[Federal Register Volume 86, Number 76 (Thursday, April 22, 2021)]
[Notices]
[Pages 21418-21429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-08315]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91586; File No. SR-ICEEU-2021-006]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to the ICE Clear Europe CDS 
Clearing Stress Testing Policy, CDS End of Day Price Discovery Policy, 
CDS Risk Model Description and CDS Risk Policy and CDS Parameters 
Review Procedures

April 16, 2021.

I. Introduction

    On February 23, 2021, 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 (the ``Act''),\1\ and Rule 19b-4,\2\ a proposed 
rule change to amend its CDS End of Day Price Discovery Policy (``Price 
Discovery Policy''), CDS Clearing Stress Testing Policy (``Stress 
Testing Policy''), CDS Risk Policy (``Risk Policy''), and CDS Risk 
Model Description (``Risk Model Description'') and to formalize a set 
of CDS Parameters Review Procedures (``Parameters Review Procedures''). 
The proposed rule change was published for comment in the Federal 
Register on March 8, 2021.\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 Europe Limited; 
Notice of Filing of Proposed Rule Change Relating to the ICE Clear 
Europe CDS Clearing Stress Testing Policy, CDS End of Day Price 
Discovery Policy, CDS Risk Model Description and CDS Risk Policy and 
CDS Parameters Review Procedures, Exchange Act Release No. 91240 
(March 2, 2021); 86 FR 13417 (March 8, 2021) (SR-ICEEU-2021-006) 
(``Notice'').
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II. Description of the Proposed Rule Change

    As discussed further below, the proposed rule change would amend 
the Price Discovery Policy, Stress Testing Policy, Risk Policy, and 
Risk Model Description, and would formalize the Parameters Review 
Procedures, to describe more fully certain existing operational 
practices at ICE Clear Europe. The proposed rule change also would 
amend the Stress Testing Policy to incorporate the impact of the COVID-
19 pandemic into the stress testing framework and would amend the Risk 
Model Description to address findings of an independent validation.\4\
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    \4\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in the ICE Clear Europe Rulebook, Price 
Discovery Policy, Stress Testing Policy, Risk Policy, Risk Model 
Description, and Parameters Review Procedures, as applicable. The 
description that follows is excerpted from the Notice, 86 FR at 
13417.
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A. Amendments to the Price Discovery Policy

    The Price Discovery Policy describes the procedures and processes 
that ICE Clear Europe uses to produce reliable, market-driven prices 
for credit default swap (``CDS'') instruments. In order to provide more 
reliable pricing where fewer than three Clearing Members have open 
interest in a particular instrument, the proposed rule change would 
clarify the general process for determining prices in such a situation. 
The proposed rule change also would make minor terminology updates to 
add uniformity to defined terms, properly reference various ICE Clear 
Europe personnel and operations, add a new table illustrating example 
assignment of index risk factors to market proxy groups, and make 
typographical corrections throughout the document to better reflect the 
Rules and other ICE Clear Europe documentation.
    The proposed rule change first would amend the Price Discovery 
Policy to consolidate and clarify the process that ICE Clear Europe 
would use to determine prices for a particular instrument or risk sub-
factor when fewer than three Clearing Members have open interest in 
that instrument or risk sub-factor.\5\ The Price Discovery Policy 
currently states that if fewer than three Clearing Members clear open 
interest in an instrument, ICE Clear Europe may require all Clearing 
Members to provide a price submission for that instrument. In that 
case, the Price Discovery Policy further provides that ICE Clear Europe 
would not use its firm trade mechanism to require Clearing Members to 
enter into trades for that instrument at the prices submitted. For 
single-name CDS, the current version of the Price Discovery Policy 
provides an identical process where fewer than three Clearing Members 
have open interest in a particular risk sub-factor.
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    \5\ As explained in the Price Discovery Policy, the term 
instrument refers to the complete set of contractual terms that 
affect the value of a CDS contract, while the term risk sub-factor 
refers to the complete set of contractual terms that affect the 
value of a CDS contract as well as the reference entity for that 
contract.
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    The proposed rule change would combine the separately described 
processes for instruments and risk sub-factors. The proposed amendments 
first would state that tradeable quotes (meaning price submissions from 
Clearing Members having an open interest) would be ICE Clear Europe's 
preferred source of price data and should be used where possible and 
reliable. As revised, the Price Discovery Policy would acknowledge, 
however, that where there are fewer than three Clearing Members with 
open interest in an instrument or risk sub-factor, there would not be 
enough Clearing Members for ICE Clear Europe to use its firm trade 
mechanism.\6\ In that case, ICE Clear Europe would require indicative 
price quotes \7\ from all Clearing Members but would not require 
Clearing Members to enter into firm trades at those prices.

[[Page 21419]]

