[Federal Register Volume 85, Number 18 (Tuesday, January 28, 2020)]
[Notices]
[Pages 5058-5060]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01367]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88013; File No. SR-ICEEU-2019-027]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change, as Modified by Partial Amendment No. 1, 
Relating to Amendments to the ICE Clear Europe CDS Procedures

January 22, 2020.

I. Introduction

    On December 2, 2019, ICE Clear Europe Limited (``ICE Clear 
Europe''), filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend its CDS Procedures to implement the 2019 
Narrowly Tailored Credit Event Supplement to the 2014 ISDA Credit 
Derivatives Definitions (the ``NTCE Supplement''). On December 10, 
2019, ICE Clear Europe filed Partial Amendment No. 1 to the proposed 
rule change.\3\ The proposed rule change, as modified by Partial 
Amendment No. 1, was published for comment in the Federal Register on 
December 18, 2019.\4\ The Commission did not receive comments on the 
proposed rule change, as modified by Partial Amendment No. 1. For the 
reasons discussed below, the Commission is approving the proposed rule 
change, as modified by Partial Amendment No. 1 (hereinafter, ``proposed 
rule change'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Partial Amendment No. 1 amended the filing to remove from 
the filed Exhibit 5 certain dates in brackets and replace them with 
new dates and remove other language left in brackets; update page 
numbering in the filed Exhibit 2 so that the page numbering in the 
filed Exhibit 2 states ``of 59'' instead of ``of 60''; and update a 
reference to paragraph 8(c) of the CDS Procedures in the original 
filing so that it instead refers to paragraph 8.1(c) of the CDS 
Procedures.
    \4\ Securities Exchange Act Release No. 87722 (Dec. 12, 2019), 
84 FR 69421 (Dec. 18, 2019) (SR-ICEEU-2019-027) (``Notice'').
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II. Description of the Proposed Rule Change

A. Background

    Following certain events in the credit default swap (``CDS'') \5\ 
market, the International Swaps and Derivatives Association, Inc. 
(``ISDA''), in consultation with market participants, developed and 
published the NTCE Supplement.\6\ The NTCE Supplement reflects an 
effort by ISDA to address so-called narrowly-tailored credit events. 
According to ISDA, a narrowly-tailored credit event is an arrangement 
between a participant in the CDS marketplace and a corporation, through 
which the corporation triggers a credit event on CDS covering the 
corporation, thereby increasing payment to the buyers of CDS protection 
on the corporation while minimizing the impact on the corporation.\7\
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    \5\ The following description is substantially excerpted from 
the Notice. See Notice, 84 FR at 69421. Capitalized terms not 
otherwise defined herein have the meanings assigned to them in the 
ICE Clear Europe Rules or CDS Procedures.
    \6\ See ISDA Board Statement on Narrowly Tailored Credit Events, 
available at https://www.isda.org/2018/04/11/isda-board-statement-on-narrowly-tailored-credit-events/; see also Joint Statement on 
Opportunistic Strategies in the Credit Derivatives Market (``The 
continued pursuit of various opportunistic strategies in the credit 
derivatives markets, including but not limited to those that have 
been referred to as `manufactured credit events,' may adversely 
affect the integrity, confidence and reputation of the credit 
derivatives markets, as well as markets more generally.'') available 
at https://www.sec.gov/news/press-release/2019-106.
    \7\ See ISDA Board Statement on Narrowly Tailored Credit Events, 
available at https://www.isda.org/2018/04/11/isda-board-statement-on-narrowly-tailored-credit-events/.
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    The NTCE Supplement, if applied to a CDS transaction, would make 
two principal changes to the 2014 ISDA Credit Derivatives Definitions 
to address narrowly-tailored credit events.\8\ First, the NTCE 
Supplement would change the definition of the ``Failure to Pay'' credit 
event to exclude certain narrowly-tailored credit events through a new 
Credit Deterioration Requirement. The Credit Deterioration Requirement 
would provide that a failure of a corporation to make a payment on an 
obligation would not constitute a Failure to Pay Credit Event 
triggering CDS on that corporation if the failure does not directly or 
indirectly result from, or result in, a deterioration in the 
creditworthiness or financial condition of the corporation.\9\ Thus, a 
narrowly-tailored or manufactured failure to pay that does not reflect 
or result in a credit deterioration by a corporation would not 
constitute a Credit Event for CDS Contracts that incorporate the NTCE 
Supplement and thus would not necessarily trigger payment to buyers of 
CDS protection. The NTCE Supplement would also provide guidance related 
to the factors that would be relevant to determining whether a Failure 
to Pay Credit Event satisfies the Credit Deterioration Requirement. As 
would be the case with other Failure to Pay Credit Events under CDS 
contracts, the relevant Credit Derivatives Determinations Committee 
would, in the normal course, make the determination as to whether a 
Failure to Pay Credit Event satisfies the Credit Deterioration 
Requirement.
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    \8\ See ISDA 2019 NTCE Protocol FAQ, available at https://www.isda.org/protocol/isda-2019-ntce-protocol.
    \9\ See ISDA 2019 Narrowly Tailored Credit Event Supplement to 
the 2014 ISDA Credit Derivatives Definitions (Published on July 15, 
2019), available at https://www.isda.org/a/KDqME/Final-NTCE-Supplement.pdf.
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    Second, the NTCE Supplement would reduce the amount of payout a CDS 
protection buyer could claim in certain circumstances by imposing a new 
provision for Fallback Discounting. Fallback Discounting would discount 
a CDS protection buyer's claim for payout under a CDS contract where 
that claim for payout is based on an obligation issued by a corporation 
at a discount.\10\ This would address the potential scenario where a 
corporation issues a bond at a substantial discount to its principal 
amount and the bond is delivered in settlement of a CDS at its full 
principal amount. In this scenario, Fallback Discounting would prevent 
a buyer of CDS protection from using the full principal amount of the 
bond issued at a discount as a basis for payout under the CDS contract.
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    \10\ Id.
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B. Changes to CDS Procedures

