[Federal Register Volume 84, Number 231 (Monday, December 2, 2019)]
[Notices]
[Pages 66036-66039]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25960]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87612; File No. SR-ICC-2019-013]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change Relating to the ICC Clearing Rules

November 25, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, 15 U.S.C. 78s(b)(1) and Rule 19b-4, 17 CFR 240.19b-4, notice is 
hereby given that on November 15, 2019, ICE Clear Credit LLC (``ICE 
Clear Credit'' or ``ICC'') filed with the Securities and Exchange 
Commission the proposed rule change, security-based swap submission, or 
advance notice as described in Items I, II, and III below, which Items 
have been prepared primarily by ICC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The principal purpose of the proposed rule change is to make 
certain changes to the ICC Clearing Rules (the ``Rules'') \1\ to 
incorporate amendments to the industry-standard ISDA 2014 Credit 
Derivatives Definitions (the ``2014 Definitions'') that are being 
adopted in the broader CDS market to address so-called narrowly 
tailored credit events and related matters.
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    \1\ Capitalized terms used but not defined herein have the 
meanings specified in 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, ICC included statements 
concerning the purpose of and basis for the proposed rule change, 
security-based swap submission, or advance notice and discussed any 
comments it received on the proposed rule change, security-based swap 
submission, or advance notice. The text of these statements may be 
examined at the places specified in Item IV below. ICC has prepared 
summaries, set forth in sections (A), (B), and (C) below, of the most 
significant aspects of these statements.

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

(a) Purpose
    ICE Clear Credit proposes amendments to its Rules to incorporate 
changes to the 2014 Definitions that are intended to address so-called 
``narrowly tailored credit events''. In the wake of certain credit 
events and potential credit events in the CDS market in recent years, 
the International Swaps and Derivatives Association, Inc. (``ISDA''), 
in consultation with market participants, has developed and published 
the 2019 Narrowly Tailored Credit Event Supplement to the 2014 ISDA 
Credit Derivatives Definitions (the ``NTCE Supplement'').\2\ The NTCE 
Supplement, if applied to a CDS transaction, effects two principal 
changes to the 2014 Definitions: (1) A change to the definition of the 
``Failure to Pay'' credit event designed to exclude certain narrowly 
tailored credit events and (2) a change to the process for determining 
the Outstanding Principal Balance of an obligation to address certain 
obligations of a reference entity that were issued at a discount.
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    \2\ The NTCE Supplement is published on the ISDA website at 
https://www.isda.org/a/KDqME/Final-NTCE-Supplement.pdf.
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    As described by ISDA in the attached guidance to the NTCE 
Supplement, the supplement was published in light of concerns among 
market participants and regulators about ``instances of [CDS] market 
participants entering into arrangements with corporations that are 
narrowly tailored to trigger a credit event for CDS contracts while 
minimizing the impact on the corporation, in order to increase payment 
to the buyers of CDS protection.'' \3\ ISDA has expressed concern that 
``narrowly tailored defaults . . . could negatively impact the 
efficiency, reliability and fairness of the overall CDS market.'' 
Regulators have also expressed concern with narrowly tailored or 
manufactured credit events, including a joint statement by the heads of 
the Commission, the Commodity Futures Trading Commission and the UK 
Financial Conduct Authority that

[[Page 66037]]

