[Federal Register Volume 85, Number 149 (Monday, August 3, 2020)]
[Notices]
[Pages 46763-46766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16705]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89409; File No. SR-ICEEU-2020-005]


Self-Regulatory Organizations; ICEEU Limited; Order Approving 
Proposed Rule Change Relating to Amendments to the ICEEU Clearing Rules

July 28, 2020.

I. Introduction

    On June 2, 2020, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
revise its Clearing Rules (the ``Rules'') \3\ to account for default 
insurance proceeds. The proposed rule change was published for comment 
in the Federal Register on June 18, 2020.\4\ The Commission did not 
receive comments on 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\ Securities Exchange Act Release No. 89060 (June 12, 2020), 
85 FR 36904 (June 18, 2020) (SR-ICEEU-2020-005) (``Notice'').
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II. Description of the Proposed Rule Change

    ICE Clear Europe proposes amendments to Parts 9 and 11 of the Rules 
relating to its use of default insurance that is intended to cover 
losses resulting from a Clearing Member default.\5\ Currently, ICE 
Clear Europe includes proceeds from default insurance among the 
resources available to meet the obligations and liabilities arising 
from a default for the F&O contract category, but not for the CDS or FX 
contract categories. Such default insurance provides an additional 
default resource to cover losses from Clearing Member defaults, prior 
to the need to use guaranty fund resources or assessment contributions 
from non-defaulting Clearing Members.
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    \5\ The following description of the proposed rule change is 
excerpted from the Notice, 85 FR 36904.
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    As noted further below, the proposed rule change would add 
insurance proceeds to the assets available for defaults for the CDS and 
FX contract categories, and would alter the placement of insurance 
proceeds in the default waterfall for the F&O contract category. 
However, ICE Clear Europe is not, and would not be, required to obtain 
or maintain default insurance.
    Specifically, the proposal would 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 each of 
these default waterfalls, after first applying the Defaulter's 
resources and then ICE Clear Europe's initial contribution (often 
referred to as its ``skin in the game'') in the waterfall of assets 
used to meet the obligations and liabilities of a Defaulter and any 
shortfall, loss or liability to ICE Clear Europe 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).) 
Default insurance proceeds would thus be applied before guaranty fund 
contributions and assessment contributions from non-defaulting Clearing 
Members.\6\
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    \6\ Conforming amendments would be made to the Rule 101 
definitions of ``ICE Clear Europe CDS GF Contribution,'' ``ICE Clear 
Europe F&O GF Contribution,'' and ``ICE Clear Europe FX GF 
Contribution'' as well as to Rule 909(a), reflecting the placement 
of default insurance proceeds in the applicable waterfalls under 
Rule 908.
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    Rule 1103(e) sets forth certain limitations with respect to the 
benefits of default insurance. The proposed rule change would amend 
this rule to clarify that ICE Clear Europe is not obligated to

[[Page 46764]]

