[Federal Register Volume 85, Number 38 (Wednesday, February 26, 2020)]
[Notices]
[Pages 11129-11136]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03775]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88253; File No. SR-ICC-2019-010]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change, as Modified by Partial Amendment No. 1 
and Partial Amendment No. 2, Relating to Amendments to the ICC Clearing 
Rules To Address Non-Default Losses, on an Accelerated Basis

February 20, 2020.

I. Introduction

    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'') \3\ 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.\4\ The Commission received comments regarding the proposed rule 
change.\5\
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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 Clearing Rules; Exchange Act Release No. 
86729 (Aug. 22, 2019); 84 FR 45191 (Aug. 28, 2019) (SR-ICC-2019-010) 
(``Notice'').
    \5\ Comments are available at https://www.sec.gov/comments/sr-icc-2019-010/sricc2019010.htm.
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    On October 4, 2019, the Commission designated a longer period of 
time for Commission action on the proposed rule change until November 
26, 2019.\6\ On October 7, 2019, ICC filed a partial amendment 
(``Partial Amendment No. 1'') to modify the proposed rule

[[Page 11130]]

change.\7\ 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 \8\ to 
determine whether to approve or disapprove the proposed rule change as 
modified by Partial Amendment No. 1.\9\ On January 24, 2020, ICC filed 
Partial Amendment No. 2 to the proposed rule change.\10\ Notice of 
Partial Amendment No. 2 was published in the Federal Register on 
February 3, 2020, and in that notice the Commission requested comments 
on the proposed rule change, as modified by Partial Amendments No. 1 
and No. 2.\11\ The Commission did not receive any comments in response 
to the Notice of Partial of Amendment No. 2.
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    \6\ 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).
    \7\ 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.
    \8\ 15 U.S.C. 78s(b)(2)(B).
    \9\ 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).
    \10\ In Partial Amendment No. 2 to the proposed rule change, ICC 
modified the initial filing to (1) differentiate the treatment of 
investment losses in the Client Origin Account from the treatment of 
investment losses in the House Origin Account and (2) limit the 
allocation of investment losses to those Clearing Participants that 
have instructed, or are deemed to have instructed, ICC to invest the 
cash Initial Margin in the Client Origin Account.
    \11\ 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; Exchange Act Release No. 88064 (Jan. 28, 2020); 85 
FR 6007 (Feb. 3, 2020).
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    For the reasons discussed below, the Commission is approving the 
proposed rule change, as modified by Partial Amendment No. 1 and 
Partial Amendment No. 2 (hereinafter, ``proposed rule change'') on an 
accelerated basis.

II. Background

    The proposed rule change is principally designed to address and 
manage the risks posed to ICC by potential non-default loss events, 
including investment losses, custodial losses with respect to margin 
and General Guaranty Fund contributions, and other losses resulting 
from general business risk, operational risk, or other non-default 
scenarios, to ensure that ICC has a mechanism to fully allocate any 
such losses and thereby enhance its ability to continue orderly 
clearing operations or otherwise maintain its viability as a going 
concern in the event that such losses are realized.\12\ To that end, 
the proposed rule change would define three exclusive categories of 
losses not related to a Clearing Participant default: (i) Investment 
Losses, (ii) Custodial Losses, and (iii) Non-Default Losses. In 
addition, with respect to the treatment of such losses, the proposed 
rule change would: (i) Define the resources of ICC that ICC would apply 
to cover each such category of losses; (ii) assign responsibility to 
Clearing Participants, in certain circumstances, to make contributions 
with respect to Investment Losses and Custodial Losses (but not Non-
Default Losses); and (iii) in the event that ICC recovers funds related 
to Investment Losses or Custodial Losses, address the treatment of 
recoveries by ICC with respect to such losses. The proposed rule change 
would also make additional changes related to all three categories of 
losses, including changes to take into account the effect of the 
proposed rule change on other ICC rules.
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    \12\ See Notice, 84 FR at 45193.
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A. Loss Categories

    The proposed rule change would add to Rule 102 new definitions for 
``Investment Losses'' and ``Non-Default Losses'' and revise the 
definition of ``Custodial Losses.''
    Under the proposed rule change, Investment Losses would be defined 
as losses incurred or suffered by ICC in connection with the default of 
the issuer of any investment of Margin or General Guaranty Fund assets 
by ICC, or the default of the counterparty to any repurchase, reverse 
repurchase contract, or similar transaction used to invest or reinvest 
such Margin or General Guaranty Fund assets. The proposed rule change 
would also include as an Investment Loss change in value of investments 
due to market movements, but would exclude a Custodial Loss, a negative 
yield or interest rate on an investment, and a loss on a security or 
non-cash asset posted by a Clearing Participant as a Margin or Guaranty 
Fund contribution.
    Currently, Rule 406(g) defines Custodial Losses as those arising 
out of or relating to the holding, investment, or use of the Client 
Omnibus Margin Account or assets credited thereto from time to time, 
and specifies that ICC shall not be liable for any such losses except 
to the extent that they result from the gross negligence or willful 
misconduct of ICC, or from the investment of such assets by ICC in its 
discretion within the meaning of CFTC Rule 1.29(b). The proposed rule 
change would move the definition of Custodial Losses to Section 102 of 
ICC's Rules (Definitions) and revise it to mean losses of Margin or 
General Guaranty Fund assets (including declines in the value thereof) 
as a result of (i) the insolvency or failure of a Custodian or (ii) the 
embezzlement or theft of such assets by any person (other than ICC or 
its employees or representatives). The proposed rule change would 
define a Custodian for this purpose as a bank or trust company, central 
bank, central securities depository or other third party settlement 
system used by ICC for the deposit, holding, custody or transfer of 
cash or securities. Additionally, because the proposed rule change 
would create a stand-alone definition of Investment Losses, as 
described above, the revised definition of Custodial Losses would 
specify that Custodial Losses would not include Investment Losses.
    The proposed rule change would define Non-Default Losses to include 
losses incurred or suffered by ICC that are neither Investment Losses 
nor Custodial Losses and arise in connection with an event other than a 
Clearing Participant's default. The definition thus would capture 
losses from general business or operational risk that do not constitute 
Custodial Losses or Investment Losses.

