[Federal Register Volume 84, Number 203 (Monday, October 21, 2019)]
[Notices]
[Pages 56270-56276]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22841]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87297; File No. SR-ICC-2019-007]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Partial Amendment No. 1 and Order Granting Accelerated 
Approval of Proposed Rule Change, as Modified by Partial Amendment No. 
1, Relating to the ICC Rules, ICC End-of-Day Price Discovery Policies 
and Procedures, and ICC Risk Management Framework

October 15, 2019.

I. Introduction

    On June 28, 2019, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (the 
``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
make certain changes to ICC's Clearing Rules (the ``Rules'') \3\ and 
related procedures to provide for the clearing of credit default index 
swaptions (``Index Swaptions''). The proposed rule change was published 
for comment in the Federal Register on July 17, 2019.\4\ On August 28, 
2019, the Commission extended the period to take action on the proposed 
rule change until October 15, 2019.\5\ The Commission has not received 
any comments on the proposed rule change. On September 5, 2019, ICC 
filed Partial Amendment No. 1 to the proposed rule change.\6\ The 
Commission is publishing this notice to solicit comments on Partial 
Amendment No. 1 from interested persons and is approving the proposed 
rule change, as modified by Partial Amendment No. 1 (hereinafter, 
``proposed rule change'') on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
    \4\ Self-Regulatory Organizations; ICE Clear Credit LLC; 
Proposed Rule Change, Security-Based Swap Submission, or Advance 
Notice Relating to the ICC Rules, ICC End-of-Day Price Discovery 
Policies and Procedures, and ICC Risk Management Framework; Exchange 
Act Release No. 86358 (July 11, 2019); 84 FR 34220 (July 17, 2019) 
(``Notice'').
    \5\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Designation of Longer Period for Commission Action on Proposed 
Rule Change Relating to the ICC Rules, ICC End-of-Day Price 
Discovery Policies and Procedures, and ICC Risk Management 
Framework; Exchange Act Release No. 86799 (Aug. 28, 2019); 84 FR 
46588 (Sept. 4, 2019)
    \6\ In Partial Amendment No. 1 to the proposed rule change, ICC 
provided additional details and analyses surrounding the proposed 
rule change in the form of a confidential Exhibit 3. Partial 
Amendment No. 1 did not make any changes to the substance of the 
filing or the text of the proposed rule change.
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II. Description of the Proposed Rule Change

A. Background

    The proposed rule change would amend ICC's Rules, End-of-Day Price 
Discovery Policies and Procedures (the ``EOD Policy'') and Risk 
Management Framework (the ``Risk Framework'') to provide for the 
clearing by ICC of Index Swaptions.\7\
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    \7\ As explained in the Notice, prior to the commencement of 
clearing of Index Swaptions, ICC intends to adopt certain other 
policies and procedures in addition to this proposed rule change. 
ICC does not intend to commence clearing of Index Swaptions until 
any such policies and procedures, as well as the current proposed 
rule change, have been approved by the Commission or otherwise 
become effective. See Notice, 84 FR at 34220.
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    An Index Swaption is a contract whereby one party (the ``Swaption 
Buyer'') has the right (but not the obligation) to cause the other 
party (the ``Swaption Seller'') to enter into an index credit default 
swap transaction at a pre-determined strike price on a specified 
expiration date on specified terms.\8\ In the case of Index Swaptions 
that would be cleared by ICC, the underlying index credit default swap 
would be limited to certain CDX and iTraxx Europe index credit default 
swaps that are accepted for clearing by ICC, and which would be 
automatically cleared by ICC upon exercise of the Index Swaption by the 
Swaption Buyer in accordance with its terms.
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    \8\ The description that follows is excerpted from the Notice, 
84 FR 34220.
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B. Amendments to ICC's Rules

