[Federal Register Volume 85, Number 118 (Thursday, June 18, 2020)]
[Notices]
[Pages 36904-36906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13120]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89060; File No. SR-ICEEU-2020-005]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change Relating to Amendments to the ICE 
Clear Europe Clearing Rules

June 12, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 2, 2020, ICE Clear Europe Limited (``ICE Clear Europe'' or the 
``Clearing House'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule changes described in Items I, II, 
and III below, which Items have been prepared primarily by ICE Clear 
Europe. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    ICE Clear Europe is proposing to make certain changes to its 
Clearing Rules (the ``Rules'') \3\ to address the receipt of proceeds 
from default insurance.
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    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, ICE Clear Europe included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. ICE Clear Europe has prepared summaries, 
set forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(a) Purpose
    ICE Clear Europe proposes amendments to Parts 9 and 11 of the Rules 
relating to default insurance that is intended to cover losses 
resulting from a Clearing Member default. Among other changes, the 
proposed amendments address the potential receipt of proceeds from 
default insurance. Although ICE Clear Europe is not, and would not be, 
required to obtain or maintain default insurance, the proceeds of any 
such insurance would, under the Rules as proposed to be revised, be 
applied as part of the resources available to ICE Clear Europe in the 
event of a Clearing Member default. Such default insurance would 
provide additional default resources to cover losses from Clearing 
Member defaults, prior to the need to use guaranty fund resources from 
non-defaulting Clearing Members. This would provide a potential extra 
layer of protection for the non-defaulting Clearing Members' guaranty 
fund contributions and assessments. ICE Clear Europe is also proposing 
certain additional conforming amendments to the Rules. The proposed 
revisions are described in detail below.
    ICE Clear Europe proposes to amend the default waterfalls in Rules 
908(b) (for F&O-only Clearing Members or Sponsored Principals), (c) 
(for CDS-only Clearing Members or Sponsored Principals), (d) (for FX-
only Clearing Members or Sponsored Principals) and (g) (for Clearing 
Members or Sponsored Principals in multiple membership categories) such 
that default insurance proceeds would be placed third in the waterfall 
of assets used to meet the obligations and liabilities of a Defaulter 
and any shortfall, loss or liability to the Clearing House upon an 
Event of Default. (In the case of a defaulter with multiple membership 
categories, the proceeds of default insurance would be applied to each 
Default Amount on a pro rata basis, as provided in Rule 908(g)(iii) as 
proposed to be revised.) Default insurance proceeds would thus be 
applied following the Clearing House initial contribution and before 
the Clearing Member guaranty fund contributions and assessment 
contributions. Conforming amendments would be made to the Rule 101 
definitions of ``Clearing House CDS GF Contribution'', ``Clearing House 
F&O GF Contribution'' and ``Clearing House FX GF Contribution'' as well 
as to Rule 909(a), reflecting the placement of default insurance 
proceeds in the applicable waterfalls under Rule 908.
    Rule 1103(e) (which states certain limitations with respect to the 
benefits of default insurance) would be amended to provide that the 
Clearing House is not obliged to obtain or maintain any default 
insurance policy or make or receive the proceeds under any claim prior 
to processing to the next levels of assets in the applicable waterfall 
in Rule 908, and subject to the payment order specified in Rule 
1102(k). The amendments would further reflect that there could be a 
delay in receiving insurance proceeds such that other assets applicable 
under Rule 908 may be called prior to insurance proceeds being received 
and proceeds of any claim may need to be applied to meet losses across 
more than one Event of Default if there are multiple defaulters. The 
amendments would further set out the order in which proceeds of default 
insurance claims would be paid out if there are multiple defaulters 
within a certain period, such that insurance proceeds would not be 
applied to a default in respect of which there were no further losses 
after applying default resources up to and including the Clearing House 
contribution, and would be applied to remaining losses based on which 
default occurred first in time, and to losses from defaults occurring 
simultaneously (including defaults occurring on the same day) on a pro 
rata basis.
    Rule 1102(k) (which addresses allocation of amounts recovered from 
a Defaulter) would be amended to address application of recoveries to 
pay amounts owed to default insurers in respect of default insurance, 
as well as reimbursements to Clearing Members and the Clearing House in 
respect of their contributions that have been used, in the reverse 
order in which assets were applied under Rule 908 (i.e., to non-
defaulting Clearing Members in respect of their Guaranty Fund 
Contributions that had been applied, then to the default insurance 
provider in respect of amounts owed to it, and then to the Clearing 
House in respect of its default contribution). Rule 1102(k) would also 
be revised to clarify that application of such amounts would be subject 
to (i) retaining or repaying amounts applied by the Clearing House 
(which would no longer include claims under insurance policies) or 
other third parties applied to meet shortfalls; (ii) if applicable, 
reimbursing payments to Persons that made Assessment Contributions in 
the reverse order specified in Rule 908; and (iii) if applicable, 
meeting certain repayment obligations under Rules 909(j), 914(j) or 
916(n).
    Rule 909(j) (which addresses reimbursement of Assessment 
Contributions) would also be amended to reflect the application of 
default insurance. The amendments would expand the existing provision 
to provide that if, after any Assessment Contribution has been paid in 
relation to an Event of Default, the Clearing House collects on the 
defaulted obligation, loss or shortfall in whole or in part from an 
insurer, the Clearing House would refund the collected