The minimum number of three Clearing Members, below which indicative 
quotes would be used, would be subject to ongoing review by ICE Clear 
Europe and ICE Clear Europe could change it as necessary.
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    \6\ As described above, under ICE Clear Europe's firm trade 
mechanism, ICE Clear Europe selects Clearing Members to enter into 
trades at the prices submitted, and thus this serves as means of 
ensuring that Clearing Members submit realistic price quotes.
    \7\ As proposed to be revised, the Price Discovery Policy would 
provide that an indicative quote is a reasonable estimate of the 
market price but does not necessarily reflect a price at which the 
member would transact.
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    The proposed rule change would also add a new Table 4 illustrating 
an example of assignment of certain CDS indices (referred to as index 
risk factors) to market proxy groups. The proposed new Table 4 would 
show the index risk factors for each of the CDX and iTraxx market proxy 
groups, clarifying how ICE Clear Europe categorizes those index risk 
factors. The market proxy group for a particular index risk factor 
affects how ICE Clear Europe determines the end-of-day bid-offer width 
for that index risk factor.\8\ Relatedly, the proposed rule change 
would update a reference to Table 2 in the EOD BOWs section to Table 4 
and update existing references to Tables 4 through 7 to Tables 5 
through 8. The new table would clarify the Price Discovery Policy and 
would not change ICE Clear Europe's existing practices.\9\
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    \8\ Notice, 86 FR at 13418.
    \9\ Notice, 86 FR at 13418.
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    Moreover, the proposed rule change would update the governance 
section of the policy. In the governance section addressing material 
changes to the EOD price discovery methodology, spread-to-price 
conversion determinants, or parameters, the proposed rule change would 
clarify that review is to be performed by the Trading Advisory Group 
(instead of the Trading Advisory Committee) and the Product Risk 
Committee (instead of the Risk Committee). These changes would reflect 
the current names of those groups at ICE Clear Europe. Moreover, the 
Price Discovery Policy currently requires that the Board and Executive 
Risk Committee be notified of level red breaches of the policy, which 
are the most severe breaches, as soon as possible. The proposed rule 
change would replace ``as soon as possible'' with ``immediately'', thus 
clarifying the need for immediate notification to the Board and 
Executive Risk Committee.
    Finally, the proposed rule change would update certain references 
and the titles of defined terms throughout the Price Discovery Policy 
to be consistent with terminology used in the Rules and other ICE Clear 
Europe documentation and make other minor typographical updates. For 
example, the proposed rule change would replace the term ``Clearing 
Participant'' with ``Clearing Member''; ``CP'' with ``CM''; and 
``Trading Advisory Committee''/``TAC'' with ``Trading Advisory Group''/
``TAG''. Moreover, the proposed rule change would modify the statement 
that trading desks at each self-clearing member are ``required'' to 
copy ICE Clear Europe on intraday quotes that are provided to market 
participants via email to instead state that the self-clearing members 
are ``requested'' to copy ICE Clear Europe on such emails.

B. Amendments to the Stress Testing Policy

    The Stress Testing Policy describes the practices that ICE Clear 
Europe uses to identify potential weaknesses in its risk methodologies 
and ensure that its financial resources are adequate. The proposed rule 
change would make a number of amendments to the Stress Testing Policy, 
including adding stress test scenarios; clarifications and enhancements 
to the stress-testing methodology description to capture significant 
market behaviors observed during the COVID-19 pandemic; and 
clarifications to the governance of stress testing. These changes are 
described below and organized according to the sections of the Stress 
Testing Policy.
    In addition to those changes, throughout the various sections of 
the Stress Testing Policy the proposed rule change would correct 
typographical errors, update certain references, and update the titles 
of defined terms. For example, the proposed rule change would replace 
the term ``Members'' with ``CM'' to refer to Clearing Members and 
``Guaranty Fund'' with ``GF''. The proposed rule change would also 
replace references to the ``Board Risk Committee'' or ``BRC'' with 
references to the ``Model Oversight Committee'' or ``MOC'', to ensure 
that the Stress Testing Policy references the correct ICE Clear Europe 
committees.
i. Purpose
    The proposed rule change would revise the discussion of the purpose 
of the Stress Testing Policy to better reflect how the policy is 
integrated into ICE Clear Europe's risk procedures and governance 
structure and the Clearing House's current governance framework. 
Specifically, the proposed rule change would reference the Model 
Oversight Committee (``MOC'') rather than an outdated reference to the 
Board Risk Committee (``BRC''). Further, the proposed rule change would 
state that any terms not defined in the policy would be defined in both 
the ICE Clear Europe CDS Risk Policy and the Rules, rather than solely 
in the Rules.
ii. Methodology
    First, the proposed rule change would amend the methodology section 
of the Stress Testing Policy. The methodology section explains ICE 
Clear Europe's overall process for creating stress scenarios and 
applying those scenarios to actual cleared portfolios and hypothetical 
portfolios. ICE Clear Europe uses this stress testing process to 
determine the sufficiency of its financial resources. The proposed rule 
change would add a discussion of stress testing in the context of wrong 
way risk to the general methodology section of the policy.\10\ As 
described in the revised Stress Testing Policy, ICE Clear Europe would 
combine into one sub-portfolio all positions in index risk factors and 
single-name risk factors that exhibit high levels of positive 
association with a Clearing Member's portfolio. ICE Clear Europe would 
then separately stress test this sub-portfolio to further analyze the 
wrong way risk. The proposed rule change is intended to better reflect 
existing practice and does not reflect a change in Clearing House 
practice.\11\
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    \10\ As described in the Risk Model Description, ICE Clear 
Europe's risk model considers two types of wrong way risk: Specific 
and general. Specific wrong way risk results from a Clearing 
Member's self-referencing trades, meaning CDS trades whose 
underlying reference entity is the Clearing Member, or an entity 
guaranteed by, or affiliated with the Clearing Member. General wrong 
way risk results from trades that involve instruments that are 
highly correlated with a Clearing Member, or an entity guaranteed 
by, or affiliated with a Clearing Member.
    \11\ Notice, 86 FR at 13418.
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    The proposed rule change would also revise the methodology section 
to update the process for the retirement or modification of outdated 
stress scenarios or portfolios. Currently, the methodology section of 
the Stress Testing Policy provides that in the event that a scenario or 
portfolio is no longer applicable or has been superseded, ICE Clear 
Europe's Clearing Risk Department may retire or modify the outdated 
scenario or portfolio by (i) consulting with ICE Clear Europe senior 
management; (ii) conducting analysis to support its recommendation; 
(iii) discussing the analysis and obtaining input from the Risk Working 
Group; and (iv) presenting the final analysis to the CDS Risk Committee 
and/or the BRC for approval. As revised, when the Clearing Risk 
Department seeks to retire or modify a scenario or portfolio, it would 
first conduct an analysis to determine whether the change is 
significant. The Risk Oversight Department would review this analysis. 
The ICE Clear Europe Board, or its delegated committee, would then 
approve the decommissioning of scenarios if that decommissioning 
constituted a significant change, while the MOC would approve the 
decommissioning of scenarios (if it did not constitute a

