, by 
clarifying the recovery tools that ICE Clear Europe may use to 
effectuate a recovery, the Revised Recovery Plan would enhance ICE 
Clear Europe's ability to prepare in advance for, and practice the use 
of, such tools, which the Commission believes would enhance ICE Clear 
Europe's ability to use such tools effectively to carry-out a 
successful recovery. In addition, by continuing to utilize the Plan as 
the single source of information about, and steps needed to effectuate, 
a recovery of ICE Clear Europe, the Revised Recovery Plan continues to 
help ensure that ICE Clear Europe's personnel would have the 
information and guidance necessary to effectuate a recovery in a 
consistent and coordinated fashion, which could thereby increase the 
likelihood of a successful recovery. Moreover, the Commission believes 
that by identifying and assessing available recovery tools, the Revised 
Recovery Plan would enhance ICE Clear Europe's ability to identify in 
advance which tools may be most effective for different situations or 
needs, which in turn would enhance ICE Clear Europe's ability to use 
such tools effectively to bring about a recovery, consistent with Rule 
17Ad-22(e)(3)(ii).\22\
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    \21\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \22\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    Therefore, the Commission finds that the proposed rule change would 
be a plan for the orderly recovery of ICE Clear Europe, consistent with 
Rule 17Ad-22(e)(3)(ii).\23\
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    \23\ 17 CFR 240.17Ad-22(e)(3)(ii).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the 
Exchange Act, and in particular, Section 17A(b)(3)(F) of the Exchange 
Act \24\ and Rules 17Ad-22(e)(2), and 17Ad-22(e)(3)(ii) thereunder.\25\
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    \24\ 15 U.S.C. 78q-1(b)(3)(F).
    \25\ 17 CFR 240.17Ad-22(e)(2); (e)(3)(ii).
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    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act that the proposed rule change (SR-ICEEU-2019-013) be, and 
hereby is, approved.\26\
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    \26\ In approving the proposed rule change, the Commission 
considered the proposal's impacts on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15252 Filed 7-17-19; 8:45 am]
 BILLING CODE 8011-01-P