    The proposed rule change would adopt a new Subchapter 26R of ICC's 
Rules, which would set out the contract terms and specifications for 
cleared Index Swaptions.
    Rule 26R-102 would set out key definitions used for Index 
Swaptions, which would be generally similar to those used in the 
subchapters for other index Contracts cleared by ICC. Key defined terms 
would include ``Eligible Untranched Swaption Index'', which would 
specify the applicable series and version of a CDX or iTraxx index or 
sub-index underlying an Index Swaption. As with other index CDS, ICC 
would maintain a List of Eligible Untranched Swaption Indices, which 
would contain the Eligible Untranched Swaption Indices as well as the 
eligible expiration dates and strike prices, as well as other relevant 
terms, for Index Swaptions that would be accepted for clearing by ICC. 
Rule 26R-102 would also define the ``Relevant Index Swaption Untranched 
Terms Supplement,'' (referred to herein as the ``Swaption Terms 
Supplement''). The Swaption Terms Supplement, published by the 
International Swaps and Derivatives Association, Inc. (``ISDA''), would 
provide the standard contractual terms for index swaptions of the 
relevant type. These terms would be incorporated by reference into the 
contract terms in the Rules for a cleared Index Swaption.
    Rule 26R-102 also would define the ``Underlying Contract,'' which 
would be the index CDS Contract into which the Index Swaption may be 
exercised, and the ``Underlying New Trade,'' which would be a new 
single name CDS trade that would arise upon exercise of an Index 
Swaption where a relevant Restructuring Credit Event, if applicable, 
has occurred with respect to a reference entity in the relevant index.
    New Rule 26R-103 would clarify the application of certain aspects 
of the Rules to Index Swaptions. Specifically, it would specify that 
Index Swaptions would be CDS Contracts for purposes of Chapters 20 
(regarding default management), 20A (regarding transfers of positions), 
21 (regarding determination of credit events), and 26E (regarding 
restructuring credit events). Chapter 22, regarding physical settlement 
of CDS, would not apply to Index Swaptions. Although Index Swaptions 
would be physically settled, in the sense that the Index Swaption,

[[Page 56271]]

upon exercise, would result in the parties entering into an index CDS 
position, the physical settlement terms for CDS Contracts in Chapter 22 
of the Rules would not apply to settlement of the Index Swaption 
itself. Instead, new Rule 26R-317(c) would, as discussed below, specify 
the physical settlement terms for Index Swaptions. Finally, Rule 26R-
103 would specify that once an Index Swaption has been exercised, the 
resulting Underlying Contract and Underlying New Trade, if any, would 
themselves be treated as CDS Contracts for all purposes of the Rules.
    New Rule 26R-309 would require CDS Participants to use reasonable 
efforts not to submit for clearing an Index Swaption at a time when the 
Underlying Contract could not be submitted for clearing under the Rules 
or at a time when the CDS Participant would be under an obligation to 
use reasonable efforts not to submit a trade in such Underlying 
Contract. New Rule 26R-309 would be necessary because the Rules related 
to CDS Contracts cleared by ICC impose limitations on submission of 
trades for clearing at certain times.\9\ Thus, ICC would not accept for 
clearing an Index Swaption at a time when it could not accept the 
Underlying Contract for clearing. As with other CDS Contracts under the 
Rules, a CDS Participant would also be required to notify ICC if it has 
submitted an Index Swaption that was not a Conforming Trade under the 
Rules, meaning a trade that was not submitted in accordance with, and 
did not meet the requirements established by, the Rules and the ICE 
Clear Credit Procedures.\10\
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    \9\ See, e.g., ICC Rule 26A-309.
    \10\ See ICC Rule 309(g).
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    Rule 26R-315 would establish certain of ICC's basic contractual 
terms for Index Swaptions. The Rule would provide that each Index 
Swaption is governed by the applicable Swaption Terms Supplement, 
subject to the relevant provisions of Subchapter 26R of the Rules. In 
the case of any inconsistency between the Swaption Terms Supplement and 
the Rules, the Rules would govern. This approach would be consistent 
with the treatment of other cleared index CDS Contracts under the 
Rules, which rely on and incorporate their own market-standard terms 
supplements.
    New Rule 26R-316 would address ICC's process in the event that ISDA 
publishes a new Swaption Terms Supplement that would apply to an Index 
Swaption that is already being cleared by ICC. Consistent with ICC's 
practice for other index CDS Contracts,\11\ the ICC Board or its 
designee would determine whether Index Swaptions referencing the 