[[Page 21420]]

significant change) or recommend the decommissioning of scenarios to 
the Board if the change were deemed significant in the course of the 
MOC's review. Under the revised Stress Testing Policy, the criteria to 
determine the significance would be in accordance with the applicable 
law and the existing regulatory guidelines. The proposed rule change 
would largely formalize current practice and reflect the role of the 
MOC under the Clearing House's Model Risk Governance Framework.
    Similarly, the proposed rule change would also clarify that if the 
Clearing Risk Department wishes to add new scenarios or portfolios, the 
MOC must approve the addition, but the Board's approval is not 
required. Currently, the Stress Testing Policy provides that where the 
Clearing Risk Department seeks to add new scenarios or portfolios, the 
CDS Risk Committee is informed of the additions, but its recommendation 
or approval is not required.
    Finally, the proposed rule change would also describe and clarify 
one of the assumptions that ICE Clear Europe currently uses in stress 
testing. Specifically, the proposed rule change would add a statement 
that during the execution of stress testing and sensitivity testing, 
under the multiple Clearing Members default scenario, the stress 
testing would explicitly incorporate the conditional uncollateralized 
loss-given-defaults resulting from the defaulting Clearing Members' 
single-name positions.
iii. Predefined Scenarios; New COVID-19 Scenarios
    The proposed rule change would next make a number of revisions to 
the section describing the predefined stress scenarios that ICE Clear 
Europe uses in stress testing. The proposed rule change first would 
clarify that the scenarios reflect a margin period of risk from 1 to 7 
days, taking into account the 5-day margin period used in the existing 
margin methodology for house accounts and the 7-day margin period used 
in the existing margin methodology for client accounts. To accommodate 
this difference, the proposed rule change would replace references to a 
5-day margin period of risk with an N-day margin period of risk, with 
N-day representing the greatest relevant stress period (i.e., 5 days 
for house accounts and 7 days for client accounts).
    Next, the proposed rule change would amend the description of each 
of ICE Clear Europe's stress scenarios to describe them more 
thoroughly. The Stress Testing Policy categorizes the stress testing 
scenarios as either extreme but plausible or extreme market. Extreme 
but plausible scenarios are those scenarios that are believed to be 
potential, but with a low probability of occurrence, based on 
historically observed data or that are constructed based on 
hypothetical data. Extreme market scenarios, on the other hand, are 
designed to test the performance of ICE Clear Europe's risk model, as 
described in the Risk Model Description, under extreme conditions but 
are not expected to be realized market outcomes. The Stress Testing 
Policy further categorizes extreme but plausible scenarios as either 
historically observed or hypothetical.
    With respect to the historically observed extreme but plausible 
scenarios, the proposed rule change would update the description of 
existing scenarios. First, the proposed rule change would update the 
description of the margin period of risk to reflect the use of N-day, 
rather than 5-day, as discussed above. The proposed rule change would 
also add further description of the historical period on which the 
scenarios are based and the determination of the stress period. For 
example, in the description of the 2008/2009 credit crisis scenario, 
the proposed rule change would clarify that the determination of the 
exact stress period is defined by the greatest observed change of 
spreads of the Most Actively Traded Instrument (``MATI'') for each 
relevant sub-portfolio. The proposed rule change would make a similar 
clarification in the description of the Western European Credit Crisis 
scenarios. For the Lehman Brothers scenarios, the proposed rule change 
would define the scenario magnitudes for each risk factor according to 
both its sector classification and time to maturity of the considered 
instrument. ICE Clear Europe would derive the corresponding stress 
test, titled the Opposite LB Default Price Change Scenarios, from the 
Lehman Brothers scenarios by multiplying the scenario result by a 
negative factor in order to reflect the reduced magnitudes of the 
observed price increases during the considered period. These proposed 
rule changes are intended to more thoroughly describe each of these 
existing stress testing scenarios.\12\
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    \12\ Notice, 86 FR at 13418-13419.
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    The proposed rule change also would clarify the scope of the 
discordant spread scenarios for corporate and sovereign single-name 
CDS. Specifically, the proposed rule change would update the 
description to better specify the indices on which the discordant 
scenarios are based. For example, the Stress Testing Policy currently 
provides that the scenarios are based on discordant moves among major 
indices. The proposed rule change would revise this to instead refer to 
discordant moves among the major European and North American five year 
on-the-run indices. The proposed rule change would also state that the 
Corporate Single-Names and Indices Discordant Spread Scenarios, which 
reflect realizations when certain indices or sub-indices for the EU 
region and certain U.S. on-the-run indices exhibited the greatest 
combined discordant change, would be created and applied to single-
names and indices. Next, the proposed rule change would further update 
references to indices used in stress scenarios and state that other 
stress scenarios would be based on discordant spread realizations 
across European Indices. Finally, the proposed rule change would note 
that other stress scenarios would reflect discordant spreads 
realizations among geographical regions. These proposed rule changes 
are intended to more thoroughly describe each of these existing stress 
testing scenarios.\13\
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    \13\ Notice, 86 FR at 13419.
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    Finally, the proposed rule change would also add new historically 
observed scenarios based on market conditions during the COVID-19 
Pandemic. ICE Clear Europe would base these scenarios on stress market 
moves experienced between February and April 2020. The first set of 
scenarios, titled the COVID-19 Widening/Tightening Spread Scenarios, 
would be based on the greatest observed N-day relative spread 
increases/decreases during the period. The second set of scenarios, 
titled the COVID-19 Price Decrease Scenario, would be based on the 
greatest observed N-day relative price decreases during the period.
    With respect to the hypothetical extreme but plausible scenarios, 
the proposed rule change would add description of each of the current 
hypothetical scenarios and also add new scenarios based on discordant 
moves across different sectors and countries. For the current 
hypothetical scenarios, the proposed rule would clarify that ICE Clear 
Europe creates the 2008/2012 Crises Widening and Curve Inverting 
Scenarios by combining the largest shock among the 2008/2009 Credit 
Crisis Widening and the Western European Credit Crisis Widening 
Scenarios for each Risk Factor. The proposed rule change would add 
similar language to the description of the 2008/2012 Crises Tightening 
and Credit Curve Steepening Scenarios. The proposed rule change would 
also update the description of the Forward Looking