such strategies ``may adversely affect the integrity, confidence and 
reputation of the credit derivatives markets, as well as markets more 
generally. These opportunistic strategies raise various issues under 
securities, derivatives, conduct and antifraud laws, as well as policy 
concerns.'' \4\
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    \3\ NTCE Supplement, Guidance on the interpretation of the 
definition of ``Failure to Pay''.
    \4\ Securities and Exchange Commission, Commodity Futures 
Trading Commission and UK Financial Conduct Authority, Joint 
Statement on Opportunistic Strategies in the Credit Derivatives 
Markets (June 24, 2019); see also Update to June 2019 Joint CFTC-
SEC-FCA Statement on Opportunistic Strategies in the Credit 
Derivatives Market (Sept. 19, 2019).
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    With respect to the Failure to Pay credit event, the NTCE 
Supplement adopts a concept of a ``Credit Deterioration Requirement.'' 
If applicable, this requirement will provide that a failure of a 
reference entity to make a payment on an obligation will not constitute 
a Failure to Pay Credit Event if the failure ``does not directly or 
indirectly either result from, or result in, a deterioration in the 
creditworthiness or financial condition'' of the reference entity. As 
such, a ``narrowly tailored'' or ``manufactured'' failure to pay, which 
does not reflect or result in a credit deterioration, would not 
constitute a Credit Event for CDS Contracts that incorporate the NTCE 
Supplement and apply the Credit Deterioration Requirement. The NTCE 
Supplement also includes guidance as to factors relevant to the 
determination of whether credit deterioration has occurred. That 
determination would, under the 2014 Definitions, in the ordinary course 
be made by the relevant Credit Derivatives Determinations Committee.
    The NTCE Supplement also amends the method of calculating the 
Outstanding Principal Balance of obligations. The amendments are 
intended to address a potential scenario where a corporation agrees to 
issue a bond at a substantial discount to its principal amount, where 
the bond could be delivered in settlement of a CDS at its full 
principal amount. Under the 2014 Definitions, the Quantum of the Claim 
(which is used to determine the Outstanding Principal Balance used in 
calculating settlement obligations) is determined taking into account 
any applicable laws insofar as they reduce the size of the claim to 
reflect the original issue price or accrued value of the obligation. 
The NTCE Supplement clarifies that the applicable laws to be considered 
include any bankruptcy or insolvency law or other law affecting 
creditors' rights to which the relevant obligation is or may become 
subject. In addition, the NTCE Supplement includes the concept of 
``Fallback Discounting,'' which if designated to be applicable, 
provides a method for discounting the Quantum of the Claim (where it is 
not otherwise reduced under applicable law or pursuant to its own 
terms) of an obligation that is issued at less than 95% of its 
principal amount, based on straight-line interpolation between the 
issue price and the principal amount.
    ICE Clear Credit has been advised that CDS market participants are 
expected to commence transacting in CDS incorporating the NTCE 
Supplement (with Credit Deterioration Requirement and Fallback 
Discounting applicable) on or about January 27, 2020. In addition, ISDA 
has published, and opened for adherence, an NTCE Protocol pursuant to 
which parties may, on a multilateral basis, agree to amend outstanding, 
non-cleared CDS transactions to incorporate the NTCE Supplement. The 
amendments made by the NTCE Protocol are also expected to have an 
implementation date on or about January 27, 2020. Adherence to the 
protocol will thus make existing transactions fungible with 