    As described below, the proposed rule change would apply the NTCE 
Supplement to any non-sovereign single-name and index CDS contract that 
incorporates the 2014 ISDA definitions (a ``2014-type CDS Contract'') 
and that is open on, or entered into after, January 27, 2020 (or such 
later date as designated by ICE Clear Europe by Circular).
    The proposed rule change would add new defined terms to the CDS 
Procedures to include new definitions related to the NTCE Supplement. 
The proposed rule change would further define the effective date of the 
changes, the ``NTCE Protocol Effective Date,'' as January 27, 2020, or 
such later date as designated by ICE Clear Europe by Circular.
    The proposed rule change would next incorporate these new 
definitions into the defined terms associated with non-

[[Page 5059]]

sovereign single-name and index CDS contracts by amending the CDS 
Procedures to specify that the applicable contract definitions shall 
include the NTCE Supplement. This change would apply to any 2014-type 
CDS Contract that is part of an Open Contract Position on the NTCE 
Protocol Effective Date or is entered into on or after the NTCE 
Protocol Effective Date.
    In addition to this change, the proposed rule change would make 
specific changes to the terms associated with single-name CDS and index 
CDS to update those terms in light of the NTCE Supplement. With respect 
to single-name CDS, the proposed rule change would update certain 
single-name CDS contracts that are open on the NTCE Protocol Effective 
Date to reference the new physical settlement matrix that will apply to 
new single-name CDS entered into after the NTCE Protocol Effective 
Date. This change would apply to CDS with non-sovereign reference 
entities that are 2014-type CDS Contracts.
    With respect to index CDS, the proposed rule change would amend the 
terms associated with index CDS contracts to include the new standard 
terms supplement and confirmations issued in response to the NTCE 
Supplement. Such new standard terms supplement and confirmations would 
incorporate the NTCE Supplement. For new index CDS, the proposed rule 
change would apply the new standard terms supplement and confirmations 
incorporating the NTCE Supplement to any index CDS submitted for 
clearing on or after the NTCE Protocol Effective Date. For open index 
CDS, the proposed rule change would apply the NTCE Supplement to 2014-
type CDS Contracts and those that include a 2014-type CDS Contract as a 
component position on the NTCE Protocol Effective Date. The proposed 
rule change therefore would convert existing index CDS contracts to 
reference the new standard terms incorporating the NTCE Supplement, 
thereby ensuring that those existing contracts would be fungible with 
new index CDS contracts after the NTCE Protocol Effective Date.

