[Federal Register Volume 85, Number 22 (Monday, February 3, 2020)]
[Notices]
[Pages 6007-6009]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01910]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88064; File No. SR-ICC-2019-010]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Partial Amendment No. 2 to Proposed Rule Change Relating to 
Amendments to the ICC Clearing Rules To Address Non-Default Losses

January 28, 2020.
    On August 8, 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 
amend ICC's Clearing Rules (the ``Rules'') to address treatment of 
losses not related to a Clearing Participant default. The proposed rule 
change was published for comment in the Federal Register on August 28, 
2019.\3\ On October 4, 2019, the Commission designated a longer period 
of time for Commission action on the proposed rule change until 
November 26, 2019.\4\ On October 7, 2019, ICC filed a partial amendment 
(``Partial Amendment No. 1'') to modify the proposed rule change.\5\ On 
November 25, 2019, the Commission published notice of Partial Amendment 
No. 1, solicited comments from interested persons on the proposed rule 
change as modified by Partial Amendment No. 1, and instituted 
proceedings under Section 19(b)(2)(B) of the Act \6\ to determine 
whether to approve or disapprove the proposed rule change as modified 
by Partial Amendment No. 1.\7\ On January 24, 2020, ICC filed Partial 
Amendment No. 2 to the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Self-Regulatory Organizations; ICE Clear Credit LLC; 
Proposed Rule Change, Security-Based Swap Submission, or Advance 
Notice Relating to the ICC Clearing Rules; Exchange Act Release No. 
86729 (Aug. 22, 2019); 84 FR 45191 (Aug. 28, 2019) (SR-ICC-2019-
010).
    \4\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Designation of Longer Period for Commission Action on Proposed 
Rule Change Relating to Amendments to the ICC Clearing Rules To 
Address Non-Default Losses; Exchange Act Release No. 87225 (Oct. 4, 
2019); 84 FR 54712 (Oct. 10, 2019) (SR-ICC-2019-010).
    \5\ 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.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Partial Amendment No. 1 and Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove Proposed 
Rule Change, as Modified by Partial Amendment No. 1, Relating to 
Amendments to the ICC Clearing Rules To Address Non-Default Losses; 
Exchange Act Release No. 87622 (Nov. 25, 2019); 84 FR 66041 (Dec. 2, 
2019) (SR-ICC-2019-010).
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    Pursuant to Section 19(b)(1) of the Act \8\ and Rule 19b-4 
thereunder \9\ the Commission is publishing notice of Partial Amendment 
No. 2 to the proposed rule change as described in Items I and II below, 
which Items have been prepared by ICC. The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
modified by Partial Amendments No. 1 and No. 2, from interested 
persons.
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    \8\ 15 U.S.C. 78s(b)(1).
    \9\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of Partial 
Amendment No. 2 to the Proposed Rule Change