B. Treatment of Losses

i. ICC Resources
    The proposed rule change would require that, with respect to an 
Investment Loss or Custodial Loss, ICC would first apply any available 
Investment Loss Resources or Custodial Loss Resources, as applicable. 
ICC would determine the amount of such resources based on its 
assessment of its potential exposure to investment losses under its 
investment policies and procedures, and the ICC Board would 
periodically conduct a risk-based assessment of the appropriate level 
of Investment Loss Resources.\13\ As an initial measure of its 
potential exposure to investment losses, ICC has taken into account 
components of the European Union capital requirements applicable to 
central counterparties (which are not directly applicable to ICC), in 
particular the capital requirements for credit, counterparty and market 
risks and operational and legal risks.\14\ Based on its initial 
assessment of ICC's potential Investment Losses utilizing this 
methodology, ICC determined that its

[[Page 11131]]

potential exposure to Investment Losses is $20 million, and therefore 
the proposed rule change would initially define Investment Loss 
Resources as $20 million of ICC's own assets designated by ICC as 
available to be applied to Investment Losses. Similarly, based on ICC's 
initial assessment of its potential Custodial Losses utilizing this 
methodology, ICC determined that its potential exposure to Custodial 
Losses is $32 million, and therefore the proposed rule change would 
initially define Custodial Loss Resources as $32 million of ICC's own 
assets designated by ICC as available to be applied to Custodial 
Losses. In either case, as noted, the ICC Board could modify the amount 
from time to time, and such determination would be risk-based in light 
of ICC's potential exposure to such losses.
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    \13\ See Notice, 84 FR at 45194.
    \14\ See id.
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    Unlike Investment Losses and Custodial Losses, the proposed rule 
change would not define or place a cap on the specific ICC resources 
available to satisfy Non-Default Losses. Rather, proposed Rule 811(b) 
would require that Non-Default Losses, whatever the amount, be met from 
available ICC capital and other ICC assets (including available 
retained earnings, Investment Loss Resources, and Custodial Loss 
Resources). Thus, the proposed rule change would make ICC solely 
responsible for Non-Default Losses and would not allocate Non-Default 
Losses to Participants. Similarly, proposed Rule 811(b) would prohibit 
ICC from covering Non-Default Losses with ICC contributions to default 
resources or with Clearing Participant contributions to Margin, General 
Guaranty Fund, or Assessments.
ii. Responsibility of Clearing Participants
    Unlike Non-Default Losses, for which ICC would be solely 
responsible, in the event Investment Loss Resources are insufficient to 
cover an Investment Loss (an ``Investment Loss Shortfall''), ICC would 
have the right, under proposed Rule 811(d), to allocate the Investment 
Loss Shortfall to Clearing Participants (including any Defaulting 
Participants). In that event, the Clearing Participants would be 
obligated to make a contribution (an ``Investment Loss Contribution''), 
based on their pro rata share of the Investment Loss Shortfall, 
determined based on the methodology described below. Investment Loss 
Contributions could only be applied to Investment Loss Shortfalls (and 
not Custodial Loss Shortfalls). Under proposed Rule 811(e), a Clearing 
Participant's pro rata Investment Loss Contribution in respect of any 
event giving rise to an Investment Loss could not exceed its aggregate 
Initial Margin (both house and customer) and General Guaranty Fund 
contributions (its ``Participant IM/GF Contribution'').
    The method for determining a Clearing Participant's Investment Loss 
Contribution would depend on whether the Investment Loss occurred with 
respect to the House Origin Account or Client Origin Account. In the 
case of an Investment Loss in the House Origin Account, a Clearing 
Participant's Investment Loss Contribution would be based on the 
proportion of 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, only those 
Clearing Participants that are ``Investing Participants'' (as defined 
below) would be obligated to make an Investment Loss Contribution. 
Specifically, 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, rather than the aggregate 
Participant IM/GF Contributions of all Clearing Participants (as would 
be the case in the House Origin Account). In the event of simultaneous 
Investment Losses for the House Origin Account and Client Origin 
Account, ICC would apply available Investment Loss Resources pro rata 
based on the amount of such Investment Losses. Thus, with respect to an 
Investment Loss Shortfall in the Client Origin Account, only those 
Clearing Participants that are Investing Participants would be required 
to contribute to the shortfall, rather than all Clearing Participants, 
and, moreover, each Investing Participant's pro rata share of the 
shortfall would be determined by the ratio of its Participant IM/GF 
Contribution to the aggregate Participant IM/GF Contributions of all 
Investing Participants.
    Proposed Rule 402(k) would define ``Investing Participant'' as any 
Clearing Participant that (1) has instructed ICC to invest the cash 
Initial Margin in its Client Origin Account or (2) is deemed to have 
instructed ICC to invest the cash Initial Margin in its Client Origin 
Account. As provided in proposed Rule 402(k), a Clearing Participant 
would be required to instruct ICC whether ICC should invest cash 
Initial Margin. If instructed to invest, ICC would invest the cash in 
accordance with its Rules and investment policies procedures and 
applicable law. If instructed not to invest, ICC would hold the cash in 
a deposit account with a Custodian in accordance with ICC's policies 
and procedures. If a Clearing Participant does not provide an 
instruction, then (i) for U.S. dollar cash, the Clearing Participant 
would be deemed to have instructed ICC not to invest such cash, and 
(ii) for cash in other (non U.S. dollar) currencies, the Clearing 
Participant would be deemed to have instructed ICC to invest such cash. 
Thus, the term Investing Participant and therefore responsibility for 
an Investment Loss Shortfall in the Client Origin Account would apply 
to any Clearing Participant that instructs ICC to invest cash Initial 
Margin or that makes no instruction with respect to cash Initial Margin 
in currencies other than U.S. dollars.
    Likewise, in the event that Custodial Loss Resources are 
insufficient to cover a Custodial Loss (a ``Custodial Loss 
Shortfall''), ICC would have the right, under proposed Rule 811(f), to 
allocate the Custodial Loss Shortfall to all Clearing Participants 
(including any Defaulting Participants). The proposed rule change would 
give ICC the right to allocate Custodial Loss Shortfalls to Clearing 
Participants in the same fashion as ICC would allocate Investment Loss 
Shortfalls in the House Origin Account. In other words, each Clearing 
Participant would be obligated to make a contribution based on its pro 
rata share of the Custodial Loss Shortfall, determined based on the 
proportion of its Participant IM/GF Contribution as compared to the 
aggregate Participant IM/GF Contributions for all Participants. In the 
event of a Custodial Loss where the Custodian is a central bank, 
however, proposed Rule 811(f) would make the entire Custodial Loss as a 
Custodial Loss Shortfall subject to allocation to Clearing Participants 
(as opposed to first applying Custodial Loss Resources). As discussed 
in the Notice, ICC believes such an approach is justified by the remote 
nature of such a failure by a central bank and the preference among 
regulators and Clearing Participants for central bank custody.\15\ 
Finally, as with Investment Losses, a Clearing Participant's pro rata 
contribution in respect of any event giving rise to a Custodial Loss 
could not exceed its Participant IM/GF Contribution.
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    \15\ Notice, 84 FR at 45195.
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iii. Recoveries by ICC
    Proposed Rule 811(l) would provide a ``reverse waterfall'' for 
allocation of any recoveries ICC obtains with respect to an Investment 
Loss or Custodial Loss