existing standard terms supplement would be fungible with Index 
Swaptions referencing the new standard terms supplement, and if so, ICC 
would, in effect make the new Swaption Terms Supplement applicable to 
existing Index Swaptions by updating relevant existing Index Swaptions 
to reference the new Swaption Terms Supplement.
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    \11\ See ICC Rule 26A-316(b) (CDX North America); ICC Rule 26C-
316(b) (CDX Emerging Markets); ICC Rule 26F-316(b) (iTraxx Europe); 
ICC Rule 26J-316(b) (iTraxx Asia/Pacific).
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    New Rule 26R-317 would specify other key terms for Index Swaptions. 
Subsection (a) would, with respect to an Index Swaption referencing a 
CDX.NA index, modify the Relevant Index Swaption Standard Terms 
Supplement and the 2014 ISDA Credit Derivatives Definitions 
incorporated into the Supplement. These modifications would reflect 
changes ICC would make to accommodate the clearing of the Index 
Swaption transactions, including to incorporate ICC's procedures for 
determination of a Credit Event and for application of physical 
settlement. These modifications would be consistent with similar 
modifications that ICC uses for the CDX.NA index itself.\12\ Subsection 
(b) of new Rule 26R-317 would make similar modifications with respect 
to an Index Swaption referencing an iTraxx Europe index.\13\ Rule 26R-
317(c) would state explicitly that Index Swaptions would be physically 
settled in accordance with Subchapter 26R.
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    \12\ See ICC Rule 26A-317(b).
    \13\ See ICC Rule 26F-317.
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    New Rule 26-317(d) would set out certain terms and elections under 
the Swaption Terms Supplement that would apply to all Index Swaptions 
of a particular type and underlying index. Significantly, ICC would 
only accept Index Swaptions that are European style, such that the 
option may only be exercised on the expiration date. New Rule 26-317(d) 
would also define ICC as the Calculation Agent, except as provided in 
the CDS Committee Rules in Chapter 21. This would mean that upon 
settlement ICE Clear Credit, as calculation agent, would determine the 
applicable settlement payment or payments (as determined under the 
Swaption Terms Supplement, and based on the strike adjustment amount 
and accrued amount thereunder) which shall be owed by the Swaption 
Buyer or the Swaption Seller under any exercised Index Swaption, in 
respect of such exercise. Finally, Rule 26-317(d) would also make 
inapplicable certain provisions under the Swaption Terms Supplement 
that would not apply to Index Swaptions.
    New Rule 26-317(e) would set out the terms for an Index Swaption 
that must be included in the submission of an Index Swaption 
transaction for clearing. Specifically, the submission must identify 
the underlying index, trade date, expiration date, Swaption Buyer, 
Swaption Seller, strike price and swaption premium. The submission must 
also specify whether the Index Swaption is a ``payer'' or ``call'' 
option, in which case the Swaption Buyer, upon exercise, would be the 
fixed rate payer under the Underlying Contract, or a ``receiver'' or 
``put'' option, in which case the Swaption Seller, upon exercise, would 
be the fixed rate payer under the Underlying Contract. The submission 
must also specify the scheduled termination date of the Underlying 
Contract and original notional amount of the Underlying Contract.
    New Rule 26R-318 would provide procedures for exercise and 
assignment of Index Swaptions. The rule would provide that an Open 
Position in an Index Swaption may be exercised on its expiration date 
by the relevant Participant (or, in the case of a client position, the 
relevant Non-Participant Party) that is the Swaption Buyer delivering 
an exercise notice to ICC. New Rule 26R-318(d) would further provide 
that upon receipt of the exercise notice, ICC would assign the exercise 
notices to Open Positions of Participants that are Swaption Sellers 
(across both the house and customer origin accounts) in accordance with 
the Exercise Procedures.\14\ Under new Rule 26R-318(e), such an 
assignment would constitute exercise of the relevant Open Position in 
such Index Swaption between ICE Clear Credit, as Swaption Buyer and 
such Swaption Seller. Moreover, the exercise of both the Open Position 
between the Swaption Buyer and ICE Clear Credit and the offsetting Open 
Position between ICE Clear Credit and the Swaption Seller would be 
deemed effective simultaneously at the time of such assignment, as 
recorded in the books and records of ICE Clear Credit. New Rule 26R-
318(g) would specify that, for the avoidance of doubt, the assignment 
of an exercise notice does not create a direct relationship between the 
exercising Swaption Buyer and the assigned Swaption Seller.