    ICC is filing this Partial Amendment No. 2 to SR-ICC-2019-010 (the 
``Filing'') to make certain clarifications related to the allocation of 
Investment Losses.\10\ With this Partial Amendment No. 2, ICC is 
including Exhibit 4, which reflects changes to the text of the proposed 
rule change pursuant to this Partial Amendment No. 2, and Exhibit 5, 
which reflects all proposed changes to the current rule text, as 
amended by this Partial Amendment No. 2. This Partial Amendment No. 2 
makes the following changes to the Filing: (1) It specifies that the 
allocation of Investment Losses is limited to Investing Participants in 
the case of Investment Losses in the client origin account and (2) it 
clarifies that Investment Losses would be determined separately for the 
house account and client origin account.
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    \10\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules and the Filing.
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    In this Partial Amendment No. 2, ICC proposes new term ``Investing 
Participant'' in Rule 102. An Investing Participant would be defined in 
Rule 402(k) as a Participant that has instructed ICC to invest cash 
Initial Margin provided by it in respect of its client origin account. 
The incorporation of this term clarifies that, in the case of an 
Investment Loss in the client origin account, the obligation to pay an 
Investment Loss Contribution is in respect of Investing Participants 
under the proposed approach.
    Additionally, ICC proposes in this Partial Amendment No. 2 that 
Investment Losses would be determined separately for the house account 
and client origin account. In the event the Investment Loss Resources 
were insufficient to cover the Investment Loss (an ``Investment Loss 
Shortfall''), ICC would have the right, under Rule 811(d), to allocate 
the Investment Loss Shortfall to Participants (including any Defaulting 
Participants). In the case of an Investment Loss in the house account, 
each Participant would be obligated to make a contribution (an 
``Investment Loss Contribution''), based on its pro rata share of the 
Investment Loss Shortfall, determined based on the proportion of its 
aggregate Initial Margin (both house and customer) and General Guaranty 
Fund contributions (its ``Participant IM/GF Contribution'') as compared 
to the aggregate Participant IM/GF Contributions for all Participants. 
For example, in the case of an Investment Loss Shortfall of 3,000 units 
in the house account, each Participants is obligated make an Investment 
Loss Contribution. Assuming the aggregate Participant IM/GF 
Contributions for all Participants is 525,000 units and Participant 
``ABC'' has a Participant IM/GF Contribution of 26,250 (5%), Investing 
Participant ``ABC'' has an Investment Loss Contribution of 150 units 
(5% of the Investment Loss Shortfall).
    In the case of an Investment Loss in the client origin account, 
each Investing Participant would be obligated to pay an Investment Loss 
Contribution equal to its pro rata share of the Investment Loss 
Shortfall, determined based on the proportion of its Participant IM/GF 
Contribution to the aggregate Participant IM/GF Contributions of all 
Investing Participants. For example, in the case of an Investment Loss 
Shortfall of 3,000 units in the client origin account where only 27 of 
29 Participants are Investing Participants, only 27 Investing 
Participants are obligated make an Investment Loss Contribution. 
Assuming the aggregate Participant IM/GF Contributions of all Investing 
Participants is 500,000 units and Investing Participant ``XYZ'' has a 
Participant IM/GF Contribution of 20,000 (4%), Investing Participant 
``XYZ'' has an Investment Loss Contribution of 120 units (4% of the 
Investment Loss Shortfall). Whether a Participant is an Investing 
Participant would be determined as of the time immediately prior to the 
Investment Loss. In the case of simultaneous Investment Losses for the 
house account and client origin account, available Investment Loss 
Resources would be applied pro rata based on the amount of such 
Investment Losses.
    The proposed approach in the Filing mutualizes Investment Losses 
across Participants, in these remote loss scenarios where such losses 
exceed applicable ICC resources allocated to such losses. This 
Amendment No. 2 further clarifies that, with respect to the

