[Federal Register Volume 85, Number 48 (Wednesday, March 11, 2020)]
[Notices]
[Pages 14284-14286]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04920]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88337; File No. SR-ICC-2020-001]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating To Revising the ICC Clearing 
Rules To Consider the Possibility of ICC Receiving Proceeds From 
Default Insurance

March 5, 2020.

I. Introduction

    On January 9, 2020, 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 
revise its Clearing Rules (the ``Rules'') \3\ to consider the 
possibility of ICC receiving proceeds from default insurance. The 
proposed rule change was published for comment in the Federal Register 
on January 21, 2020.\4\ The Commission did not receive comments 
regarding the proposed rule change. For the reasons discussed below, 
the Commission is approving the proposed rule change.
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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; Notice 
of Filing of Proposed Rule Change, Security-Based Swap Submission, 
or Advance Notice Relating to the ICC Clearing Rules; Exchange Act 
Release No. 87958 (Jan. 14, 2020); 85 FR 3446 (Jan. 21, 2020) 
(``Notice'').
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II. Description of the Proposed Rule Change

    The proposed rule change would amend Chapters 1 and 8 of the ICC 
Rules to allow ICC to receive proceeds from an insurance policy in the 
event of the default of a Clearing Participant (``CP''). The proposed 
rule change would incorporate these proceeds from insurance into ICC's 
default waterfall and therefore treat them similar to other resources 
that ICC uses to cover losses from CP defaults, like the guaranty fund. 
In terms of incorporating insurance proceeds into ICC's default 
waterfall, under the proposed rule change, generally ICC would use 
proceeds from insurance before using guaranty fund resources from non-
defaulting CPs. Although the proposed rule change would establish the 
legal framework for ICC to maintain insurance and use insurance 
proceeds in the event of a CP's default, the proposed rule change would 
not require that ICC maintain such insurance.
    With respect to Chapter 1 of the ICC Rules, which sets out the 
defined terms used in the Rules, the proposed rule change would add to 
ICC Rule 102 (``Definitions'') the term ``Insurance Proceeds'' and 
would refer to proposed Rule 802(b)(i)(A)(4), where the term would be 
defined. Proposed Rule 802(b)(i)(A)(4) would define the term 
``Insurance Proceeds'' to mean insurance proceeds, if any, received by 
ICC in connection with a CP's default. Additionally, proposed Rule 
802(b)(i)(A)(4) would state that ICC shall not be obligated to obtain 
or maintain any insurance policy with respect to the default of a CP, 
thus making explicit the point described above that the proposed rule 
change would not require that ICC maintain insurance against defaults.
    With respect to Chapter 8 of the ICC Rules, the proposed rule 
change would first amend ICC Rule 802(a). ICC Rule 802(a) provides that 
ICC may charge against a defaulting CP's contributions to the guaranty 
fund losses suffered from the CP's default. Rule 802(a) lists the types 
of losses and expenses that ICC may charge against the defaulting CP's 
contributions to the guaranty fund, ordered by priority. Rule 802(a) 
also explains how ICC would pay out any surplus remaining after paying 
all of the other listed items. As explained in Rule 802(a), ICC may pay 
the surplus to ICC or to whomever may be lawfully entitled to receive 
the surplus, including any insurer, surety, or guarantor of the 
obligations of ICC. The proposed rule change would add to this any 
insurer, surety, or guarantor with respect to the obligations of the

[[Page 14285]]