[[Page 56272]]

Rather, both such parties would continue to face ICC as clearing 
organization. Finally, new Rule 26R-318(f) would specify that Index 
Swaptions that are not validly exercised on the expiration date would 
expire without further obligation of any party.
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    \14\ As discussed in the Notice, ICC intends to adopt a set of 
Exercise Procedures that will provide further detail as to the 
manner in which Index Swaptions may be exercised by Swaption Buyers 
and in which notices of exercise will be assigned to Swaption 
Sellers. See Notice, 84 FR at 34221, n.5.
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    New Rule 26R-319 would provide procedures for settlement of an 
exercised Index Swaption. New Rule 26R-319(a) would provide that upon 
exercise, a cleared Contract in the form of the Underlying Contract 
would automatically come into effect as between the exercising Swaption 
Buyer and ICC and an offsetting cleared Contract would automatically 
come into effect as between ICC and the assigned Swaption Seller. ICC, 
as a Calculation Agent, would determine the settlement payment or 
payments owed by the Swaption Buyer or the Swaption Seller in 
connection with the exercise. Such payments would represent a strike 
adjustment amount based on the strike price of the Index Swaption and 
an accrual amount reflecting the accrued fixed payment for the 
Underlying Contract through expiration. The Swaption Buyer or the 
Swaption Seller, as applicable, would make such payments in accordance 
with the terms of the relevant Index Swaption (based on the Swaption 
Terms Supplement).
    Consistent with the terms of the Index Swaption, new Rule 26R-
319(b) would require additional settlements if one or more Credit 
Events has occurred with respect to the underlying index at or prior to 
the expiration date of the Index Swaption. In general, such settlements 
would be designed so that the party in the position of the protection 
buyer under the Index Swaption would receive settlement for all such 
Credit Events as if it had held the Underlying Contract at the time of 
the Credit Event. These settlement amounts may include auction cash 
settlement amounts, fixed rate payments, and accruals with respect to 
such credit events. The proposed rule would also provide for an 
additional accrual amount, owed by the party that is in the position of 
fixed rate payer or floating rate payer, as applicable, to ensure 
consistency in economic result where the swaption expiration occurs 
after the relevant auction date for a Credit Event as compared to cases 
where expiration occurs before the auction date. New Rule 26R-319(b) 
would also address cases where the relevant Underlying Contract is 
itself subject to physical settlement under Chapter 22 of the Rules. In 
that case, the rule would provide for matching of Swaption Buyers and 
Swaption Sellers for that purpose.
    New Rule 26R-319(c) would apply in the case of a relevant M(M)R 
Restructuring Credit Event and would provide for delivery of MP Notices 
(both Restructuring Credit Event Notices and Notices to Exercise 
Movement Option) by Swaption Buyer and Swaption Sellers prior to 
expiration of the Index Swaption. Such notices would have effect with 
respect to the Underlying New Trade established if the Index Swaption 
is exercised. New Rule 26R-319(c) would also address settlement with 
respect to the Underlying New Trade.
    Rule 26R-502 would clarify that ICC may take the following actions 
with respect to Index Swaptions without consulting the Risk Committee: 
(i) Adding new eligible Strike Prices; (ii) adding new Expiration Dates 
for Index Swaptions; (iii) adding new series and tenors for the indices 
which are Underlying Contracts for Index Swaptions; and (iv) adding new 
eligible Scheduled Termination Dates for Underlying Contracts. In ICC's 
view, these actions are business-as-usual actions necessary to maintain 
existing cleared contracts and do not pose a material risk change to 
ICC. As such, consultation with ICC's Risk Committee would not be 
necessary for these changes.
    Finally, Consistent with similar provisions for other product 
subchapters,\15\ new Rule 26R-616 would provide that actions by the 
Board or its designee to give effect to certain determinations of the 
Credit Derivatives Determinations Committee or Regional CDS Committee, 
such as succession events and the like, would not constitute a Contract 
Modification for purposes of the Rules. Thus, new Rule 26R-616 would 
allow ICC's Board or its designee to give effect to determinations of 
the Credit Derivatives Determinations Committee or Regional CDS 
Committee, as those determinations affect the Underlying Contracts for 
Index Swaptions, without complying with ICC Rule 616. ICC Rule 616 
requires that ICC provide Participants notice ahead of certain Contract 
Modifications. In ICC's view, these changes would not constitute 
Contract Modifications, as defined in ICC's Rules, because they are 
changes built into the terms of the contracts that are expected, and 
traded on, by market participants.
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    \15\ See ICC Rule 26B-616; 26D-616; 26G-616; 26H-616; 26I-616; 
26L-616; 26M-616; 26N-616; 26O-616; 26P-616; and 26Q-616.
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C. EOD Policy Amendments