[[Page 11132]]

allocated to Clearing Participants. Under the proposed rule, after 
deduction of expenses of ICC, ICC would provide the recoveries to the 
parties that bore the loss (whether ICC, Clearing Participants, or 
both) in the reverse order from which they were initially applied. The 
proposed rule change would also set out ICC's obligations to seek 
recoveries in respect of Investment Losses and Custodial Losses, 
generally using the same degree of care as it exercises with respect to 
its own assets that are not subject to allocation under proposed Rule 
811.

C. Additional Changes

    Proposed Rule 811(u) would contain a general disclaimer by ICC of 
losses resulting from the holding, deposit, custody, transfer, or 
investment of Margin, General Guaranty Fund contributions and 
Assessment Contributions, except as otherwise provided in Rule 811, and 
provided that Rule 811 would not limit any liability of ICC for its own 
gross negligence or willful misconduct. The proposed rule change would 
relatedly amend Rule 406 to remove an existing disclaimer for custodial 
losses, which would be superseded by the new provisions in the proposed 
rule change.
    Proposed Rule 811 would also address certain procedures for notices 
to Participants of the use of Investment Loss Resources and Custodial 
Loss Resources and of required Loss Contributions in respect of 
Investment Losses and Custodial Losses. The proposed rule would also 
define the timing and manner of collection of Loss Contributions 
(including through offset against obligations of ICC to return margin 
or other assets), and for currency conversions as necessary. The 
proposed rule would specify that the requirement to make Loss 
Contributions would not reduce or otherwise affect other obligations of 
a Clearing Participant to make payments or deliveries to ICC under the 
Rules, or otherwise limit ICC's netting, setoff and other rights under 
the Rules. In particular, the proposed rule would separate obligations 
to make Loss Contributions from any obligation to make an Assessment 
Contribution and would specify that the limitations on Assessments 
under the Rules would not apply to liabilities for Loss Contributions. 
The proposed rule would similarly explain that use of the Loss 
Contribution procedures would also not be deemed to constitute an ICE 
Clear Credit Default under the Rules.
    Finally, proposed Rule 811 would require ICC to disclose to 
Clearing Participants the amount of Custodial Loss Resources and 
Investment Loss Resources at least annually, and to notify Clearing 
Participants promptly following any changes in such amounts. Proposed 
Rule 811 would further specify that if such loss resources are applied 
as a result of a loss event, any replenishment of such resources by ICC 
would not reduce the amount of any Custodian Loss Shortfall or 
Investment Loss Shortfall (or resulting Loss Contributions) for that 
loss event. Finally, proposed Rule 811 would explicitly limit ICC's 
liability for Custodial Losses or Investment Losses to the amount of 
designated Custodial Loss Resources or Investment Loss Resources, as 
applicable, from time to time.

