[Federal Register Volume 85, Number 105 (Monday, June 1, 2020)]
[Notices]
[Pages 33221-33223]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11649]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88944; File No. SR-ICC-2020-005]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC Clearing Participant 
Default Management Procedures

May 26, 2020.

I. Introduction

    On April 3, 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 \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to revise the ICC Clearing 
Participant (``CP'') Default Management Procedures (``Default 
Management Procedures''). The proposed rule change was published for 
comment in the Federal Register on April 15, 2020.\3\ 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\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Proposed Rule Change Relating to the ICC Clearing 
Participant Default Management Procedures; Exchange Act Release No. 
88614 (April 9, 2020); 85 FR 21052 (April 15, 2020) (SR-ICC-2020-
005) (``Notice'').
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II. Description of the Proposed Rule Change

    The proposed rule change would make amendments to the Default 
Management Procedures related to (i) the personnel involved in the 
default management process, including personnel at ICC and 
representatives of CPs; (ii) actions taken as part of the default 
management process; (iii) the development and execution of default 
management tests; and (iv) the correction of typographical and drafting 
errors.\4\
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    \4\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in the ICC Rules and Default Management 
Procedures, as applicable.
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A. Personnel Involved in the Default Management Process

    As mentioned above, the proposed rule change would make changes 
related to the personnel involved in the default management process, 
including personnel at ICC and representatives of CPs.
    First, the proposed rule change would amend the list of defined 
terms in Section 2 to update the definition of the term ``ICC 
Management''. Under the proposed rule change, ICC Management would 
consist of the General Counsel, Chief Risk Officer, Chief Operating 
Officer, Chief Compliance Officer, Head of Corporate Development, and 
Head of Technology. The Default Management Procedures assign certain 
responsibilities to, and require certain notifications to, the 
individuals comprising ICC Management.
    Second, the proposed rule change would revise the personnel at each 
CP for which ICC maintains contact information related to the default 
management process. Currently, ICC is required to maintain contact 
information for the Chief Executive Officer (``CEO''), Chief Financial 
Officer (``CFO''), and General Counsel of each CP, as well as other 
role-based contacts that are specific to the default management 
process. The proposed rule change would remove this and instead require 
ICC to maintain contact information for the most senior person in 
charge of the CDS business and the most senior person responsible for 
providing compliance oversight for the CDS business. The Default 
Management Procedures would refer to these personnel as the CP's ``CP 
Default Contacts.'' Accordingly, the proposed rule change would 
replace, throughout the Default Management Procedures, references to a 
CP's CEO, CFO, and General Counsel, with the term CP Default Contacts.

B. Actions Taken as Part of the Default Management Process

    In addition to changes related to the personnel involved in the 
default management process, the proposed rule change would make changes 
related to certain actions taken as part of the default management 
process. First, the proposed rule change would amend Subsection 6.1.1, 
which describes certain actions that ICC's President must take before a 
CP is declared in default. Currently, ICC's President must notify ICE's 
Head of Enterprise Risk Management and ICE's CFO of a CP's possible 
default. The proposed rule change would instead require that ICC's 
president notify ICE's Global Head of Clearing, rather than the ICE 
CFO.
    Next, the proposed rule change would amend Subsection 6.1.5, which 
describes certain actions that ICC's CCO must take before a CP is 
declared in default. Currently, Subsection 6.1.5 requires that ICC's 
CCO draft certain notifications and email those notifications to ICC 
Management for review and approval prior to sending the notifications. 
The proposed rule change would instead require that ICC's CCO email the 
notifications to the Close-Out Team, rather than ICC Management, for 
review and approval. The Close-Out Team is responsible for overseeing 
the default management process and includes ICC Management, the most 
senior member of the ICC Treasury Department, and the ICC Risk 
Oversight Officer. Thus, under this proposed change, ICC's CCO would 
still send the notifications to ICC Management for review and approval, 
because ICC Management is part of the Close-Out Team, but would also 
send the notifications to the most senior member of the ICC Treasury 
Department and the ICC Risk Oversight Officer, who are the other 
members of the Close-Out Team.
    Next, the proposed rule change would amend Subsection 6.4, which 
describes certain actions that ICC's President must take after a CP is 
declared in default. Currently, Subsection 6.4 requires that ICC's 
President call or email the Chairman of the Risk Committee to inform 
the Chairman of the declaration of default and that ICC's President 
confirm with ICC's CCO that the Chairman has been notified. The 
proposed rule change would expand this to require that the President 
inform the Risk Committee (not just the Chairman) and ICC's Board, and 
furthermore, that the President confirm with ICC's CCO that the Risk 
Committee and Board have been notified.
    The proposed rule change would also amend Subsection 8.6 to clarify 
that ICC could only take certain actions relating to direct liquidation 
if ICC obtains Board approval. Currently, Subsection 8.6 describes the 
actions that ICC would take to liquidate a defaulting CP's portfolio by 
direct transactions, rather than a default auction. Subsection 8.6 
currently provides that if the Close-Out Team does not receive Board 
approval, ICC may not execute direct liquidation trades that would 
consume the Guaranty Fund resources of non-Defaulting CPs and provides 
a list of certain actions that ICC would take otherwise. The proposed 
rule change would clarify this point by specifying that the list of 
actions ICC would take are actions that