    The proposed rule change would also amend ICC's EOD Policy to 
incorporate Index Swaptions. The EOD Policy sets out ICC's EOD price 
discovery process used to determine the daily settlement prices for all 
cleared Contracts, based on submissions made by Participants. The 
proposed amendments to the EOD Policy would specify the characteristics 
that define a unique Index Swaption instrument for purposes of price 
submissions by Participants, including exercise style, underlying 
index, option type (put or call), expiration date, strike price and 
convention (price or spread), and transaction type (reflecting the 
Swaption Terms Supplement).
    The amendments to the EOD Policy would establish a methodology for 
determining EOD bid-offer widths (``BOWs'') for clearing-eligible Index 
Swaptions, which are used for establishing EOD settlement prices. Under 
the methodology, ICC would determine a systematic EOD BOW for each 
Index Swaption. The final BOW for an Index Swaption would be determined 
as the greater of the systematic BOW and a dynamic BOW determined on 
the range of a series of unique price submissions made by Participants 
for the particular Index Swaption (excluding certain of the largest and 
smallest elements), in a manner similar to that which ICC currently 
uses for calculating dynamic BOWs for single name CDS instruments.
    The amendments to the EOD Policy also would set out price 
submission requirements for Participants. Under the amendments, if a 
Participant has a gross notional position for any Index Swaption in any 
strip \16\ of puts or calls, the Participant must provide submissions 
for all clearing-eligible instruments in that strip of puts or calls 
and the corresponding strip of calls or puts. In addition, if an 
insufficient number of Participants are required to submit under this 
standard, ICC may require all Participants to provide relevant 
submissions. Finally, the amendments would establish the times that 
Participants are required to submit prices related to Index Swaptions 
and specify the required format of submissions.
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    \16\ The amendments would define a ``strip'' as the group of 
Index Swaptions on a given ``surface'' with the same expiration date 
(but with different strike prices). The amendments would define a 
``surface'' as the group of Index Swaptions from a given put/call 
surface pair with the same option type. The amendments would define 
a ``put/call surface pair,'' as the group of Index Swaptions with 
the same combination of underlying index, strike convention and 
transaction type, but differ with respect to option type, expiration 
date and strike price.
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    The amendments would apply ICC's firm trade requirements to Index 
Swaptions. Under ICC's firm trade requirements, Participants are 
required

[[Page 56273]]

to enter into a subset of trades generated by ICC's cross-and lock 
algorithm. As with other cleared products, the amendments would 
establish be a notional limit for firm trades for Participants in 
affiliate groups. The amendments would set out procedures for 
determining the relevant firm trade days for Index Swaptions and the 
strips of puts and calls that are firm-trade eligible. Finally, the 
amendments would amend the governance provisions of the EOD Policy to 
make the ICC Risk Management Department responsible for performing 
certain functions regarding firm trades and Index Swaptions, like 
selecting days for firm trades in Index Swaptions.
    The amendments would also address distribution of Index Swaption 
prices, both to Participants and publicly. As with indices and CDS, the 
amendments would require that ICC publish a subset of EOD prices for 
Index Swaptions on its website.
    The amendments would make certain other clarifications to the EOD 
Policy. The amendments would incorporate Index Swaptions into the table 
in the appendix setting out the timing for various aspects of the price 
submission process. The amendments would also add a reference to ICE 
Data Services' Credit Market Analysis services as a potential source of 
alternative pricing data to use if ICC determines that the EOD price 
discovery process has failed to determine reliable EOD prices. The 
amendments would also make clarifications to the existing process for 
index and single name CDS Contracts to distinguish it from the 
additional submission process for Index Swaptions. Finally, the 
amendments would also update defined terms and make typographical 
corrections.

D. Risk Framework Amendments

    The proposed rule change would amend the Risk Framework to 
incorporate the clearing of Index Swaptions. The amendments would 
define Index Swaptions and identify key terms of Index Swaptions, 
consistent with the Rules and EOD Policy. The amendments would, for 
risk management purposes, define an Index Swaption instrument as a 
specific combination of underlying index, expiration date, strike 
price, option type, exercise type, currency and transaction type. The 
amendments would apply the ICC initial margin model to Index Swaptions 
and would specifically address how each component of the model would 
apply to Index Swaptions. For example, the amendments would apply the 
integrated spread response component of the margin model to Index 
Swaptions, based on implied forward looking Index Swaption prices. 
Moreover, the amendments would specify that because Index Swaptions 
would not be eligible for index-single name decomposition benefits for 
purposes of determining the integrated spread response, they would not 
be subject to basis risk requirements based on decomposed index 
positions. The amendments would explain that certain price-based 
scenarios and jump to default requirements in the margin model would, 
in the case of Index Swaptions, be applied to delta equivalent notional 
amounts of the underlying index swap position. Similarly, the 
amendments would also apply concentration charges to Index Swaption 
positions, based on delta equivalent notional amounts of the underlying 
index.
    The amendments to the Risk Framework would also remove certain 
outdated references and clarify certain risk management data and 
systems used in the margin models. For example, the amendments would 
delete a reference to ICC relying on its outsourcing relationship with 
its affiliate, the Clearing Corporation, for the technology systems and 
infrastructure to automate processing, reporting, and data gathering 
because ICC now maintains such systems in-house. The amendments would 
also update Appendix 2 to the Risk Framework to incorporate Index 
Swaptions. Appendix 2 contains a list of risk-related questions and 
document requests that ICC uses when evaluating an applicant for 
membership as a Clearing Participant.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\17\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \18\ and Rules 17Ad-22(b)(2), 17Ad-22(d)(2), 17Ad-22(d)(4), 
and 17Ad-22(d)(8) thereunder.\19\
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    \17\ 15 U.S.C. 78s(b)(2)(C).
    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(b)(2), (d)(2), (d)(4), and (d)(8).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of ICC 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 ICC or for which it is responsible, and, in 
general, to protect investors and the public interest.\20\
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described in detail above, the proposed rule change would adopt 
a new Subchapter 26R to the Rules, which would identify, define, and 
set forth the key contract terms governing, and specifications for, 
cleared Index Swaptions. By doing so, Subchapter 26R would allow ICC to 
create the basic contractual structure of Index Swaptions, without 
which ICC could not clear Index Swaptions. In addition, Subchapter 26R 
would support ICC's clearance and settlement of Index Swaptions and the 
Underlying Contracts by identifying and defining the rights and 
obligations of CDS Participants with respect to submitting Index 
Swaptions for clearing, and setting forth the requirements for 
exercising, assigning, settling, and modifying Index Swaptions, 
including after the occurrence of certain credit events. For example, 
Subchapter 26R would define the terms for an Index Swaption that must 
be included in the submission of an Index Swaption transaction for 
clearing; require CDS Participants to use reasonable efforts not to 
submit for clearing an Index Swaption at a time when the Underlying 
Contract could not be submitted for clearing; provide basic procedures 
for the exercise, assignment, settlement, and modification of Index 
Swaptions; and provide procedures to use for settlement in case of the 
occurrence of certain credit events. Finally, the Commission believes 
that the proposed new Subchapter 26R, in providing procedures to 
address the publication of a new Swaption Terms Supplement; allowing 
ICC to take certain business-as-usual actions with respect to Index 
Swaptions without consulting the Risk Committee; and providing that 
actions to give effect to certain determinations of the Credit 
Derivatives Determinations Committee or Regional CDS Committee would 
not constitute a Contract Modification for purposes of the Rules, would 
give ICC flexibility to modify Index Swaptions as