III. Statutory Standards

    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.\16\ The Commission addresses in its review of the 
proposed rule change the following relevant provisions of the Exchange 
Act and the rules and regulations thereunder applicable to registered 
clearing agencies:
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    \16\ 15 U.S.C. 78s(b)(2)(C).
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     Section 17A(b)(3)(D) of the Exchange Act requires, in 
part, that the rules of ICC provide for the equitable allocation of 
reasonable dues, fees, and other charges among its participants.\17\
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    \17\ 15 U.S.C. 78q-1(b)(3)(D).
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     Section 17A(b)(3)(F) of the Exchange Act requires, in 
part, that the rules of ICC be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, to assure 
the safeguarding of securities and funds which are in the custody or 
control of ICC or for which it is responsible, and to protect investors 
and the public interest.\18\
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    \18\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(d)(3) under the Exchange Act requires that 
ICC establish, implement, maintain and enforce written policies and 
procedures reasonably designed to hold assets in a way that minimizes 
risk of loss or of delay in its access to them.\19\
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    \19\ 15 U.S.C. 17Ad-22(d)(3).
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     Rule 17Ad-22(d)(8) under the Exchange act 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.\20\
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    \20\ 15 U.S.C. 17Ad-22(d)(8).
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IV. Discussion and Commission Findings

    After considering the entire record, and for the reasons given 
below, the Commission finds that the proposed rule change is consistent 
with Section 17A(b)(3)(F) and (D) of the Act \21\ and Rules 17Ad-
22(d)(3) and 17Ad-22(d)(8) thereunder.\22\
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    \21\ 15 U.S.C. 78q-1(b)(3)(F), (D).
    \22\ 17 CFR 240.17Ad-22(d)(3) 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.\23\ Based on its 
review of the record, the Commission finds the proposal is consistent 
with Section 17A(b)(3)(F) of the Exchange Act.
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    \23\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that the proposed rule change as a whole 
would help enhance ICC's ability to manage non-default losses 
generally, and more specifically to continue operating as a going 
concern in the event that it incurs potential operational, general 
business risk, or other non-default losses by, among other things, 
ensuring that ICC's Rules clearly and transparently identify, define 
and address specific categories of potential non-default risks that ICC 
will attempt to assess and cover. For example, ICC has assessed its 
potential exposure to Investment, Custodial, and Non-Default Losses--
taking into account relevant components of the European Union capital 
requirements applicable to central counterparties, including the 
capital requirements for credit, counterparty, market, operational, and 
legal risks--to determine an initial measure of ICC's exposure to such 
risks, and has selected and set its level of Investment Loss Resources 
and Custodial Loss Resources to be commensurate with those 
measures.\24\ At the same time, ICC

[[Page 11133]]

proposes to designate the specific ICC resources that would be used to 
cover such losses and the process for replenishing such resources 
should such losses materialize. Similarly, with respect to Non-Default 
Losses, ICC proposes to designate that such losses be met from 
available ICC capital and other ICC assets and to prohibit the use of 
ICC contributions to default resources or Clearing Participant 
contributions to Margin, General Guaranty Fund, or Assessments to cover 
such losses. In addition, ICC also proposes to periodically conduct 
risk-based assessments of the appropriate level of ICC resources 
designed to fully cover such potential losses and to reserve the 
ability to adjust such resources as needed.\25\ Correspondingly, ICC 
proposes to create new definitions for Investment Losses and Non-
Default Losses and the term Custodian, and modify the existing 
definition of Custodial Losses to ensure consistency with the above 
descriptions. The Commission did not receive any comments on these 
aspects of the proposal.
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    \24\ See Notice, 84 FR at 45194.
    \25\ See Id.
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    The proposed rule change would also limit ICC's liability for 
Custodial Losses or Investment Losses in various ways. For example, the 
proposed rule change would specify that ICC's liability for Custodial 
and Investment Losses would be limited to the amount of the designated 
Custodial Loss Resources or Investment Loss Resources, respectively, 
and would clarify that ICC would not be liable for losses resulting 
from the holding, deposit, custody, transfer, or investment of Margin, 
General Guaranty Fund contributions, and Assessment Contributions, 
absent ICC's own gross negligence or willful misconduct. As such, the 
proposed rule change is designed to align the limitation of ICC's 
liability for Custodial and Investment Losses with the amount that ICC 
has determined is sufficient to fully cover its potential exposure to 
such losses.
    As discussed in more detail in the Notice, ICC views potential loss 
scenarios where Investment or Custodial Losses could exceed applicable 
ICC resources (i.e., an Investment Loss Shortfall or Custodial Loss 
Shortfall), as extreme and therefore remote.\26\ Nevertheless, by 
stipulating that ICC may only allocate Investment Loss Shortfalls in 
the House Origin Account and Custodial Loss Shortfalls to Clearing 
Participants and Investment Loss Shortfalls in the Client Origin 
Account to Investing Participants (up to their Participant IM/GF 
Contribution), the proposed rule change is designed to allow ICC to 
plan for, and fully allocate Investment Losses and Custodial Losses 
that materialize as a result of, remote and unprecedented, but 
potentially extreme, loss events that could exceed ICC's designated 
Investment Loss and Custodial Loss Resources.\27\ The Commission 
believes that this aspect of the proposed rule change also would 
enhance ICC's ability to fully cover its potential exposure to 
potential Investment and Custodial Losses, including such losses that 
could exceed ICC's available Investment Loss and Custodial Loss 
Resources.
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    \26\ Notice, 84 FR at 45195.
    \27\ Notice, 84 FR at 45193-45194. As discussed in more detail 
below, one commenter expressed the belief that ICC's Clearing 
Participants should not be responsible for Investment Losses and 
Custodial Losses but rather ICC should ensure adequate 
capitalization to address all non-default losses, including 
Investment Losses and Custodial Losses. The Commission discusses and 
addresses this comment below in Section 0.
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    Relatedly, the proposed rule change would enhance ICC's ability to 
replenish the resources available to satisfy Investment Losses and 
Custodial Losses in the event that such Losses materialize by putting 
in place a process for collecting and using Loss Contributions, 
defining the timing and manner of notices to Participants on the amount 
and use Loss Contributions, and defining the timing and manner of 
collection of Loss Contributions, which ICC could, in turn, use to 
satisfy Investment Loss Shortfalls and Custodial Loss Shortfalls. The 
proposed rule change also would define ICC's responsibility for, and 
the standard of care it would be required to utilize in, seeking 
recoveries from Investment Losses and Custodial Losses, and how ICC 
would allocate such recoveries.
    Finally, the Commission believes that various aspects of the 
proposed rule change would help to ensure that Non-Default Losses, 
Investment Losses, and Custodial Losses would not affect ICC's ability 
to cover losses arising from the default of a Clearing Participant. In 
particular, the proposed rule change would: (i) Specify that Loss 
Contributions would not reduce or otherwise affect other obligations of 
a Clearing Participant to make payments or deliveries to ICC under the 
Rules, or otherwise limit ICC's netting, setoff and other rights under 
the Rules; (ii) separate a Clearing Participant's obligation to make 
Loss Contributions from any obligation to make an Assessment 
Contribution; (iii) specify that the limitations on Assessments under 
the Rules would not apply to liabilities for Loss Contributions; and 
(iv) clarify that action by ICC under proposed Rule 811 (specifying 
ICC's treatment of Non-Default Losses, Investment Losses, and Custodial 
Losses) would not be deemed to constitute an ICE Clear Credit Default 
under the Rules. The Commission believes that these provisions will 
help ensure that ICC's treatment and allocation of losses not arising 
from the default of a Clearing Participant do not hinder ICC's ability 
to cover and fully allocate losses arising from the default of one or 
more Clearing Participants.
    Taken together, the Commission believes that the various components 
of the proposed rule change discussed above would enhance ICC's ability 
to manage the specific categories of general business risk, operational 
risk, and other non-default scenarios that ICC has identified and 
assessed, which in turn would reduce the risk that ICC would be 
unavailable to clear and settle security-based swap transactions and 
therefore is consistent with promoting prompt and accurate clearance 
and settlement of such transactions. Accordingly, the Commission finds 
that the proposed rule change is consistent with the requirements of 
Section 17A(b)(3)(F) of the Act.\28\
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    \28\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Section 17A(b)(3)(D) of the Act