transactions on the new terms. Accordingly, ICE Clear Credit is 
proposing to amend its Rules for relevant products to incorporate the 
NTCE Supplement, both for new and existing cleared transactions. For 
this purpose, the proposed ICC amendments will apply to all cleared CDS 
contracts with corporate (i.e., non-sovereign) reference entities, 
consistent with the NTCE Protocol and the expected approach for new CDS 
transactions. ICC proposes to make such changes effective by the 
industry implementation date.
    Specifically, ICC would amend Rule 20-102 to include new 
definitions for ``NTCE Amending Contracts'', which would be those 
Contracts being amended to incorporate the NTCE Supplement, as 
specified in a list to be maintained by ICC, and ``NTCE Effective 
Date'', which will be the date of implementation of the amendment. The 
NTCE Effective Date will initially be January 27, 2020 (or such later 
date as designated by ICC by Circular). Rule 20-102 would also include 
a definition for the NTCE Supplement.
    ICC would further amend each relevant subchapter of Chapter 26 of 
the Rules to implement the NTCE Supplement. A set of amendments would 
apply to index CDS transactions and a separate set of amendments would 
apply to single-name CDS transactions.
    In the case of index CDS, for CDX.NA Index CDS transactions, in 
subchapter 26A, in Rule 26A-102, the definition of CDX.NA Untranched 
Terms Supplement would be amended to include the new 2020 standard 
terms supplement for such transactions, as published by ISDA, which 
incorporates the NTCE Supplement, along with conforming changes to 
cross-references. Rule 26A-316 would be amended by adding a new 
paragraph (e), which provides that open positions in CDX.NA Untranched 
Contracts that are NTCE Amending Contracts would be amended, effective 
as of the NTCE Effective Date, to reference the updated 2020 standard 
terms supplement in lieu of the standard terms supplement previously in 
effect. This will have the effect of converting all existing CDX.NA 
Untranched Contracts to reference the new standard terms supplement, 
such that they will be fungible with new CDX.NA Untranched Contracts, 
which will also reference the new standard terms supplement. New 
paragraph (e) would also provide that the amendments will be effective 
regardless of whether any transaction record in the Deriv/SERV 
warehouse is updated to reflect the change.
    Substantially similar changes for other categories of index CDS 
would also be made in subchapters 26F (for iTraxx Europe Untranched 
Contracts) and 26J (for iTraxx Asia/Pacific Untranched Contracts).
    In the case of single-name CDS, for Standard North American 
Corporate (SNAC) Contracts, in subchapter 26B, Rule 26B-616 would be 
amended by adding a new paragraph (c), which provides that open 
positions in SNAC Contracts that are NTCE Amending Contracts would be 
amended, effective as of the NTCE Effective Date, to incorporate the 
NTCE Supplement and specify that Fallback Discounting and Credit 
Deterioration Requirement will be applicable. The contracts would also 
be amended to reference the new ISDA physical settlement matrix, to be 
published as of the NTCE Effective Date (or other relevant 
implementation date as determined by ICC). The amendments will have the 
effect of converting existing SNAC Contracts to reference the updated 
physical settlement matrix, such that they will be fungible with new 
SNAC Contracts, which will also reference that matrix. New paragraph 
(c) would also provide that the amendments will be effective regardless 
of whether any transaction record in the Deriv/SERV warehouse is 
updated to reflect the change.
    Substantially similar changes for other categories of single-name 
CDS would also be made in subchapters 26G (for Standard European 
Corporate Contracts), 26H (for Standard European Financial Corporate 
Contracts), 26M (for