[[Page 56274]]

necessary in response to routine changes to the Underlying Contract and 
thus continue clearing and settling Index Swaptions despite changes to 
the Underlying Contracts. Thus, the Commission believes that the 
proposed rule change, in general, would allow ICC to clear and settle 
Index Swaptions and the Underlying Contracts, which, in turn, would 
promote the prompt and accurate clearance and settlement of Index 
Swaptions.
    Moreover, as discussed above, the proposed rule change would apply 
ICC's EOD Policy to Index Swaptions and specify how ICC generates EOD 
prices for Index Swaptions. Specifically, the proposed rule change 
would establish a methodology for determining EOD BOWs for Index 
Swaptions and apply the existing price submission requirements under 
the current EOD Policy to Index Swaptions, including a price submission 
window and ICC's firm trade requirements. Similarly, the proposed rule 
change would apply ICC's existing margin model to Index Swaptions and 
specify the manner in which key aspects of the model would function 
with respect to Index Swaptions. Because ICC uses EOD prices and its 
margin model to generate margin requirements for cleared transactions, 
and because the proposed rule change would allow ICC to generate margin 
requirements for cleared Index Swaptions, the Commission believes that 
the proposed rule change would allow ICC to manage the risks associated 
with clearing Index Swaptions. The Commission believes that these 
risks, if not properly managed, could cause ICC to realize losses on 
the clearance of Index Swaptions and thereby disrupt ICC's ability to 
promptly and accurately clear securities transactions. Accordingly, the 
Commission therefore believes that the proposed rule change, in 
applying the EOD Policy and ICC's margin model to Index Swaptions, 
would promote the prompt and accurate clearance and settlement of 
securities transactions. Similarly, given that mismanagement of the 
risks associated with clearing Index Swaptions could cause ICC to 
realize losses on such transactions and threaten ICC's ability to 
operate, thereby threatening access to securities and funds in ICC's 
control, the Commission believes that the proposed rule change would 
help assure the safeguarding of securities and funds which are in the 
custody or control of the ICC or for which it is responsible. Finally, 
for both of these reasons, the Commission believes the proposed rule 
change would, in general, protect 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 ICC's 
custody and control, and, in general, protect investors and the public 
interest, consistent with the Section 17A(b)(3)(F) of the Act.\21\
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    \21\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rules 17Ad-22(b)(2)