    Section 17A(b)(3)(D) of the Act requires that the rules of ICC 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its participants.\29\ As discussed below, based on 
its review of the record, the Commission finds that ICC's proposed rule 
change--as relevant here, the proposal to allocate Investment Losses 
and Custodial Losses to Clearing Participants in the event that such 
Losses exceed ICC's Investment Loss and Custodial Loss Resources--is 
consistent with Section 17A(b)(3)(D) of the Exchange Act.\30\
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    \29\ 15 U.S.C. 78q-1(b)(3)(D).
    \30\ Id.
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    As noted, the purpose of the proposed rule change as a whole is to 
ensure that ICC has resources sufficient to recover operations and 
continue as a going concern in the vent that it incurs non-default 
losses. To that end, as discussed above, ICC has assessed its potential 
exposure to Investment, Custodial, and Non-Default Losses--taking into 
account relevant components of the European Union capital requirements 
applicable to central counterparties, including the capital 
requirements for credit, counterparty, market,

[[Page 11134]]

operational, and legal risks \31\--and designated specific ICC 
resources in the form of $20 million in Investment Loss Resources and 
$32 million in Custodial Loss Resources that ICC believes should be 
sufficient to cover such potential Losses. The Commission did not 
receive any comments on this aspect of the proposed rule change. Based 
on our review of the record, the Commission believes that ICC's efforts 
to determine its reasonable potential exposure to Investment and 
Custodial Losses are reasonable.
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    \31\ See Notice, 84 FR at 45194.
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    As discussed above, the proposed rule change would make ICC's 
Clearing Participants responsible for any amount of Investment Losses 
and Custodial Losses beyond ICC's contributions of $20 million and $32 
million respectively, and solely responsible for any amount of 
Custodial Loss where the Custodian is a central bank. ICC views the 
potential risk of such Losses as remote, but intends this aspect of the 
proposed rule change as necessary to allow it to ``plan for remote and 
unprecedented, but potentially extreme, types of loss event[s] . . . . 
'' \32\
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    \32\ Notice, 84 FR at 45194.
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    One commenter, the Futures Industry Association (``FIA''), 
submitted a comment letter generally expressing the belief that ICC's 
Clearing Participants should not be responsible for Investment Losses 
and Custodial Losses but rather ICC should ensure adequate 
capitalization to address all non-default losses, including Investment 
Losses and Custodial Losses.\33\ The FIA suggests this is appropriate 
because it believes that Investment Losses and Custodial Losses are 
under the exclusive control and governance of ICC.\34\ As evidence, the 
FIA points to ICC's investment policy and its relationships with, and 
oversight of, Custodians, which the FIA maintains are determined and 
approved by ICC without the involvement of Clearing Participants.\35\ 
In support of its argument the FIA also contends that ``participants 
are provided with a specified return on collateral posted and do not 
directly receive the gain from ICC's investment of funds.'' \36\
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    \33\ See letter from Jacqueline Mesa, Chief Operating Officer & 
Senior Vice President of Global Policy, Futures Industry 
Association, dated September 18, 2019, to Vanessa Countryman, 
Secretary, Commission (``FIA Letter'') at 2.
    \34\ FIA Letter at 2.
    \35\ FIA Letter at 1, 2.
    \36\ FIA Letter at 1.
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    ICC disputes the FIA's characterization and offers, as evidence, 
the regulations applicable to ICC as a registered clearing agency.\37\ 
ICC maintains that these regulations dictate how ICC may invest Margin 
and Guaranty Fund assets, by requiring that ICC hold such assets in a 
manner that minimizes the risk of loss or delay in access and only 
invest in instruments and counterparties with minimal credit, market 
and liquidity risk.\38\ ICC further explains that its investment and 
custodial policies are reviewed and approved by ICC's Risk Committee, 
which is made up predominantly of representatives of ICC's Clearing 
Participants, and ICC's Board of Managers, which includes 
representatives of Clearing Participants.\39\ Similarly, ICC represents 
that ICC's procedures for the monitoring of ICC's Custodians, 