[[Page 36905]]

amount, less expenses, to non-defaulting Clearing Members in respect of 
their paid Assessment Contributions. The amendment would also add a 
drafting clarification that such reimbursements are subject to the 
Clearing House retaining or repaying amounts applied to meet any 
shortfall and certain repayment obligations, if applicable, under Rules 
914(j) (addressing payment of recoveries to persons that were subject 
to reduced gains distributions under Rule 914) and 916(n) (addressing 
payments of recoveries to persons that received reduced amounts in the 
case of product termination under Rule 916), which is consistent with 
the existing language of Rule 914(j) and 916(n).
    The term ``Available Non-Defaulter Resources'' in Rule 913 would be 
amended to include claims under default insurance policies available to 
be applied pursuant to Rule 908, provided that they were received in 
cleared funds at the time the Clearing House performs a calculation of 
Available Non-Defaulter Resources.
    Rule 914(j) (which addresses application of recoveries in the 
context of reduced gains distribution) would be extended such that it 
would also apply where the Clearing House receives insurance proceeds. 
Existing Rule 914(j) provides that if the Clearing House receives an 
amount that would, had it been paid on time, have increased the 
Clearing House's available resources on a day on which a Margin Account 
Adjustment was made in connection with Reduced Gains Distributions, the 
Clearing House would distribute the amounts received first to non-
defaulting Contributors who were liable to pay an adjustment on a pro 
rata basis and second in accordance with Rule 1102(k) (as described 
above). The amendment would include default insurance proceeds in the 
type of received amounts subject to the rule.
    Similarly, Rule 916(n) (which addresses application of recoveries 
in the context of product termination) would be amended such that it 
also applies to insurance proceeds. Existing Rule 916 in general 
permits the Clearing House to terminate the open contracts in a 
relevant contract category (e.g., F&O or CDS) under specified 
circumstances, including in certain cases following an Under-priced 
Auction or where the Clearing House determines there are not sufficient 
Clearing Members to support continued clearing of the relevant contract 
category. In the case of such a termination of a contract category, 
under existing Rule 916(n), where ICE Clear Europe receives an amount 
that would, had it been paid on time, have increased the amount owed to 
(or decreased the amount owed by) Clearing Members or Sponsored 
Principals upon termination of a contract category, ICE Clear Europe 
would distribute the amount received first to non-defaulting Clearing 
Members or Sponsored Principals who received less in respect of product 
termination than they were otherwise owed, then in accordance with Rule 
914(j) (as discussed above), and then in accordance with Rule 1102(k) 
(as discussed above). The amendment would include default insurance 
proceeds in the type of received amounts subject to distribution under 
Rule 916(n).
(b) Statutory Basis
    ICE Clear Europe believes that the proposed rule changes are 
consistent with the requirements of Section 17A of the Act \4\ and the 
regulations thereunder applicable to it, including the applicable 
standards under Rule 17Ad-22.\5\ In particular, Section 17A(b)(3)(F) of 
the Act requires that the rule change be consistent with the prompt and 
accurate clearance and settlement of securities transactions and 
derivative agreements, contracts and transactions cleared by ICE Clear 
Europe, the safeguarding of securities and funds in the custody or 
control of ICE Clear Europe or for which it is responsible, and the 
protection of investors and the public interest.\6\ The proposed 
changes amend the default waterfalls in Rule 908 to apply the proceeds 
of default insurance, if any, as an additional default resource after 
the application of ICE Clear Europe's own initial contributions and 
prior to the application of guaranty fund contributions or assessment 
contributions of non-defaulting Clearing Members. Placing the proceeds 
from any default insurance that ICE Clear Europe may receive before the 
guaranty fund resources of non-defaulting Clearing Members in the 
default waterfall is generally favorable to non-defaulting Clearing 
Members and enhances ICE Clear Europe's procedures that are designed to 
protect and ensure the safety of Clearing Member funds and assets. 
Although ICE Clear Europe is not relying on the additional default 
resources from default insurance to meet regulatory minimum financial 
requirements, in ICE Clear Europe's view, the proposed changes to the 
Rules nonetheless enhance ICE Clear Europe's ability to manage the risk 
of defaults by providing resources to cover losses from Clearing Member 
defaults, prior to the need to use guaranty fund resources from non-
defaulting Clearing Members, thereby promoting the prompt and accurate 
clearance and settlement of securities transactions, derivatives 
agreements, contracts, and transactions and the safeguarding of 
securities and funds which are in the custody or control of ICE Clear 
Europe or for which it is responsible within the meaning of Section 
17A(b)(3)(F) of the Act.\7\
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    \4\ 15 U.S.C. 78q-1.
    \5\ 17 CFR 240.17Ad-22.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    The amendments will also satisfy relevant requirements of Rule 
17Ad-22,\8\ as set forth in the following discussion.
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    \8\ 17 CFR 240.17Ad-22.
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    Rule 17Ad-22(e)(4) \9\ requires ICE Clear Europe to maintain 
financial resources at a minimum sufficient to enable it to cover a 
wide range of foreseeable stress scenarios that include, but are not 
limited to, the default of the two participant families that would 
potentially cause the largest aggregate credit exposure in extreme but 
plausible market conditions. ICE Clear Europe is not relying on default 
insurance to meet its regulatory financial resource requirements, 
including for purposes of Rule 17Ad-22(e)(4), and is not reducing the 
amount of its other relevant financial resources. ICE Clear Europe 
believes that the proposed revisions will nonetheless enhance its 
default waterfall and default management procedures. As described 
above, the proposed amendments contemplate the possibility of ICE Clear 
Europe receiving proceeds from default insurance, which would provide 
additional default resources to cover losses from Clearing Member 
defaults, prior to the need to use guaranty fund resources from non-
defaulting Clearing Members. Conforming changes proposed to Rule 
1103(e) would permit the use of Guaranty Fund Contributions to occur 
prior to receipt of any default insurance proceeds and the application 
of default insurance proceeds to meet losses across multiple Events of 
Default. As such, default insurance would, in ICE Clear Europe's view, 
represents a tool that strengthens ICE Clear Europe's ability to manage 
its financial resources and withstand the pressures of defaults, 
consistent with the requirements of Rule 17Ad-22(b)(3).\10\
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    \9\ 17 CFR 240.17Ad-22(e)(r).
    \10\ 17 CFR 240.17Ad-22(e)(4).
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    Rule 17Ad-22(e)(13) \11\ requires ICE Clear Europe to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to ensure it has the authority and operational 
capacity to take timely