[[Page 21421]]

Credit Events Scenarios to clarify that the Clearing Member reference 
entity that would be considered to be in default would be different 
from the Clearing Member whose portfolio would be subject to the stress 
test.
    The proposed rule change would also add description of new 
scenarios titled the Sectors and Countries Discordant Scenarios. These 
scenarios would be designed to reproduce discordant moves across 
sectors and entities of different countries, in particular the large 
price moves in the oil benchmark products in the first half of 2020 and 
COVID-19 stress period.
    With respect to the Extreme Market Scenarios, the proposed rule 
change would clarify how ICE Clear Europe derives these scenarios. 
Specifically, ICE Clear Europe would create the extreme steepening and 
extreme inverting scenarios from crises steepening and crises inverting 
scenarios by applying a factor to steepening scenarios and doubling the 
shocks for inverting scenarios. Further, the proposed rule change would 
incorporate the new COVID-19 historical scenarios into the 
determination of extreme scenarios, much like the calculation of 
extreme scenarios based on the LB default scenario. Finally, the 
proposed rule change would clarify the description of the Guaranty Fund 
extreme market scenarios by specifying that these scenarios would be 
designed to account for the occurrence of credit events for two 
Clearing Member risk factor groups and three non-Clearing Member risk 
factor groups. The proposed rule change would also clarify that these 
scenarios consider an even more extreme case in which five risk factor 
groups for up to five Clearing Members undergo credit events.
iv. Guaranty Fund Adequacy Analysis
    The proposed rule change would revise the section that describes 
the Guaranty Fund adequacy analysis by noting that the number of 
defaults of reference entities is one of the major risks in the CDS 
clearing service. Because of that risk, the Clearing Risk Department 
considers complementary extreme scenarios where a combination of up to 
five risk factor groups for up to five Clearing Members would be 
assumed to default before simulating spreads widening and tightening on 
the non-defaulting entities in order to fully deplete the Guaranty 
Fund. The proposed rule change would explain that the scenario and 
analysis aim to provide estimates of the level of protection achieved 
through initial margin and Guaranty Fund in relation to multiple 
defaults. The proposed rule change is intended to clarify the stress-
testing description but does not reflect a change in current 
practice.\14\
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    \14\ Notice, 86 FR at 13420.
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v. Portfolio Selection
    The proposed rule change would update the description of the 
process for determination of sample portfolios for stress testing in 
the portfolio selection section. Currently, ICE Clear Europe applies 
the stress test scenarios to sample portfolios that are obtained from 
the actual cleared portfolios by considering positions opposite to 
those in the cleared portfolios. Under the proposed rule change, ICE 
Clear Europe would derive the portfolio from the currently cleared 
portfolios by only considering positions in index risk factors and 
sectors that exhibit a high degree of association with the Clearing 
Member at issue--in particular indices, sovereigns, and financials risk 
factors--rather than just considering exactly opposite positions. Next, 
the proposed rule change would further clarify that constructed sub-
portfolios would be subject to the stress test analysis with the 
standard set of stress test scenarios. The proposed rule change would 
further clarify that the aim of the stress analysis with the 
hypothetical portfolios would be to provide estimates of the potential 
exposure of Clearing Members to risk factors generating General Wrong 
Way Risk.
    Finally, the proposed rule change would remove the current 
reference to special strategy sample portfolios and instead add a new 
provision addressing application of stress testing scenarios to 
expected future portfolios upon the launch of new clearing services or 
products. This stress test analysis would be presented to and reviewed 
by the CDS Product Risk Committee prior to launch.
vi. Interpretation and Review of Stress-Testing Results
    The proposed rule change would amend the interpretation and review 
of the stress-testing results section to update the governance of 
enhancements to stress scenarios. Currently, the Stress Testing Policy 
provides that depending on the outcome of the stress testing, ICE Clear 
Europe's Clearing Risk Department may consider enhancements to ICE 
Clear Europe's risk model. The Stress Testing Policy provides that such 
enhancements to stress scenarios will first be discussed with senior 
management and then the CDS Risk Committee, and the Board Risk 
Committee, with ultimate approval by the ICE Clear Europe Board. The 
proposed rule change would revise this to provide that enhancements to 
stress scenarios would be discussed and approved based on the 
governance outlined in ICE Clear Europe's Model Risk Governance 
Framework.
    Similarly, the Stress Testing Policy currently notes that certain 
stress testing can lead to a review if the results show ICE Clear 
Europe's financial resources are insufficient. The proposed rule change 
would simplify this discussion by noting that ICE Clear Europe's 
financial resources should cover the two greatest Affiliate Groups' 
uncollateralized stress losses under the extreme but plausible market 
scenarios and if not, additional funds could be required and 
enhancements to the current risk methodology would be considered. 
Further, the proposed rule change would provide that the ICE Clear 
Europe Board and its delegated committees (rather than the CDS Risk 
Committee and BRC) would be provided with information as to the stress 
test results where necessary or appropriate to perform their duties.
    Finally, the proposed rule change would remove certain outdated 
and/or duplicative statements, including matters relating to governance 
that are now addressed in the Model Risk Governance Framework and 
outdated references to certain examples or specific committees. For 
example, under the proposed rule change, the MOC instead of the 
Executive Risk Committee would undertake any related deficiency 
analysis and review. Moreover, the Stress Testing Policy currently 
discusses the governance of the review and approval to changes to the 
stress scenarios, stress testing, or risk model. The proposed rule 
change would delete this description, because ICE Clear Europe would 
now conduct this review in accordance with the procedures in the Model 
Risk Governance Framework. Finally, under the proposed rule change, the 
stress testing report would be presented to the CDS Product Risk 
Committee instead of the CDS Risk Committee during scheduled meetings 
instead of scheduled monthly meetings.
vii. Policy Governance and Reporting
    The proposed changes to the policy governance and reporting 
section, would update the committees involved in the review and 
approval of the Stress Testing Policy, to be more consistent with other 
ICE Clear Europe documentation. For example, the CDS Risk Committee and 
the BRC currently review the Stress Testing policy annually. Under the 
proposed rule change, only the BRC would conduct