investment counterparties and depositories, are subject to review by 
ICC's Risk Committee.\40\ In response to the FIA's contention that 
participants are provided with a specified return on collateral posted, 
ICC asserts that the majority of the investment yield and depository 
interest received related to such custodial and investment activity is 
credited to Clearing Participants and therefore ICC effectively acts as 
an agent for the Clearing Participants and their clients.\41\ Thus, ICC 
maintains that, in taking custody and investing Margin and Guaranty 
Fund assets, ICC essentially is acting on behalf of Clearing 
Participants.\42\
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    \37\ See letter from Stanislav Ivanov, President, ICC, dated 
October 15, 2019, to Vanessa Countryman, Secretary, Commission 
(``ICC Letter'') at 1.
    \38\ ICC Letter at 1.
    \39\ ICC Letter at 2.
    \40\ ICC Letter at 2.
    \41\ ICC Letter at 2.
    \42\ ICC Letter at 2.
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    Based on our review of the record, the Commission does not agree 
with the FIA's characterization of Investment Losses and Custodial 
Losses as under the exclusive control and governance of ICC. As an 
initial matter, the Commission notes that ICC's ability to invest 
Margin and Guaranty Fund assets is subject to the requirements of 
Exchange Act Rule 17Ad-22(d)(3), which requires that ICC``[h]old assets 
in a manner that minimizes risk of loss or of delay in its access to 
them; and invest assets in instruments with minimal credit, market and 
liquidity risks.'' \43\ Moreover, ICC invests pursuant to its policies 
and procedures, which must be filed with and approved by the Commission 
pursuant to Section 19(b)(1) of the Exchange Act \44\ and Rule 19b-4 
thereunder,\45\ and which, once approved, ICC must comply with under 
Section 19(g) \46\ of the Exchange Act.\47\ Specifically, under ICC 
Rule 502, ICC may not modify its policies and procedures regarding 
investment of Initial Margin and Guaranty Fund assets without 
consulting the Risk Committee,\48\ and under ICC Rule 503, a majority 
of the Risk Committee consists of representatives of Clearing 
Participants.\49\ Taken together, in the Commission's view, these 
factors limit how and where ICC may invest its Clearing Participants' 
Initial Margin and Guaranty Fund assets.
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    \43\ 17 CFR 240.17Ad-22(d)(3).
    \44\ 15 U.S.C. 78s(b)(1).
    \45\ 17 CFR 240.19b-4.
    \46\ 15 U.S.C. 78s(g).
    \47\ See, e.g., Exchange Act Release No. 87859 (Dec. 26, 2019); 
85 FR 157 (Jan. 2, 2020) (SR-ICC-2019-012); Exchange Act Release No. 
84312 (Sep. 28, 2018); 83 FR 50124 (Oct. 4, 2018) (SR-ICC-2018-009); 
Exchange Act Release No. 78566 (Aug. 12, 2016); 81 FR 55254 (Aug. 
18, 2016) (SR-ICC-2016-009); Exchange Act Release No. 76733 (Dec. 
22, 2015); 80 FR 81384 (Dec. 29, 2015) (SR-ICC-2015-017); Exchange 
Act Release No. 74456 (Mar. 6, 2015); 80 FR 13055 (Mar. 12, 2015) 
(SR-ICC-2015-002); Exchange Act Release No. 72762 (Aug. 5, 2014); 79 
FR 46896 (Aug. 11, 2014) (SR-ICC-2014-12).
    \48\ See ICC Rule 502(b) and (c) (``ICE Clear Credit shall not 
take nor permit to be taken any of the following actions without 
prior consultation with the Risk Committee . . . Modify the ICE 
Provisions that relate to . . . the application, or the use, 
rehypothecation or investment, of Margin and . . . Modify the ICE 
Provisions that relate to . . . the use, rehypothecation or 
investment of Collateral on deposit in the General Guaranty Fund . . 
. .'').
    \49\ See ICC Rule 503(a) regarding appointment of nine 
Participant Appointees.
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    The FIA also states its belief that ICC has a duty of care to its 
clearing members and that ICC should not be able to pass through losses 
that are within the sole control of ICC.\50\ As an initial matter, with 
respect to the FIA's assertion that ICC owes Clearing Participants a 
duty of care, the Commission notes that ICC is subject to the 
requirements of Section 17A(b)(3)(F) of the Act, which requires that 
ICC's Rules be designed to, among other things, assure the safeguarding 
of securities and funds which are in ICC's custody or control or for 
which it is responsible,\51\ as well as the requirements of Rule 17Ad-
22(d)(3), which requires ICC to establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to hold 
assets, including Clearing Participants' securities and funds, in a way 
that minimizes risk of loss or of delay in its access to them, and to 
invest assets in instruments with minimal credit, market, and liquidity 
risks.\52\ As discussed in more detail below, the Commission believes 
that ICC's proposal is consistent with these