obtain or keep in place or make any claim under any default insurance 
policy, or to make or receive the proceeds under any claim prior to 
moving to the next levels of assets in the applicable waterfalls 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 
that proceeds of any insurance claim may need to be applied to meet 
losses across more than one Event of Default if there are multiple 
Defaulters.
    In addition, the proposed rule change would amend the Rules to set 
out the order in which proceeds of default insurance claims would be 
paid out if there are multiple Defaulters within a certain period. 
Specifically, insurance proceeds would not be applied to defaults for 
which there were no further losses after applying default resources up 
to and including the ICE Clear Europe initial contribution. If there 
are further losses, then insurance proceeds would be applied to 
remaining losses based on which default occurred first in time, and to 
losses from defaults occurring simultaneously (which incldues defaults 
occurring on the same day) on a pro rata basis.
    Rule 1102(k) currently addresses the allocation of amounts 
recovered from a Defaulter to Guaranty Fund Contributions of non-
defaulting Clearing Members. The proposed rule change would amend this 
rule to address application of these recoveries to pay amounts owed to 
default insurers, as well as reimbursements to other Clearing Members 
and ICE Clear Europe with respect to their contributions and 
assessments. Specifically, these recoveries would be paid in the 
reverse order of 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 ICE Clear Europe 
in respect of its initial 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 ICE Clear Europe (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, ICE Clear Europe collects on the 
defaulted obligation, loss or shortfall in whole or in part from an 
insurer, ICE Clear Europe would refund the collected 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 ICE Clear Europe 
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 cash proceeds from claims under default insurance 
policies available to be applied pursuant to Rule 908, provided that 
such proceeds were received at the time ICE Clear Europe performs a 
calculation of Available Non-Defaulter Resources.
    The proposed rule change would also amend Rule 914(j) with respect 
to the application of recoveries in the context of reduced gains 
distribution. Currently, this Rule provides that if ICE Clear Europe 
receives an amount from a Defaulter or another Clearing Member or 
Sponsored Principal that would, had it been paid on time, have 
increased ICE Clear Europe's Available Resources on a day on which a 
Margin Account Adjustment was made in connection with Reduced Gains 
Distributions, ICE Clear Europe 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). Under the amendment, default insurance 
proceeds would be included in the type of received amounts subject to 
the rule.
    Similarly, the proposed rule change would amend Rule 916(n), which 
addresses application of recoveries in the context of product 
termination. Currently, Rule 916, in general, permits ICE Clear Europe 
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 ICE Clear Europe determines 
there are not sufficient Clearing Members to support continued clearing 
of the relevant contract category. Currently, pursuant to Rule 916(n), 
in the event that ICE Clear Europe terminates a contract category and 
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).

III. 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 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the organization 
presenting it.\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 Rules 17Ad-22(e)(4) \9\ and 17Ad-22(e)(13) \10\ 
thereunder.
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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(e)(4).
    \10\ 17 CFR 240.17Ad-22(e)(13).
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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 ICE Clear Europe be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and, to 
the extent applicable, derivative agreements, contracts, and 
transactions, to assure the safeguarding of securities and funds which 
are in the custody or control of ICE Clear Europe or for which it is 
responsible, and, in general, to protect investors and the public 
interest.\11\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).

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[[Page 46765]]

    As discussed above, the proposed rule change would amend the 
default waterfalls for the CDS and FX categories to include the 
proceeds of default insurance, if any, as an additional default 
resource after the application of the Defaulter's own resources and ICE 
Clear Europe's own initial contributions and prior to the application 
of guaranty fund contributions or assessments from non-defaulting 
Clearing Members. In addition, the proposed rule change would alter the 
order of the resources identified in the default waterfall for the F&O 
category, such that proceeds from default insurance would come third, 
after the application the Defaulter's own resources and ICE Clear 
Europe's initial contribution and prior to the application of Guaranty 
Fund contributions or assessments from non-defaulting Clearing Members. 
The Commission believes that by including additional financial 
resources in its default management system, ICE Clear Europe would 
enhance the financial resources used to manage defaults. Specifically, 
the Commission believes that the ability to use the proceeds of default 
insurance in this manner would provide ICE Clear Europe with an 
additional potential source of default liquidity with respect to the 
CDS and FX product categories. In addition, the placement of the 
default insurance proceeds in the default waterfalls for all three 
categories could allow ICE Clear Europe to avoid utilizing the 
resources of non-defaulting Clearing Members, which, in turn could 
reduce the risk of loss contagion (i.e., the risk of losses arising at 
non-defaulting Clearing Members if ICE Clear Europe has to utilize the 
guaranty fund, which would then be subject to replenishment). In 
addition, these financial resources would be more likely to remain 
available for subsequent defaults and also provide additional financial 
resources necessary to ensure ICE Clear Europe's ability to safeguard 
securities and funds.
    For these reasons, the Commission finds that the proposed rule 
change would promote the prompt and accurate clearance and settlement 
of securities transactions and to assure the safeguarding of securities 
and funds in ICE Clear Europe's custody and control. Therefore, the 
Commission finds the proposed rule change is consistent with section 
17A(b)(3)(F) of the Act.\12\
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4)