III. 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 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the 
organization.\11\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \12\ and Rule 17Ad-22(e)(1) thereunder.\13\
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(e)(1).
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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 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, 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.\14\
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the NTCE Supplement would amend the underlying 
legal terms applicable to CDS contracts to which it applies by, among 
other things, limiting Credit Events to those that reflect a 
deterioration in the creditworthiness or financial condition of the 
relevant company. It also would reduce the amount of payout a CDS 
protection buyer could claim in certain circumstances where the claim 
for payout is based on an obligation issued by a company at a discount. 
Further, because ISDA has determined that the Protocol Effectiveness 
Condition is satisfied and set an implementation date of January 27, 
2020, the NTCE Supplement will apply to all single-name CDS contracts 
and components of index CDS contracts that incorporate the 2014 ISDA 
Credit Derivatives Definitions currently in place or entered into on or 
after that date.
    As noted above, because ICE Clear Europe will clear and settle CDS 
contracts that are subject to the changes being made by the NTCE 
Supplement, the proposed rule change would amend the CDS Procedures to 
incorporate the amendments resulting from the NTCE Supplement, thereby 
ensuring that ICE Clear Europe's CDS Procedures accurately reflect and 
appropriately apply the legal terms and conditions applicable to such 
CDS contracts.
    In the Commission's view, a lack of clarity in the underlying legal 
terms and conditions applicable to the transactions that ICE Clear 
Europe clears and settles could hinder ICE Clear Europe's ability to 
promptly and accurately clear and settle such transactions. Likewise, 
disputes regarding the applicable legal terms and conditions of such 
transactions could lead to disputes or confusion regarding the 
necessary and appropriate margin submitted in connection with such 
transactions, thereby threatening ICE Clear Europe's ability to 
safeguard such margin. Accordingly, by making the changes described 
above, and in particular by ensuring ICE Clear Europe's CDS Procedures 
accurately reflect and appropriately apply the legal terms and 
conditions applicable to the CDS contracts that are cleared and settled 
by ICE Clear Europe, the Commission believes that the proposed rule 
change would help ensure that ICE Clear Europe's CDS Procedures 
continue to promote the prompt and accurate clearance and settlement of 
such CDS contracts and assure the safeguarding of securities and funds 
in ICE Clear Europe's custody and control. For these same reasons the 
Commission also finds that the proposed rule change would, in general, 
protect investors and the public interest.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act.\15\
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(1)

    Rule 17Ad-22(e)(1) requires that ICE Clear Europe establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to provide for a well-founded, clear, transparent, 
and enforceable legal basis for each aspect of its activities in all 
relevant jurisdictions.\16\ As discussed above, the proposed rule 
change would help to clarify and ensure that ICE Clear Europe's CDS 
Procedures accurately reflect and appropriately apply the legal terms 
and conditions applicable to the CDS contracts that are cleared and 
settled by ICE Clear Europe. The Commission believes that this, in 
turn, would help ensure that the ICE Clear Europe CDS Procedures 
provide a consistent and enforceable legal basis for clearing and 
settling CDS contracts to which the NTCE Supplement applies in light of 
the amendments made by the NTCE Supplement.
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    \16\ 17 CFR 240.17Ad-22(e)(1).
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    Therefore, the Commission finds that the proposed rule change is 
consistent with Rule 17Ad-22(e)(1).\17\
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    \17\ Id.
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IV. 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

[[Page 5060]]

Section 17A(b)(3)(F) of the Act \18\ and Rule 17Ad-22(e)(1) 
thereunder.\19\
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    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(e)(1).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\20\ that the proposed rule change, as modified by Partial Amendment 
No. 1 (SR-ICEEU-2019-027), be, and hereby is, approved.\21\
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    \20\ 15 U.S.C. 78s(b)(2).
    \21\ 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).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-01367 Filed 1-27-20; 8:45 am]
 BILLING CODE 8011-01-P