[[Page 33222]]

ICC would only take if Board approval is obtained. In other words, the 
proposed rule change would make explicit a point assumed in the current 
drafting of Subsection 8.6, that ICC would only undertake the listed 
actions upon approval of ICC's Board to execute direct liquidation 
trades that would consume the Guaranty Fund resources of non-Defaulting 
CPs.
    Finally, the proposed rule change would amend Subsection 9.1, 
regarding calling for assessments. ICC's Rules and the Default 
Management Procedures allow ICC to call for assessment contributions to 
the Guaranty Fund in the event that the Guaranty Fund has been depleted 
or ICC anticipates the need for additional funds related to a default, 
and CPs are obligated to meet these assessments by providing additional 
amounts to the Guaranty Fund.\5\ Currently, ICC distributes notices 
calling for assessment contributions to each CP's Execution 
Coordinator. Under ICC's Default Management Procedures, such role is 
responsible for coordinating internally and with ICC for hedging and 
liquidation related activities. The proposed rule change would replace 
the term Execution Coordinator with the existing defined term Central 
Point of Contact. Under the Default Management Procedures, the Central 
Point of Contract is the position at each CP that has overall 
responsibility for coordinating internally and with ICC during the 
default management process.
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    \5\ See ICC Rule 803.
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C. Development and Execution of Default Management Test

    The proposed rule change would also revise the Default Management 
Procedures regarding the development and execution of default 
management tests, which ICC uses to simulate a Clearing Participant 
default and its actions to manage such a default. Currently, Subsection 
4.5 requires that ICC, in coordination with its CPs and Direct 
Participant Customers, conduct a default management test at least once 
per calendar year. The proposed rule change would amend the Default 
Management Procedures to require that ICC coordinate with its Risk 
Committee and Board, in addition to CPs and Direct Participant 
Customers, regarding its default management test and that ICC conduct 
its default management test every twelve months instead of once per 
calendar year.
    Moreover, Subsection 4.5 currently requires that ICC's Risk 
Oversight Officer work with ICC Management (which is a defined term as 
discussed above) in planning and coordinating the execution of default 
management tests. The proposed rule change would require that ICC's 
Risk Oversight Officer work with the Close-Out Team instead of ICC 
Management. As discussed above, as defined, the Close-Out Team includes 
the personnel comprising ICC Management as well as certain additional 
personnel, and thus ICC Management would still be involved in planning 
and coordinating the execution of default management tests. Moreover, 
the proposed rule change would require that the proposed scope of a 
default management test be presented to ICC's Board for review prior to 
execution of the test.
    Finally, the proposed rule change would add Appendix 1 to the 
Default Management Procedures. Appendix 1 would include language on the 
development of the scope of a default management test. Specifically, 
proposed Appendix 1 would set forth key scenario components that ICC 
may consider when developing a default management test, including (1) 
scenarios resulting in CP defaults, such as a CP's failure to meet 
payment obligations to ICC, insolvency or bankruptcy; (2) default 
management tools available to ICC in case of default, including 
consulting with the CDS Default Committee or performing Secondary 
Default Management Actions (e.g., calling for assessment 
contributions); (3) timing considerations, such as the time and length 
of a default event; (4) planning strategy (e.g., whether there is 
advance notice of a test); and (5) event specific elements that may 
occur in a default scenario, such as the occurrence of multiple CP 
defaults or stressed market conditions.

D. Typographical and Drafting Errors

    Finally, as mentioned above, the proposed rule change would make 
other non-material changes to fix typographical and drafting errors.\6\
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    \6\ For further information about these specific changes, please 
see Notice, 85 FR at 21054.
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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.\7\ For the reasons given below, the Commission finds that 
the proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act \8\ and Rule 17Ad-22(d)(8) and (d)(11).\9\
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    \7\ 15 U.S.C. 78s(b)(2)(C).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22(d)(8), (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.\10\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, the proposed rule change would update, 
throughout the Default Management Procedures, the defined list of 
individuals that comprise ICC Management. The proposed rule change 
would also update the personnel at CPs for which ICC maintains contact 
information, and that ICC contacts, regarding a default. The Commission 
believes that this aspect of the proposed rule change should help ICC 
better manage a default by helping to ensure that ICC has accurate 
contact information for CPs and contacts the personnel at CPs who 
should be best positioned to respond to a default, and that the 
appropriate personnel at ICC (as part of the defined term ICC 
Management) are involved in responding to a default.
    The proposed rule change would also, as discussed above, make 
changes related to the actions available to ICC in response to a 
default, by clarifying in Section 8.6 that ICC may take certain actions 
to directly liquidate a defaulting CP's portfolio via bilateral trades 
(rather than an auction) if ICC's Board approves. Similarly, the 
proposed rule change would require that ICC's president notify ICE's 
Global Head of Clearing of the possible default or risk of default 
before a default is declared and notify the Risk Committee and Board 
once a CP has been declared in default. The proposed rule change would 
also require that ICC's CCO email notifications to the Close-Out Team, 
rather than ICC Management, for review and approval, and that ICC 
distribute notices calling for assessment contributions to each CP's 
Central Point of Contact rather than Execution Coordinator. The 
Commission believes that these aspects of the proposed rule change 
should help to ensure that appropriate personnel are informed of, and 
able to participate in, ICC's