[[Page 11135]]

requirements. Further, as discussed above, in the Commission's view, 
where and how ICC may invest Margin and Guaranty Fund assets is subject 
to applicable Exchange Act requirements and Rules and ICC's own Rules, 
and therefore the Commission does not agree with the FIA's 
characterization of Investment Losses and Custodial Losses as under the 
exclusive control and governance of ICC.
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    \50\ FIA Letter at 2.
    \51\ 15 U.S.C. 78q-1(b)(3)(F).
    \52\ 17 CFR 240.17Ad-22(d)(3).
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    Finally, the FIA states that it ``is unclear . . . why ICC's own 
funds would not be used first'' in case of a Custodial Loss resulting 
from a central bank acting as Custodian.\53\ In response, ICC points to 
international standards, which encourage clearing houses to fully 
utilize central bank services.\54\ Moreover, as ICC explained in the 
Notice, ``[w]ith respect to Custodial Losses arising from a central 
bank custodial failure, ICC believes that such a scenario is extremely 
remote, and entirely outside of its control.'' \55\ The Commission 
recognizes ICC's point that clearing agencies may be encouraged in 
various ways to utilize central bank services when available and 
believes that ICC's position that a scenario involving Custodial Losses 
arising from a central bank custodial failure could be extremely remote 
is reasonable, and on that basis finds ICC's view on this point 
compelling.\56\ Accordingly, the Commission believes that ICC's 
proposal to allocate to Clearing Participants all Custodial Losses 
arising from a central bank acting as custodian without first utilizing 
ICC's Loss Resources is reasonable.
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    \53\ FIA Letter at 2.
    \54\ ICC Letter at 1.
    \55\ Notice, 84 FR at 45195.
    \56\ ICC Letter at 1.
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    In the Commission's view, because ICC uses Initial Margin and 
Guaranty Fund assets to manage the risks associated with clearing 
security-based swap transactions, it is vital to the ongoing operation 
of ICC that ICC have the ability to quickly replenish any Margin and 
Guaranty Fund assets depleted by Investment Losses and Custodial 
Losses. Based on its review of the record, the Commission finds the 
specific allocation of the Investment Losses and Custodial Losses that 
could potentially result from the investment of such assets between ICC 
and its Clearing Participants to be reasonable because ICC would be 
assuming liability commensurate with the risks associated to it with 
investment of the Margin and Guaranty Fund assets. As discussed above, 
ICC has assessed its potential exposure to Investment, Custodial, and 
Non-Default Losses--taking into account relevant components of the 
European Union capital requirements applicable to central 
counterparties, including the capital requirements for credit, 
counterparty, market, operational, and legal risks--to determine an 
initial measure of ICC's exposure to such risks, and has selected and 
set its level of Investment Loss, Custodial Loss, and Non-Default Loss 
Resources to be commensurate with those measures.\57\ As noted above, 
based on its review of the record, the Commission believes that ICC's 
efforts to determine its reasonable potential exposure to Investment 
and Custodial Losses are reasonable. At the same time, ICC proposes to 
designate the specific ICC resources that would be used to cover such 
losses and the process for replenishing such resources should such 
losses materialize. In addition, ICC also proposes to periodically 
conduct risk-based assessments of the appropriate level of ICC 
resources designed to fully cover such potential losses and to reserve 
the ability to adjust such resources as needed.\58\ It would only be in 
the event that ICC incurred Investment or Custodial Losses that exceed 
ICC's Investment Loss or Custodial Loss Resources--an eventuality that 
ICC views as remote--that ICC would have the discretion to require 
Clearing Participants to make an Investment Loss Contribution or 
Custodial Loss Contribution. And, as noted above, in that event each 
Clearing Participant's Loss Contribution could not exceed that Clearing 
Participant's IM/GF Contribution. In the Commission's view, ICC's 
proposal to use its own resources to absorb Investment and Custodial 
Losses up to the amounts that ICC has determined represent reasonable 
assessments of such potential Losses, and to allocate Investment and 
Custodial Losses to Clearing Participants on a pro rata basis based on 
relevant Initial Margin and Guaranty Fund assets only in the event that 
such Losses exceed ICC's Resources, represents an appropriate and 
reasonable allocation of potential contingent non-default losses to 
Clearing Participants.
---------------------------------------------------------------------------

    \57\ See Notice, 84 FR at 45194.
    \58\ See Id.
---------------------------------------------------------------------------