[[Page 36906]]

action to contain losses and liquidity demands and continue to meet its 
obligations in the case of participant default. The proposed changes to 
the Rules integrate default insurance into the default waterfall, 
providing additional potential default resources to cover losses from 
Clearing Member defaults, prior to the need to use guaranty fund 
resources from non-defaulting Clearing Members. Amended Rule 1103(e) 
provides that ICE Clear Europe may use the contributions of non-
defaulting Clearing Members to the guaranty fund prior to the receipt 
of proceeds owed under the default insurance provided that those 
Clearing Members are reimbursed from the insurance proceeds when 
received. Given that there may be delays in making and processing an 
insurance claim, this provision ensures that the existence and use of 
default insurance does not interfere with ICE Clear Europe's default 
management and allows ICE Clear Europe to continue its default 
management process without having to wait for the payment of insurance 
proceeds. The proposed amendments thus ensure that ICE Clear Europe can 
take timely action to contain losses and liquidity pressures and to 
continue meeting its obligations in the event of a participant default, 
consistent with the requirements of Rule 17Ad-22(e)(13).\12\
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    \11\ 17 CFR 240.17Ad-22(e)(13).
    \12\ 17 CFR 240.17Ad-22(e)(13).
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed amendments would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purpose of the Act. The amendments 
will apply consistently across all Clearing Members or across all 
Clearing Members in a particular product category, their customers and 
other market participants. Furthermore, as the amendments would place 
the application of proceeds from default insurance above Clearing 
Member guaranty fund contributions and contemplates certain repayments 
to Clearing Members upon collection from default insurers, the 
amendments are generally consistent with the interests of Clearing 
Members. As a result, ICE Clear Europe does not expect that the 
proposed changes will adversely affect access to clearing or the 
ability of Clearing Members, their customers or other market 
participants to continue to clear contracts. ICE Clear Europe also does 
not believe the amendments would materially affect the cost of clearing 
or otherwise limit market participants' choices for selecting clearing 
services. Accordingly, ICE Clear Europe does not believe the amendments 
would impose any burden on competition not necessary or appropriate in 
furtherance of the purpose of the Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    ICE Clear Europe has conducted a public consultation the proposed 
amendments \13\ and received one written response. The commenter 
inquired into whether the total default insurance coverage covers both 
F&O and CDS clearing together and, if both, how the insurance policy 
will be applied if the defaulting clearing member was active in both 
clearing segments. ICE Clear Europe noted that these points were 
addressed in the consultation Circular, which states that the coverage 
includes both F&O and CDS Contract Categories, and proposed Rule 
908(g)(iii), which states that proceeds of any insurance policy claim 
shall be applied to each segment on a basis pro rata to the shortfall, 
loss or liability of each Default Amount (as defined in Rule 908(g)) 
less Clearing House Contributions applied to such amount. No changes 
were made as a result of the comments.
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    \13\ ICE Clear Europe Circular C20/037 (March 24, 2020), 
available at https://www.theice.com/publicdocs/clear_europe/circulars/C20037.pdf (the ``Circular'').
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ICEEU-2020-005 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-ICEEU-2020-005. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings will also be available for inspection 
and copying at the principal office of ICE Clear Europe and on ICE 
Clear Europe's website at https://www.theice.com/clear-europe/regulation.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ICEEU-2020-005 and should be 
submitted on or before July 9, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13120 Filed 6-17-20; 8:45 am]
BILLING CODE 8011-01-P