defaulting CP. This aspect of the proposed change would thus allow ICC 
to pay to an insurance provider surplus guaranty fund contributions of 
the defaulting CP, which ICC may be required to do under the terms of a 
policy insuring against losses resulting from the default of a CP.
    The proposed rule change would next amend Rule 802(b) to integrate 
default insurance into ICC's default waterfall. Rule 802(b) gives ICC 
the right to charge against certain financial resources losses 
resulting from the default of a CP. Rule 802(b) lists the financial 
resources to which ICC may charge such losses, in the order by which 
ICC may use them. The proposed rule change would add to this list the 
insurance proceeds, if any, that ICC receives in connection with the 
CP's default. ICC would be able to use the insurance proceeds only 
after charging losses to ICC's contributions to the guaranty fund but 
before using the guaranty fund contributions of non-defaulting CPs.
    Under ICC Rule 802(c), the defaulting CP remains liable for any 
losses charged in the manner permitted under Rule 802(b). As such, Rule 
802(c) permits ICC to recover the liability from the defaulting CP's 
margin, collateral, or other assets, or by legal process. Rule 802(c) 
also requires that, should ICC make any such recovery, ICC must use the 
money recovered to pay back certain expenses and persons, according to 
the order listed in Rule 802(c). The proposed rule change would add to 
this list in Rule 802(c) an insurance provider, to the extent the 
provider is entitled to such recovery. Thus, this aspect of the 
proposed rule change would amend Rule 802(c) to reflect that ICC may 
owe money recovered from or in respect of a defaulting CP to the 
insurance provider and would allow ICC to pay back such insurance 
provider as necessary.
    The proposed rule change would also make two specific changes to 
provide ICC flexibility to cover losses while waiting for payment under 
an insurance policy. First, the proposed rule change would amend Rule 
802(b) to provide that ICC could use the guaranty fund contributions of 
non-defaulting CPs prior to receipt of any insurance proceeds. In that 
event, ICC would be required to reimburse the non-defaulting CPs from 
the insurance proceeds when received. Similarly, the proposed rule 
change would amend Rule 808 to allow ICC to conduct reduced gains 
distribution where ICC has made a claim under an insurance policy but 
has not yet received any proceeds from the claim. In that event, the 
proposed rule change would make any proceeds ultimately received under 
the insurance policy available as a potential resource to pay back CPs 
that have been subject to reduced gains distribution under Rule 808.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\5\ For the reasons given below, the Commission finds that 
the proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act \6\ and Rule 17Ad-22(d)(11) thereunder.\7\
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    \5\ 15 U.S.C. 78s(b)(2)(C).
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ 17 CFR 240.17Ad-22(d)(11).
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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.\8\ As discussed 
above, the proposed rule change would establish the legal framework for 
the use of default insurance by amending ICC's default waterfall to 
provide for the use of such insurance and by allowing ICC to pay to the 
insurance provider, as necessary, surplus guaranty fund contributions 
of the defaulting CP and money recovered from the defaulting CP. The 
proposed rule change would also provide ICC with the ability to use 
other financial resources and to engage in reduced gains distribution 
while awaiting payment under a default insurance policy. Although the 
proposed rule change explicitly would not require that ICC obtain or 
maintain a default insurance policy, the Commission believes that in 
establishing the legal framework and operational flexibility for using 
such a default insurance policy, the proposed rule change would provide 
ICC a means of obtaining an additional financial resource (i.e., 
insurance) for offsetting losses resulting from a CP's default.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    In doing so, the Commission believes that proposed rule change 
would enhance ICC's ability potentially to avoid the losses that could 
result from the default of a Clearing Participant. Because losses 
resulting from a CP's default could cause losses for ICC, disrupting 
ICC's ability to clear and settle securities transactions, the 
Commission believes that the proposed rule change would promote the 
prompt and accurate clearance and settlement of securities 
transactions. Moreover, because losses resulting from a CP's default 
could cause losses for ICC, disrupting ICC's access to securities and 
funds, the Commission believes the proposed rule change would help to 
assure the safeguarding of securities and funds in ICC's custody and 
control. Finally, for these reasons, the Commission believes that the 
proposed rule change would, in general, protect investors and the 
public interest.
    Therefore, the Commission finds that the proposed rule change would 
promote the prompt and accurate clearance and settlement of securities 
transactions, assure the safeguarding of securities and funds in ICC's 
custody and control, and, in general, protect investors and the public 
interest, consistent with the Section 17A(b)(3)(F) of the Act.\9\
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(d)(11)

    Rule 17Ad-22(d)(11) requires that ICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to make key aspects of its default procedures publicly 
available and establish default procedures that ensure that ICC can 
take timely action to contain losses and liquidity pressures and to 
continue meeting its obligations in the event of a participant 
default.\10\ As discussed above, the Commission believes the proposed 
rule change, in establishing the legal framework and operational 
flexibility for using a default insurance policy, would provide ICC a 
means of obtaining an additional financial resource (i.e., insurance) 
for offsetting losses resulting from a CP's default. The Commission 
believes the proposed rule change would therefore help to ensure that 
ICC is able to take timely action to contain losses and liquidity 
pressures and to continue meeting its obligations in the event of a 
CP's default by giving ICC the ability to obtain additional resources 
to offset losses resulting from a CP's default. Therefore the 
Commission finds that the proposed

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rule change is consistent with Rule 17Ad-22(d)(11).\11\
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    \10\ 15 U.S.C. 17Ad-22(d)(11).
    \11\ 15 U.S.C. 17Ad-22(d)(11).
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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 Section 17A(b)(3)(F) of the 
Act \12\ and Rule 17Ad-22(d)(11) thereunder.\13\
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(d)(11).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\14\ that the proposed rule change (SR-ICC-2020-001), be, and hereby 
is, approved.\15\
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ 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.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04920 Filed 3-10-20; 8:45 am]
BILLING CODE 8011-01-P