    Finally, as discussed above, the proposed rule change would 
allocate Investment Losses and Custodial Losses to Clearing 
Participants based on their participation in the investment of cash 
Initial Margin and their share of the total Initial Margin and Guaranty 
Fund assets. Moreover, each Clearing Participant's liability for an 
Investment Loss or Custodial Loss exceeding ICC's initial contributions 
could not exceed that Participant's aggregate contributions to the 
Guaranty Fund and the Initial Margin provided by the Participant, for 
both the House Origin Account and Client Origin Account. The Commission 
believes this allocation is equitable because it would distribute the 
losses based on each Clearing Participant's share of the Margin and 
Guaranty Fund assets that were depleted by the Investment Losses and 
Custodial Losses, and each Clearing Participant's liability could not 
exceed the total amount it contributed to Margin and the Guaranty Fund. 
Thus, the Commission believes this should help to ensure that Clearing 
Participants only contribute to the recovery from such losses in 
amounts commensurate with their contribution to Margin and Guaranty 
Fund assets in the first instance. Finally, in limiting the allocation 
of Investment Losses in the Client Origin Account to those Clearing 
Participants that have instructed, or are deemed to have instructed, 
ICC to invest cash Initial Margin, the Commission believes that the 
proposed rule change would help to ensure that only those Clearing 
Participants that have participated in an investment would contribute 
to the recovery of losses suffered on that investment.
    For the reasons discussed above, the Commission believes that the 
proposed rule change is consistent with the requirement that ICC's 
rules provide for the equitable allocation of fees. Accordingly, the 
Commission finds that the proposed rule change is consistent with the 
requirements of Section 17A(b)(3)(D) of the Act.\59\
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    \59\ 15 U.S.C. 78q-1(b)(3)(D).
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C. Consistency With Rule 17Ad-22(d)(3)

    Rule 17Ad-22(d)(3) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed to hold 
assets in a way that minimizes risk of loss or of delay in its access 
to them.\60\ The Commission believes that, in specifying that Clearing 
Participants must instruct ICC whether to invest cash Initial Margin in 
a Client Origin Account and that without an instruction to invest, ICC 
would (i) not invest US dollar cash and (ii) invest cash in other 
currencies in accordance with its rules and procedures, the proposed 
rule change would provide a procedure reasonably designed for ICC to 
hold cash Initial Margin in a Client Origin Account that minimizes risk 
of loss and of delay in access to such cash Initial Margin.
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    \60\ 15 U.S.C. 17Ad-22(d)(3).

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[[Page 11136]]

    Further, in limiting the allocation of Investment Losses in the 
Client Origin Account to those Clearing Participants that have 
instructed, or are deemed to have instructed, ICC to invest cash 
Initial Margin in the Client Origin Account, the Commission believes 
that the proposed rule change would help to minimize risk of loss and 
of delay in access to cash Initial Margin by providing a means for 
Clearing Participants to opt out responsibility for Investment Losses 
with respect to the Client Origin Account.
    Accordingly, the Commission finds that the proposed rule change is 
consistent with the requirements of Rule 17Ad-22(d)(3).\61\
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    \61\ 15 U.S.C. 17Ad-22(d)(3).
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D. 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.\62\
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    \62\ 15 U.S.C. 17Ad-22(d)(8).
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    The Commission believes that the proposed rule change, in providing 
that the ICC Board could modify the amount of Investment Loss Resources 
and Custodial Loss Resources from time to time, and specifying that 
such determination would be risk-based in light of ICC's potential 
exposure to such losses, would establish clear and transparent 
governance arrangements for determining the amount of such resources.
    Accordingly, the Commission finds that the proposed rule change is 
consistent with the requirements of Rule 17Ad-22(d)(8).\63\
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    \63\ 15 U.S.C. 17Ad-22(d)(8).
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V. Accelerated Approval of the Proposed Rule Change, as Modified by 
Partial Amendment No. 1 and Partial Amendment No. 2

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\64\ to approve the proposed rule change prior to the 30th day 
after the date of publication of Partial Amendment No. 2 in the Federal 
Register. As discussed above, Partial Amendment No. 2 modifies the 
initial proposed rule change to (1) differentiate the treatment of 
Investment Losses in the Client Origin Account from the treatment of 
Investment Losses in the House Origin Account and (2) limit the 
allocation of Investment Losses to those Clearing Participants that 
have instructed, or are deemed to have instructed, ICC to invest cash 
Initial Margin in the Client Origin Account. In so doing, Partial 
Amendment No. 2 provides for a more clear and comprehensive 
understanding of the treatment of Investment Losses and the impact of 
the proposed rule change on Clearing Participants, which helps to 
improve the Commission's review of the proposed rule change for 
consistency with the Act.
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    \64\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For similar reasons as discussed above, the Commission finds that 
Partial Amendment No. 2 is designed to help assure the prompt and 
accurate clearance and settlement of securities transactions and the 
safeguarding of securities and funds which are in the custody or 
control of ICC, consistent with Section 17A(b)(3)(F) of the Act,\65\ 
and the equitable allocation of reasonable dues, fees, and other 
charges among ICC's Clearing Participants, consistent with the Section 
17A(b)(3)(D) of the Act.\66\ Accordingly, the Commission finds good 
cause for approving the proposed rule change, as modified by Partial 
Amendment No. 2, on an accelerated basis, pursuant to Section 19(b)(2) 
of the Exchange Act.\67\
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    \65\ 15 U.S.C. 78q-1(b)(3)(F).
    \66\ 15 U.S.C. 78q-1(b)(3)(D).
    \67\ 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, as modified by Partial Amendment No. 1 and 
Partial Amendment No. 2, is consistent with the requirements of the 
Act, and in particular, with the requirements of Section 17A(b)(3)(F) 
and (D) of the Act \68\ and Rules 17Ad-22(d)(3) and (d)(8) 
thereunder.\69\
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    \68\ 15 U.S.C. 78q-1(b)(3)(F), (D).
    \69\ 17 CFR 240.17Ad-22(d)(3) and (d)(8).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\70\ that the proposed rule change, as modified by Partial Amendment 
No. 1 and Partial Amendment No. 2 (SR-ICC-2019-010), be, and hereby is, 
approved on an accelerated basis.\71\
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    \70\ 15 U.S.C. 78s(b)(2).
    \71\ 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.\72\
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    \72\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03775 Filed 2-25-20; 8:45 am]
BILLING CODE 8011-01-P