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client origin account, the obligation to pay an Investment Loss 
Contribution is in respect of Investing Participants. Even though such 
investment elections by Participants may shift the balances between 
investment assets (subject to Investment Losses) and custodial assets 
(subject to Custodial Losses), ICC believes that it is appropriate to 
limit the allocation of Investment Losses in the client origin account 
to Investing Participants. Moreover, ICC does not anticipate a 
significant amount of non-Investing Participants. In ICC's view, the 
amendments provide an appropriate and equitable method to allocate the 
loss from an extreme non-default loss scenario and will facilitate 
ICC's ability to allocate such loss so that it can continue clearing 
operations.
    Additionally, ICC proposes the following clarifying revisions to 
the Purpose and Statutory Basis sections of the Filing in the Form 19b-
4 and Exhibit 1A.
     ICC proposes to add the following text at the end of the 
second paragraph under ``Definition of Loss Categories'' on page 5 of 
the Form 19b-4 and on page 25 of Exhibit 1A: Investment Losses would be 
determined separately for the house account and client origin account.
     ICC proposes to add the following text at the end of the 
third paragraph under ``Treatment of Losses'' on page 6 of the Form 
19b-4 and on page 27 of Exhibit 1A: In the case of simultaneous 
Investment Losses for the house account and client origin account, 
available Investment Loss Resources would be applied pro rata based on 
the amount of such Investment Losses.
     ICC proposes to amend the fourth paragraph under 
``Treatment of Losses'' on page 7 of the Form 19b-4 and on page 27 of 
Exhibit 1A accordingly (new text is bolded and deleted text is 
bracketed): In the event the Investment Loss Resources were 
insufficient to cover the Investment Loss (an ``Investment Loss 
Shortfall''), ICC would have the right, under Rule 811(d), to allocate 
the Investment Loss Shortfall to [all] Participants (including any 
Defaulting Participants). In th[at]e case of an Investment Loss in the 
house account, each Participant would be obligated to make a 
contribution (an ``Investment Loss Contribution''), based on its pro 
rata share of the Investment Loss Shortfall, determined based on the 
proportion of its aggregate Initial Margin (both house and customer) 
and General Guaranty Fund contributions (its ``Participant IM/GF 
Contribution'') as compared to the aggregate Participant IM/GF 
Contributions for all Participants. In the case of an Investment Loss 
in the client origin account, each Investing Participant (i.e., a 
Participant that has instructed ICC to invest cash Initial Margin 
provided by it in respect of its client origin account) would be 
obligated to pay an Investment Loss Contribution equal to its pro rata 
share of the Investment Loss Shortfall, determined based on the 
proportion of its Participant IM/GF Contribution to the aggregate 
Participant IM/GF Contributions of all Investing Participants. Under 
Rule 811(e), the maximum contribution of a Participant for an 
Investment Loss Contribution in respect of any event giving rise to an 
Investment Loss may not exceed its Participant IM/GF Contribution. 
Investment Loss Contributions could only be applied to Investment Loss 
Shortfalls (and not Custodial Loss Shortfalls).
     ICC proposes to amend the second paragraph on page 17 of 
the Form 19b-4 and the third paragraph on page 37 of Exhibit 1A 
accordingly (new text is bolded and deleted text is bracketed): Under 
the amendments, losses in excess of the amount of Investment Loss 
Resources or Custodial Loss Resources would be shared among 
Participants as set forth in Rule 811[, proportionally based on their 
respective aggregate initial margin and guaranty fund contributions]. 
ICC has determined that the allocation of Investment Losses or 
Custodial Losses, as the case may be, to Participants (which are 
limited to Investing Participants in the case of Investment Losses in 
the client origin account) should be made proportionately based on the 
relative Participant IM/GF Contributions. The approach mutualizes both 
Investment Losses and Custodial Losses across [all] Participants, in 
these remote loss scenarios where such losses exceed applicable ICC 
resources allocated to such losses. The approach also ensures that, 
with respect to the client origin account, the obligation to pay an 
Investment Loss Contribution is in respect of Investing Participants. 
Participants may be required to make Loss Contributions that are 
independent of the particular mix of cash and securities provided by 
the Participant as margin or guaranty fund assets[, or any investment 
elections made by the Participant with respect to its customer origin 
account]. Nonetheless, ICC believes that the approach is appropriate in 
light of the remote nature of the potential losses, the fact that 
Participant margin and guaranty fund assets are invested and custodied 
collectively, and the practical and operational considerations that 
would be required for an approach that attempted to allocate losses 
based on a Participant's particular assets [and elections]. [In this 
regard, in ICC's view, individual elections by a Participant with 
respect to its customer origin account are unlikely to affect the 
overall risk of Investment Loss and Custodial Loss (and indeed, 
investment elections by Participants will generally only shift the 
balances between investment assets (subject to Investment Losses) and 
custodial assets (subject to Custodial Losses)). Regardless of any 
elections, t]The balance of investments, and the particular investments 
made, may change on a daily (or more frequent) basis, as may the 
balance of assets (and types of assets) held with any individual 
Custodian, meaning that any attempt to allocate based on specific 
Participant positions would have to be done on a real-time basis. 
Furthermore, [all] Participant assets are held and invested on an 
aggregate basis (excluding Participants that have instructed ICC not to 
invest cash Initial Margin provided by it in respect of its client 
origin account) [(]such that investments cannot be allocated to 
particular Participants[)], and all such Participants receive a blended 
rate of return from aggregate clearing house investment activity. [As a 
result,] ICC does not believe it would be operationally feasible, or 
beneficial to Participants, to attempt to allocate Investment or 
Custodial Losses based on [particular investment elections made or] 
assets maintained by individual Participants with the clearing house on 
a real time basis. Instead, ICC believes it is more appropriate, in 
light of these operational and other considerations, to allocate 
Investment Losses and Custodial Losses, if any, to Participants (which 
are limited to Investing Participants in the case of Investment Losses 
in the client origin account) based on their respective aggregate 
amount of Margin and General Guaranty Fund assets at the clearing 
house.

II. Date of Effectives of Proposed Rule Change and Timing for 
Commission Action

    Because the Commission instituted proceedings to determine whether 
to approve or disapprove the proposed rule change,\11\ the Commission 
shall by order approve, disapprove, or designate

[[Page 6009]]

a longer period for Commission action on proceedings to determine 
whether to approve or disapproved the proposed rule change, as modified 
by Partial Amendments No. 1 and No. 2, by February 24, 2020.
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    \11\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Partial Amendment No. 1 and Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove Proposed 
Rule Change, as Modified by Partial Amendment No. 1, Relating to 
Amendments to the ICC Clearing Rules To Address Non-Default Losses; 
Exchange Act Release No. 87622 (Nov. 25, 2019); 84 FR 66041 (Dec. 2, 
2019) (SR-ICC-2019-010).
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III. 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 Amendments No. 1 and No. 2, 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-2019-010 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-2019-010. 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-2019-010 and should be 
submitted on or before February 18, 2020.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-01910 Filed 1-31-20; 8:45 am]
 BILLING CODE 8011-01-P