[[Page 66038]]

Standard Australian Corporate Contracts), 26N (for Standard Australia 
Financial Corporate Contracts), 26O (for Standard Asia Corporate 
Contracts), 26P (for Standard Asia Financial Corporate Contracts) and 
26Q (for Standard Emerging Market Corporate Contracts).
(b) Statutory Basis
    ICC believes that the proposed rule changes are consistent with the 
requirements of Section 17A of the Act \5\ and the regulations 
thereunder applicable to it, including the applicable standards under 
Rule 17Ad-22.\6\ In particular, Section 17A(b)(3)(F) of the Act 
requires 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 ICC, the 
safeguarding of securities and funds in the custody or control of ICC 
or for which it is responsible, and the protection of investors and the 
public interest.\7\
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    \5\ 15 U.S.C. 78q-1.
    \6\ 17 CFR 240.17Ad-22.
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    The amendments incorporate changes to the standard terms of CDS 
Contracts that are being widely adopted by market participants to 
address potential concerns that have arisen with so-called narrowly 
tailored credit events. The amendments reflect amendments to the 2014 
Definitions, specifically with respect to the Failure to Pay and 
Outstanding Principal Balance definitions, that have been developed by 
ISDA, in consultation with market participants in both the cleared and 
uncleared CDS markets, and are set out in the NTCE Supplement. ICE 
Clear Credit understands that for the uncleared swap market, these 
amendments are expected to be widely implemented through the NTCE 
Protocol. ICE Clear Credit notes that the heads of the Commission, the 
Commodity Futures Trading Commission and the UK Financial Conduct 
Authority have stated that they welcome the efforts to implement the 
amendments set out in the NTCE Supplement and NTCE Protocol.\8\ ICE 
Clear Credit is proposing to adopt amendments to its Rules to implement 
these same changes for both new and existing contracts cleared by it. 
As a result, in ICE Clear Credit's view, the amendments will enhance 
the integrity of the credit derivatives markets and the confidence of 
market participants in those markets, and will therefore facilitate the 
prompt and accurate clearance and settlement of such contracts at ICC 
and will further facilitate the protection of investors and the public 
interest, within the meaning of Section 17A(b)(3)(F) of the Act. ICE 
Clear Credit does not believe the amendments will materially affect the 
safeguarding of securities and funds in the custody or control of ICC 
or for which it is responsible.
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    \8\ Update to June 2019 Joint CFTC-SEC-FCA Statement on 
Opportunistic Strategies in the Credit Derivatives Markets (Sept. 
19, 2019).
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    The amendments will also satisfy relevant requirements of Rule 
17Ad-22,\9\ as set forth in the following discussion.
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    \9\ 17 CFR 240.17Ad-22.
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    Legal Framework. Rule 17Ad-22(d)(1) requires a clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ``provide for a well-founded, 
transparent and enforceable legal framework for each aspect of its 
activities in all relevant jurisdictions.'' \10\ The amendments to the 
Rules are designed to supplement the contractual terms, consistent with 
industry initiatives, to address and reduce the likelihood of certain 
situations involving narrowly tailored credit events that have given 
rise to concerns among market participants and regulators, as described 
above. As such, ICC believes that the amendments will enhance the legal 
framework for clearing of CDS Contracts, consistent with the 
requirements of Rule 17Ad-22(d)(1).\11\
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    \10\ 17 CFR 240.17Ad-22(d)(1).
    \11\ 17 CFR 240.17Ad-22(d)(1).
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    Operational Risk. Rule 17Ad-22(d)(4) requires a clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ``identify sources of operational 
risk and minimize them through the development of appropriate systems, 
controls and procedures.'' \12\ ICC believes the amendments, by 
implementing the NTCE Supplement for existing and new CDS Contracts, 
will be consistent with, and eliminate basis risk as compared to, 
changes being made in the uncleared CDS markets. The changes will also 
ensure the fungibility of new and existing contracts in light of the 
NTCE Supplement amendments, which will facilitate ongoing risk 
management by the clearing house and market participants. As a result, 
in ICC's view, the amendments are consistent with the requirements of 
Rule 17Ad-22(d)(4).\13\
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    \12\ 17 CFR 240.17Ad-22(d)(4).
    \13\ 17 CFR 240.17Ad-22(d)(4).
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Credit 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 
reflect an industry-wide initiative designed to apply to all CDS market 
participants, in both the cleared and uncleared markets. ICC's specific 
amendments to its Rules will apply consistently across all Participants 
and Non-Participant Parties. ICC further expects that other market 
participants will make similar changes to their contracts and terms of 
trading. As a result, ICC does not expect that the proposed changes 
will adversely affect access to clearing or the ability of 
Participants, their customers or other market participants to continue 
to clear contracts, including CDS Contracts. ICC also does not believe 
the amendments would materially affect the cost of clearing or 
otherwise limit market Participants' choices for selecting clearing 
services. Accordingly, ICC does not believe the amendments would impose 
any burden on competition not necessary or appropriate in furtherance 
of the purpose of the Act.

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

    ICC has not solicited or received written comments with respect to 
the proposed rule changes. ICC will notify the Commission of any 
written comments on the proposed rule changes received by ICC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, security-based swap

[[Page 66039]]

submission, or advance notice is consistent with the Act. Comments may 
be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ICC-2019-013 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-2019-013. 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-2019-013 and should be 
submitted on or before December 23, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-25960 Filed 11-29-19; 8:45 am]
 BILLING CODE 8011-01-P