    Rule 17Ad-22(e)(4) \13\ requires ICE Clear Europe to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to, as applicable, effectively identify, measure, 
monitor, and manage its credit exposures to participants and those 
arising from its payment, clearing, and settlement processes, including 
by maintaining additional financial resources at a minimum 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.\14\
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    \13\ 17 CFR 240.17Ad-22(e)(4).
    \14\ 17 CFR 240.17Ad-22(e)(4)(ii).
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    As noted above, the proposed rule change would revise ICE Clear 
Europe's rules to account for the receipt of default insurance proceeds 
for all product categories prior to the need to use guaranty fund 
contributions and assessments from non-defaulting Clearing Members, 
such that default insurance proceeds would be placed third in the 
waterfall of assets after Defaulter resources and ICE Clear Europe's 
initial contribution used to meet the obligations and liabilities of a 
Defaulter. Further, in the event insurance proceeds are received after 
mutualized default or other resources are used, the proposed rule 
change would allow the proceeds to repay non-defaulting Clearing 
Members, including for such things as assessments or reduced gains 
distributions that otherwise would not have been made had the insurance 
proceeds been received at the time. The Commission believes that by 
adding insurance proceeds to its financial resources in this way, the 
proposal should help ICE Clear Europe to preserve mutualized default 
resources and the resources of individual non-defaulting Clearing 
Members, which in turn would give it the ability to manage its credit 
exposures and cover a wide range of foreseeable stress scenarios with 
additional financial resources.
    As noted above, the proposed rule change would also allow for the 
use of insurance proceeds in circumstances when ICE Clear Europe 
terminates open contracts. Specifically, 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. The 
proposal would include default insurance proceeds in the type of 
received amounts subject to distribution. The Commission believes that 
the application of additional financial resources in this way would 
strengthen its overall ability to deal with a variety of stress 
scenarios by lessening the burden on Clearing Members during contract 
termination.
    For these reasons, the Commission finds that the proposed rule 
change is consistent with Rule 17Ad-22(e)(4)(ii).\15\
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    \15\ 17 CFR 240.17Ad-22(e)(4)(ii).
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C. Consistency With Rule 17Ad-22(e)(13)

    Rule 17Ad-22(e)(13) requires ICE Clear Europe to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to, as applicable, ensure it has the authority and 
operational capacity to take timely action to contain losses and 
liquidity demands and continue to meet its obligations.\16\
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    \16\ 17 CFR 240.17Ad-22(e)(13).
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    As noted above, the proposed rule change would provide that ICE 
Clear Europe would not be obligated to obtain or keep in place or make 
any claim under any default insurance policy or make, or receive the 
proceeds under, any claim prior to processing to the next levels of 
assets in the event of a default. Further, the proposed rule change 
would specify how ICE Clear Europe would apply the proceeds of any 
default insurance after other resources, such as non-defaulting 
Clearing Members' guaranty fund contributions or assessments, had been 
used to address losses arising from a default. The Commission believes 
that these aspects of the proposed rule change will enable ICE Clear 
Europe to, if necessary, 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, which in turn 
ensures that ICE Clear Europe can take timely action to contain losses 
and meet liquidity demands even if there are delays in making and 
processing an insurance claim and that the existence and use of default 
insurance does not interfere with meeting such obligations.
    For the reasons stated above, the Commission believes that the 
proposed rule change is consistent with Rule 17Ad-22(e)(13).\17\
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    \17\ 17 CFR 240.17Ad-22(e)(13).

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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 \18\ and Rules 17Ad-22(e)(4) and 17Ad-22(e)(13) thereunder.\19\
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    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(e)(4) and 17 CFR 240.17Ad-22(e)(13).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\20\ that the proposed rule change (SR-ICEEU-2020-005) be, and hereby 
is, approved.\21\
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    \20\ 15 U.S.C. 78s(b)(2).
    \21\ 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.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16705 Filed 7-31-20; 8:45 am]
BILLING CODE 8011-01-P