[[Page 21422]]

this annual review, and the proposed rule change would delete 
references to the CDS Risk Committee. Moreover, currently the Executive 
Risk Committee must discuss any material changes to the Stress Testing 
Policy and the Board must approve such changes on the advice of the CDS 
Risk Committee. Under the proposed rule change, the MOC, not the 
Executive Risk Committee, would discuss the changes and the Board would 
approve the changes on the advice of the CDS Product Risk Committee, 
rather than the CDS Risk Committee.
viii. Appendix
    In the appendix, the proposed rule change would update the 
description of the FX stress test scenario amendments to reflect the 
greatest N-day relative depreciation (instead of five-day), similar to 
the changes discussed above.

C. Amendments to the Risk Policy

    The Risk Policy provides an overview of the policies and procedures 
that ICE Clear Europe uses to manage and mitigate risks, including 
among other things, initial margin and Guaranty Fund requirements, 
mark-to-market margin, and intra-day risk monitoring. The proposed rule 
change would make a number of amendments to the Risk Policy. These 
changes are described below and organized according to the sections of 
the Risk Policy.
    In addition to these changes, throughout the Risk Policy, the 
proposed rule change would update the titles of certain defined terms. 
For example, the proposed rule change would replace use of the term 
``ICE Clear Europe'' with ``ICEU''. The proposed rule change would also 
replace ``general WWR'' with ``GWWR'' to mean general wrong way risk 
and replace ``Risk Factor Group'' with ``RFG''.
i. Initial Margin
    In the initial margin section of the Risk Policy, the proposed rule 
change would add further description of ICE Clear Europe's initial 
margin methodology. The proposed rule change would note that ICE Clear 
Europe's initial margin methodology uses a combined stress-based spread 
response value at risk measure and a Monte Carlo simulation spread 
response value at risk measure. The proposed rule change would then add 
further description of each of the stress-based spread response value 
at risk measure and the Monte Carlo simulation spread response value at 
risk measure.
    For the stress-based spread response value at risk measure, the 
proposed rule change would clarify the description of this measure. 
Currently, the Risk Policy provides that using this measure, ICE Clear 
Europe defines the spread scenarios using two credit regimes and three 
credit curve shapes. The proposed rule change would keep the 
description of the two credit regimes and three credit curve shapes but 
would clarify that the two credit regimes consist of widening and 
tightening regimes. Moreover, the Risk Policy lists the benchmark 
tenors for which ICE Clear Europe makes estimates under the spread 
response value at risk measure. The proposed rule change would add 
additional tenors to this list, to clarify the applicable benchmark 
tenors estimated for all the risk sub-factors and replace certain 
outdated references to tenors.
    For the Monte Carlo simulation spread response value at risk 
measure, the proposed rule change would add a new subsection to the 
Risk Policy to describe this approach. Under this approach, ICE Clear 
Europe would generate hypothetical scenarios regarding changes in CDS 
spreads, which ICE Clear Europe would use to re-price CDS instruments 
in a portfolio. ICE Clear Europe would then estimate a profit/loss for 
each re-priced CDS instrument. ICE Clear Europe would aggregate these 
estimated profit/loss figures and use them to estimate the value at 
risk measure for the portfolio.
    Moreover, the proposed rule change would update the description of 
the anti-procyclicality considerations to account for the changes to 
the Stress Testing Policy described above. The Risk Policy currently 
provides that to account for anti-procyclicality, it takes into 
consideration stress price changes derived from market behavior during 
and after the Lehman Brothers default period. The proposed rule change 
would expand this to take into consideration stress price changes 
derived from the extreme but plausible stress test scenarios, with a 
cross reference to the Stress Testing Policy. Thus, this change would 
take into account the broader range of scenarios in the revised Stress 
Testing Policy, discussed above.
    Finally, the proposed rule change would update the description of 
the monitoring of the initial margin methodology and of the governance 
concerning changes to the initial margin methodology. Currently, the 
Risk Policy provides that the Clearing Risk Department recommends 
margin methodology changes to the Board for approval, working in 
consultation with the Risk Working Group and the CDS Risk Committee. 
Under the proposed rule change, the Clearing Risk Department may 
recommend margin methodology changes based on the governance in the 
Model Risk Governance Framework, working in consultation with the Risk 
Working Group and the CDS Product Risk Committee.
ii. Mark-to-Market Margin
    In the mark-to-market margin section of the Risk Policy, the 
proposed rule change would delete the description of determination of 
cash owing, the payment of mark-to-market margin, the timing of margin 
calculations, the making of mark-to-market margin, and the rights of a 
Clearing Member upon a change in mark-to-market margin balance. These 
matters are generally covered by other ICE Clear Europe documentation, 
such as the Finance Procedures.
iii. Intra-Day Monitoring
    In the intra-day monitoring section of the Risk Policy, the 
proposed rule change would add description of how ICE Clear Europe 
assures itself of the quality of the intraday prices it receives for 
CDS. The proposed rule change would provide that ICE Clear Europe would 
ensure the quality of the intraday prices by monitoring and comparing 
the quotes received with the intraday prices of the transactions 
cleared at ICE CDS clearing houses and further that ICE Clear Europe 
could also compare intraday prices with those of another third-party 
provider.
    The proposed rule change would further amend the description of the 
intraday risk limit. As described in the Risk Policy, ICE Clear Europe 
uses intraday prices to re-value Clearing Members' portfolios and 
estimate an unrealized profit/loss. The unrealized profit/loss is 
compared to the intraday risk limit. The intraday risk limit is a limit 
on the amount of unrealized profit/loss that ICE Clear Europe would 
accept for a Clearing Member before taking additional action, such as 
increased monitoring or an intraday margin call. Currently, the 
intraday risk limit is 40% of a Clearing Member's total initial margin 
requirements, with a minimum amount of Euro 15 million and a cap of 
Euro 100 million. The proposed rule change would keep the intraday risk 
limit at 40% of a Clearing Member's total initial margin requirements, 
but would replace the fixed minimum and fixed cap (Euro 15 million and 
Euro 100 million, respectively), with a minimum amount corresponding to 
the Clearing Member's minimum Guaranty Fund contribution and a maximum 
amount set and