    Rule 17Ad-22(b)(2) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed 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 review such margin requirements and the 
related risk-based models and parameters at least monthly.\22\
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    \22\ 17 CFR 240.17Ad-22(b)(2).
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    As discussed above, the proposed rule change would apply ICC's 
existing EOD Policy to Index Swaptions and specify the manner in which 
ICC would generate EOD prices for Index Swaptions, including 
establishing a methodology for determining EOD BOWs for Index Swaptions 
and applying the price submission requirements to Index Swaptions. 
Similarly, the proposed rule change would apply ICC's margin model to 
Index Swaptions and describe the manner in which components of the 
model would work with respect to Index Swaptions. Both of these changes 
would allow ICC to generate margin requirements for Participants that 
clear Index Swaptions, which would help to ensure that ICC uses margin 
requirements to limit its credit exposures to Participants that clear 
Index Swaptions under normal market conditions and help to ensure that 
ICC uses risk-based models and parameters to set margin requirements 
associated with Index Swaptions. The Commission therefore finds that 
the proposed rule change is consistent with Rule 17Ad-22(b)(2).\23\
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    \23\ 15 U.S.C. 17Ad-22(b)(2).
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    The Commission further believes that the other changes the proposed 
rule change would make to the EOD Policy and the Risk Framework would 
help improve the operation of both. Specifically, in adding a reference 
to ICE Data Services' Credit Market Analysis services as a potential 
source of alternative pricing data to use if ICC determines that the 
EOD price discovery process has failed to determine reliable EOD 
prices, the Commission believes the proposed rule change would help to 
ensure that ICC has a backup source of data to use for EOD prices. 
Moreover, in making clarifications to the existing process for index 
and single name CDS Contracts to distinguish it from the additional 
submission process for Index Swaptions, the Commission believes the 
proposed rule change would help to avoid potential confusion between 
the two different processes. Similarly, in updating defined terms and 
references and making typographical corrections, the Commission 
believes the proposed rule change would help to ensure that the EOD 
Policy operates as intended, with the correct references. Likewise, by 
updating references to risk management data and systems in the Risk 
Framework, the proposed rule change would help to ensure that the Risk 
Framework references the correct and existing ICC risk management 
systems. Thus, the Commission believes these changes would help to 
improve the operation and use of both the EOD Policy and the Risk 
Framework in the clearance of Index Swaptions. Because, as discussed 
above, the Commission finds that the application of both of these 
policies to Index Swaptions is consistent Rule 17Ad-22(b)(2),\24\ the 
Commission therefore finds that these changes are also consistent with 
that Rule.
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    \24\ 15 U.S.C. 17Ad-22(b)(2).
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    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(b)(2).\25\
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    \25\ 15 U.S.C. 17Ad-22(b)(2).
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C. Consistency With Rule 17Ad-22(d)(2)

    Rule 17Ad-22(d)(2) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
require participants to have sufficient financial resources and robust 
operational capacity to meet obligations arising from participation in 
the clearing agency; have procedures in place to monitor that 
participation requirements are met on an ongoing basis; have 
participation requirements that are objective and publicly disclosed; 
and permit fair and open access.\26\ The Commission believes that the 
proposed rule change would establish participation requirements for 
Participants that clear Index Swaptions by applying price submission 
and firm trade requirements to Index Swaptions as part of the EOD 
pricing process, including incorporating Index Swaptions into the table 
in the

[[Page 56275]]

appendix setting out the timing for various aspects of the price 
submission process. Similarly, the Commission believes that the 
proposed rule change would establish requirements for Participants that 
clear Index Swaptions by adding Index Swaptions to Appendix 2 to the 
Risk Framework, which ICC uses to evaluate an applicant for membership 
as a Clearing Participant. Moreover, the Commission believes that both 
of these requirements would be objective and publicly disclosed, as 
they would be applicable to all Participants and publicly described in 
this proposed rule change. Similarly, the Commission believes that in 
requiring that ICC publish a subset of EOD prices for Index Swaptions 
on its website, the proposed rule change would permit fair and open 
access by providing non-Participants and firms looking to become 
Participants at ICC access to the pricing information for Index 
Swaptions.
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    \26\ 15 U.S.C. 17Ad-22(d)(2).
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    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(d)(2).\27\
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    \27\ 15 U.S.C. 17Ad-22(d)(2).
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D. Consistency With Rule 17Ad-22(d)(4)