[[Page 33223]]

response to a default. The Commission therefore believes that these 
aspects of the proposed rule change should improve ICC's ability to 
manage a default.
    As discussed above, the proposed rule change would also enhance 
ICC's development and conduct of default tests by specifying, in new 
Appendix 1, the processes, tools, and conditions that ICC would test 
and requiring that ICC's Risk Oversight Officer work with other members 
of the Close-Out Team (which term would include ICC Management) to 
determine the scope of each default management test. Similarly, the 
proposed rule change would require that ICC coordinate default 
management tests with its Risk Committee and Board and that the Board 
review the scope of the Default Test prior to executing the test. 
Finally, the proposed rule change would also specify that ICC conducts 
a default management test at least every twelve months, rather than 
once per calendar year. The Commission believes these changes should 
improve the planning and conduct of default tests by setting out 
specific factors to test in Appendix 1 and requiring additional input, 
including Board review, on the scope and conduct of default tests. 
Because the Commission believes that default tests should help ICC to 
plan and prepare for responding to an actual default, the Commission 
believes that these aspects of the proposed rule change should improve 
ICC's ability to manage a default.
    Finally, the proposed rule change would correct typographical and 
drafting errors. Again, the Commission believes these proposed changes 
should help ICC better manage a default by reducing the possibility for 
confusion when applying the Default Management Procedures by removing 
unintentional drafting errors.
    By improving ICC's ability to manage a CP default, the Commission 
believes that the proposed rule change should also improve ICC's 
ability to avoid losses that could result from a CP default. The 
Commission further believes that such losses, if not properly managed, 
could hinder ICC's ability to continue operations and therefore clear 
and settle securities transactions and safeguard securities and funds 
in its custody or control. Therefore, for these reasons, the Commission 
finds that the proposed rule change should promote the prompt and 
accurate clearance and settlement of securities transactions and assure 
the safeguarding of securities and funds in ICC's custody and control, 
consistent with the Section 17A(b)(3)(F) of the Act.\11\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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B. 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 \12\ applicable 
to clearing agencies, to support the objectives of owners and 
participants, and to promote the effectiveness of ICC's risk management 
procedures.\13\ As discussed above, the proposed rule change would make 
explicit in Section 8.6 that ICC may take certain actions to directly 
liquidate a defaulting CP's portfolio via bilateral trades (rather than 
an auction) if ICC's Board approves, require that ICC coordinate 
default management tests with its Risk Committee and Board, and require 
that the Board review the scope of the Default Test prior to executing 
the test. The Commission believes that this aspect of the proposed rule 
change should establish clear governance arrangements regarding the 
Board's involvement in responding to a default and planning and 
conducting a Default Test. Similarly, the proposed rule change would 
require that ICC's President notify certain other ICE and ICC personnel 
prior to and after declaration of a default. Again, the Commission 
believes that this should establish clear governance arrangements 
regarding the President's actions in response to a default. For these 
reasons, the Commission finds the proposed rule change is consistent 
with Rule 17Ad-22(d)(8).\14\
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    \12\ 15 U.S.C. 78q-1.
    \13\ 15 U.S.C. 17Ad-22(d)(8).
    \14\ 15 U.S.C. 17Ad-22(d)(8).
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C. 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 ICC's 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.\15\ As discussed above, the proposed rule change would enhance 
ICC's development and conduct of default management tests, require that 
ICC coordinate default management tests with its Risk Committee and 
Board, and require that the Board review the scope of the default 
management test prior to executing the test. The proposed rule change 
would also specify that ICC conducts a default management test at least 
every twelve months, rather than once per calendar year, and correct 
typographical and drafting errors. The Commission believes that these 
changes, in improving ICC's conduct of its default tests and specifying 
how often ICC would conduct such tests, should help to improve ICC's 
default testing. The Commission further believes that such testing 
should help to ensure the effectiveness of ICC's Default Management 
Procedures by revealing potential deficiencies in, and facilitating the 
improvement of, ICC's Default Management Procedures. The Commission 
therefore believes that the proposed rule change should help 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. For these reasons, the Commission finds the 
proposed rule change is consistent with Rule 17Ad-22(d)(11).\16\
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    \15\ 15 U.S.C. 17Ad-22(d)(11).
    \16\ 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 \17\ and Rules 17Ad-22(d)(8) and (d)(11).\18\
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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ 17 CFR 240.17Ad-22(d)(8), (d)(11).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\19\ that the proposed rule change (SR-ICC-2020-005), be, and hereby 
is, approved.\20\
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 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.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11649 Filed 5-29-20; 8:45 am]
 BILLING CODE 8011-01-P