[[Page 21423]]

reviewed by ICE Clear Europe senior management and the CDS Product Risk 
Committee.\15\
---------------------------------------------------------------------------

    \15\ ICE Clear Europe represents that while there is no plan to 
change the existing EUR 100 million cap in practice, this change 
would give ICE Clear Europe flexibility if it determined it was 
appropriate to review and reconsider this amount in the future. 
Notice, 86 FR at 13421.
---------------------------------------------------------------------------

    The proposed rule change would also revise the list of actions that 
ICE Clear Europe would take in response to a Clearing Member's 
estimated intraday profit/loss approaching the intraday risk limit. 
Currently, the Risk Policy provides that once the estimated intraday 
profit/loss equals half of the intraday risk limit, ICE Clear Europe 
will investigate and closely monitor the Clearing Member. The proposed 
rule change would delete this provision because ICE Clear Europe 
considers it unnecessary in light of another requirement in the Risk 
Policy (i.e., that once the estimated intraday profit/loss exceeds half 
of the intraday risk limit, ICE Clear Europe will inform the Clearing 
Member that it may be subject to an intraday margin call, and the 
proposed rule change would not alter this provision). In ICE Clear 
Europe's view, this provision renders the investigation when the 
estimated intraday profit/loss equals half of the intraday risk limit 
unnecessary because in informing the Clearing Member that it may be 
subject to an intraday margin call, the Clearing Risk Department will 
make any necessary investigations of the matter.\16\
---------------------------------------------------------------------------

    \16\ Notice, 86 FR at 13421.
---------------------------------------------------------------------------

    Similarly, the proposed rule change would delete the requirement 
that ICE Clear Europe's Risk Management Department notify the ICE Clear 
Europe Treasury Department of a special margin call, as an operational 
detail that should not be covered by the Risk Policy. Moreover, ICE 
Clear Europe represents that the Clearing Risk Department would set the 
margin level and communicate it to other ICE Clear Europe departments 
in the ordinary course, as it does for any change of margin level.\17\
---------------------------------------------------------------------------

    \17\ Notice, 86 FR at 13421.
---------------------------------------------------------------------------