    Rule 17Ad-22(d)(4) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed to, 
among other things, identify sources of operational risk and minimize 
them through the development of appropriate systems, controls, and 
procedures.\28\ The Commission believes that the proposed rule change, 
in establishing procedures for the exercise and settlement of Index 
Swaptions, would identify possible operational risks in clearing Index 
Swaptions and minimize those risks through appropriate controls. 
Specifically, as discussed above, new Rule 26R-319 would provide that, 
upon exercise, a cleared Contract in the form of the Underlying 
Contract would automatically come into effect as between the exercising 
Swaption Buyer and ICC and an offsetting cleared Contract would 
automatically come into effect as between ICC and the assigned Swaption 
Seller. The Commission believes that this aspect of the proposed rule 
change would reduce the operational risks associated with clearing 
Index Swaptions by providing for the automatic settlement into an 
offsetting cleared Contract upon exercise, rather than requiring some 
further manual step or procedure by ICC or the Participants. Similarly, 
the Commission believes that, in specifying that Index Swaptions that 
are not validly exercised on the expiration date would expire without 
further obligation of any party, the proposed rule change would 
eliminate the potential operational risks associated with Participants 
attempting late exercises of Index Swaptions. Finally, in providing 
procedures for the exercise and assignment of Index Swaptions, the 
Commission believes the proposed rule change would reduce the potential 
operational risks associated with exercise and assignment by setting 
out in advance a method that a Swaption Buyer must use to exercise its 
Index Swaption and a method that ICC must use to assign the Swaption 
Buyer's position to a corresponding Swaption Seller.
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    \28\ 17 CFR 240.17Ad-22(d)(4).
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    Therefore, for the above reason the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(d)(4).\29\
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    \29\ 15 U.S.C. 17Ad-22(d)(4).
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E. Consistency With Rule 17Ad-22(d)(8)

    Rule 17Ad-22(d)(8) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed to have 
governance arrangements that are clear and transparent to fulfill the 
public interest requirements in Section 17A of the Act applicable to 
clearing agencies, to support the objectives of owners and 
participants, and to promote the effectiveness of ICC's risk management 
procedures.\30\ The Commission believes that the proposed rule change, 
in amending the governance provisions of the EOD Policy to make the ICC 
Risk Management Department responsible for performing certain functions 
related to the firm trade requirements for Index Swaptions, would 
establish clear and transparent governance arrangements for Index 
Swaptions. The Commission also believes that, in providing that actions 
by the Board or its designee to give effect to certain determinations 
of the Credit Derivatives Determinations Committee or Regional CDS 
Committee would not constitute a Contract Modification for purposes of 
the Rules, the proposed rule change would establish clear and 
transparent arrangements for the Board or its designee to take such 
actions.
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    \30\ 15 U.S.C. 17Ad-22(d)(8).
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    Therefore, for the above reason the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(d)(8).\31\
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    \31\ 15 U.S.C. 17Ad-22(d)(8).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Partial Amendment No. 1, 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-ICC-2019-007 on the subject line.

Paper Comments

    Send paper comments in triplicate to Secretary, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-ICC-2019-007. 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 Credit and on ICE 
Clear Credit's website at https://www.theice.com/clear-credit/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-ICC-2019-007 and should be 
submitted on or before November 12, 2019.

V. Accelerated Approval of the Proposed Rule Change, as Modified by 
Partial Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the

[[Page 56276]]

Act,\32\ to approve the proposed rule change prior to the 30th day 
after the date of publication of Partial Amendment No. 1 in the Federal 
Register. As discussed above, Partial Amendment No. 1 provides 
additional details and analyses surrounding ICC's proposed changes to 
implement clearing of Index Swaptions. By providing the additional 
information, Partial Amendment No. 1 provides for a more clear and 
comprehensive understanding of the estimated impact of the proposed 
rule change, which helps to improve the Commission's review of the 
proposed rule change for consistency with the Act.
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    \32\ 15 U.S.C. 78s(b)(2).
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    For similar reasons as discussed above, the Commission finds that 
Partial Amendment No. 1 is designed to promote the prompt and accurate 
clearance and settlement of securities transactions, help assure the 
safeguarding of securities and funds which are in the custody or 
control of ICC, and, in general, to protect investors and the public 
interest, consistent with Section 17A(b)(3)(F) of the Act.\33\ 
Accordingly, the Commission finds good cause for approving the proposed 
rule change, as modified by Partial Amendment No. 1, on an accelerated 
basis, pursuant to Section 19(b)(2) of the Exchange Act.\34\
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    \33\ 15 U.S.C. 78q-1(b)(3)(F).
    \34\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and in particular, with the requirements of Section 17A(b)(3)(F) of the 
Act \35\ and Rules 17Ad-22(b)(2), 17Ad-22(d)(2), 17Ad-22(d)(4), and 
17Ad-22(d)(8) thereunder.\36\
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    \35\ 15 U.S.C. 78q-1(b)(3)(F).
    \36\ 17 CFR 240.17Ad-22(b)(2), (d)(2), (d)(4), and (d)(8).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\37\ that the proposed rule change, as modified by Partial Amendment 
No. 1 (SR-ICC-2019-007), be, and hereby is, approved on an accelerated 
basis.\38\
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    \37\ 15 U.S.C. 78s(b)(2).
    \38\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \39\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22841 Filed 10-18-19; 8:45 am]
 BILLING CODE 8011-01-P