iv. CDS Guaranty Fund
    In the CDS Guaranty Fund section of the Risk Policy, the proposed 
rule change would revise the description of the Guaranty Fund at the 
beginning of this section. Currently, the Risk Policy describes the 
Guaranty Fund as mutualizing losses under extreme but plausible market 
scenarios and as designed to provide adequate funds to cover losses 
associated with the default of the two Clearing Members, as well as any 
affiliated Clearing Members, with the greatest potential losses under 
these scenarios. The proposed rule change would simplify this 
description to state that the ICE Clear Europe Guaranty Fund is 
designed to cover losses under extreme but plausible market scenarios 
with respect to two Affiliate Groups of Clearing Members.
    The proposed rule change would also amend the discussion of the 
anti-procyclicality considerations of the Guaranty Fund. Instead of 
referring to stress price changes based only on market behavior during 
and after the Lehman Brothers default period, the proposed rule change 
would refer to stress price changes based on the extreme but plausible 
price-based stress test scenarios described in the Stress Testing 
Policy, consistent with changes to the Stress Testing Policy discussed 
above.
    The proposed rule change would also amend the description of ICE 
Clear Europe's process for allocating Guaranty Fund requirements to 
Clearing Members. The Risk Policy currently provides that ICE Clear 
Europe's Risk Department performs the allocation every Thursday, with 
the allocation based on a Clearing Member's close of business positions 
as of Wednesday. The proposed rule change would revise this to state 
that the Clearing Risk Department performs the allocation weekly, with 
the allocation based on a Clearing Member's close of business positions 
as of the previous day. Thus, this change would increase flexibility, 
while retaining the same weekly performance of the allocation.
    The proposed rule change would revise the description of ICE Clear 
Europe's Guaranty Fund calls. Currently, the Risk Policy provides that 
to accommodate U.S. dollar denominated sovereign CDS contracts, ICE 
Clear Europe requires a portion of the Guaranty Fund to be in US 
dollars. The proposed rule change would revise this to clarify that ICE 
Clear Europe requires a portion of the Guaranty Fund to be in U.S. 
dollars to accommodate US dollar denominated CDS contracts, not just 
sovereign CDS contracts, given that ICE Clear Europe's US dollar 
denominated CDS contracts are not limited to sovereign contracts. The 
proposed rule change would also remove the current numerical example of 
Guaranty Fund calls/collection as unnecessary.
v. Back-Testing and Stress Testing
    In the Back-Testing and Stress Testing section of the Risk Policy, 
the proposed rule change would update the governance regarding review 
of the CDS risk models. Currently, the Risk Policy provides that if the 
model calibration consistently demonstrates exceptions outside of the 
coverage level, the Risk Management Department will review the models 
and recommend revisions to the Board and CDS Risk Committee. The 
proposed rule change would instead provide that in such a situation, 
the Clearing Risk Department would review the models and recommend 
revisions following the governance outlined in the Model Risk 
Governance Framework. Moreover, the proposed rule change would revise 
the description of stress testing to refer to the COVID-19 scenarios 
that the proposed rule change would add to ICE Clear Europe's Stress 
Testing Policy, as discussed above.
vi. Policy Governance and Reporting
    Finally, in the Policy Governance and Reporting section, the 
proposed rule change would update the names of certain ICE Clear Europe 
committees without changing the substance of the governance process. 
For example, the proposed rule change would use the term ``ROD'' 
instead of ``Risk Oversight Department'' and the term ``CDS PRC'' to 
mean the CDS Product Risk Committee.

D. Amendments to the Risk Model Description

    The Risk Model Description details the methodology that ICE Clear 
Europe uses to calculate initial margin requirements and Guaranty Fund 
requirements for its CDS Clearing Members. The proposed rule change 
would make a number of amendments to the Risk Model Description to 
clarify existing descriptions, change an existing practice with respect 
to a calculation associated with wrong way risk, and implement the 
findings of an independent validation. These changes are described 
below and organized according to the sections of the Risk Model 
Description.
    In addition to those changes, throughout the Risk Model 
Description, the proposed rule change would correct references to ICE 
Clear Europe departments and committees and update the titles of 
defined terms.
i. Background
    The proposed rule change would first update the background section 
of the Risk Model Description, which generally describes the design of 
the CDS initial margin model and its development. The proposed rule 
change would add to this background additional description to note that 
the time horizon for the interest rate sensitivity requirement of the 
initial

[[Page 21424]]

margin methodology (which is further discussed below) would be 5 days 
for house accounts and 7 days for client accounts, consistent with the 
changes to the Stress Testing Policy described above.
ii. Initial Margin Methodology
    ICE Clear Europe's CDS initial margin methodology consists of seven 
components: (i) Spread response, (ii) recovery rate sensitivity, (iii) 
liquidity charge, (iv) jump to default, (v) concentration charge, (vi) 
interest rate sensitivity, and (vii) basis risk. As discussed below, 
the proposed rule change would amend the description of the recovery 
rate sensitivity, concentration charge, and spread response components.
    The proposed rule change would first amend the description of the 
recovery rate sensitivity requirement by clarifying the volatility 
floor. ICE Clear Europe would estimate the volatility floor based on 
the average overlapping five-day absolute change of recovery rates for 
a prescribed set of reference entities that have defaulted, with 
observed recovery rates of more than a year, comprising a stress period 
of 2009-2012.
    The proposed rule change would next update the loss threshold 
calculation in the determination of specific wrong way risk and general 
wrong way risk to be based on price minus recovery rate as opposed to 
one minus recovery rate. ICE Clear Europe represents that although this 
change makes the calculation more precise, the monetary impact on 
margin requirements is expected to be immaterial (and near zero).\18\
---------------------------------------------------------------------------

    \18\ Notice, 86 FR at 13423.
---------------------------------------------------------------------------

    The proposed rule change also would amend the description of the 
concentration charge requirement. Here the proposed rule change would 
clarify the description of data used to set a threshold that ICE Clear 
Europe uses in calculating the concentration charge. The current Risk 
Model Description describes this data as market risk transfer data 
obtained from the Depository Trust & Clearing Corporation. The proposed 
rule change would maintain this description but would further specify 
that the data contain both bilateral positions among market 
participants and positions cleared at ICE.
    The proposed rule change would also amend the description of ICE 
Clear Europe's anti-procyclicality measures, which are a part of the 
spread response component. Currently, ICE Clear Europe bases the anti-
procyclicality measures on the Lehman Brothers default scenario. The 
proposed rule change would revise the anti-procyclicality measures to 
base them on historically observed extreme but plausible stress test 
scenarios in price space defined in the revised Stress Testing Policy. 
As discussed above, these scenarios are not limited to Lehman Brothers. 
Rather, they include various other scenarios, such as those based on 
the COVID-19 pandemic discussed above. Accordingly, the proposed rule 
change would revise the description of the anti-procyclicality measures 
in the Risk Model Description to include the other scenarios from the 
revised Stress Testing Policy, consistent with the changes discussed 
above. In addition, the proposed rule change would also make amendments 
to reflect the 20% portfolio gross margin floor required under relevant 
European regulation.\19\
---------------------------------------------------------------------------

    \19\ See European Market Infrastructure Regulation Article 27.
---------------------------------------------------------------------------

    Moreover, the proposed rule change would update the loss given 
default risk analysis to specify initial values of certain parameters 
and to note that certain parameters are reviewed by the Risk Working 
Group on at least a monthly basis.
    Finally, the Risk Model Description also provides a description of 
the haircut that ICE Clear Europe applies, as part of its initial 
margin methodology, to multi-currency portfolios. The proposed rule 
change would not alter the substance of this description. Rather, it 
would add a sentence to state that in order to provide consistency and 
uniformity in the parameters applied to the CDS risk model, ICE Clear 
Europe would adopt the same haircut in line with ICE Clear Credit LLC, 
which is described as being a more conservative haircut. ICE Clear 
Europe represents that this merely documents existing practice and does 
not alter ICE Clear Europe's approach.\20\
---------------------------------------------------------------------------

    \20\ Notice, 86 FR at 13422.
---------------------------------------------------------------------------

iii. Guaranty Fund Methodology
    The proposed rule change would make one change to the section that 
details ICE Clear Europe's Guaranty Fund Methodology. Similar to the 
initial margin methodology, ICE Clear Europe applies haircuts to multi-
currency portfolios to ensure that the Guaranty Fund is sufficient to 
cure losses in multiple currencies. The proposed rule change would not 
alter the substance of the description of this haircut. Rather, it 
would add a sentence to state that in order to provide consistency and 
uniformity in the parameters applied to the CDS risk model, ICE Clear 
Europe would adopt the same haircut in line with ICE Clear Credit LLC, 
which is described as being a more conservative haircut. ICE Clear 
Europe represents that this merely documents existing practice and does 
not alter ICE Clear Europe's approach.\21\
---------------------------------------------------------------------------

    \21\ Notice, 86 FR at 13422.
---------------------------------------------------------------------------

iv. Monte Carlo Approach
    The proposed rule change would next revise the section that 
describes ICE Clear Europe's Monte Carlo approach. ICE Clear Europe 
uses its Monte Carlo approach to derive the spread response requirement 
of the initial margin methodology.
    The proposed rule change would make several revisions to the 
description of the Monte Carlo approach, beginning with the 
introductory section. Currently, the introductory section provides that 
the Monte Carlo approach has been implemented as a benchmark model to 
capture the spread risk component of initial margin. The proposed rule 
change would revise this to state that the Monte Carlo approach is the 
governance-approved and implemented model adopted by ICE Clear Europe 
to capture the spread risk component of initial margin and that the 
final spread response requirement is the more conservative of the 
stress-based spread response requirement and the Monte Carlo simulated 
spread response requirement.
    Next, the proposed rule change would delete the sections entitled 
Monte Carlo Simulations via Cholesky Decomposition, Monte Carlo 
Simulations via Eigenvalue Decomposition, Distribution, Full Matrix 
Simulation Framework, Simulation of Standardized Log Returns, Model 
Parameters, Monte Carlo Engine Setups, and Conclusion, as unnecessary 
in light of revisions that would be made to other sections of the 
description. Specifically, the proposed rule change would significantly 
revise the sections on Copula Simulation, Conditional Block Matrix 
Simulation Framework, Risk Measures, and add a new section on Copula 
Parameter Estimation. These revisions would update the copula 
simulation description to provide further detail as to the 
determination and use of the linear correlation matrix and construction 
of student-t random variables and vectors for the production of 
relevant scenarios; revise the description of the conditional block 
matrix simulation framework and full matrix simulation framework to 
provide a more simplified description of the two-step conditional 
simulation

[[Page 21425]]

approach; and describe copula parameter estimation for purposes of 
multivariate distribution.
    The proposed rule change would also provide more detail with 
respect to the use of simulated P/L scenarios, combined with the post-
index-decomposition positions related to a given risk factor, to 
generate a currency-specific risk factor P/L vector. ICE Clear Europe 
would attribute each risk factor to only one sub-portfolio and 
denominate all instruments related to a given risk factor in the same 
currency. ICE Clear Europe would apply this multi-currency risk 
aggregation approach to risk factors within the European Corporate and 
U.S. Corporate sub-portfolios denominated in EUR and USD currencies, 
respectively. The proposed rule change would also add a diagram to 
demonstrate a bivariate simulation aspect of the risk aggregation 
approach.
    The proposed rule change would also amend the Risk Measures section 
to explain that each cleared portfolio initially would be split into 
sub-portfolios based on common features in order to obtain risk 
estimates reflective of the market behavior and default management 
practices. The ICE Clear Europe Risk Management department would 
periodically review the definitions of the sub-portfolios and update 
them upon consultation with the Product Risk Committee.
    Finally, the proposed rule change also would clarify that in the 
Monte Carlo implementation, distributions are based on simulated CDS 
spread scenarios, and that instrument profits or losses are calculated 
by re-pricing instruments at their coupons as well as their implied 
recovery rates.
v. Data
    The data section of the Risk Model Description explains the sources 
of data that ICE Clear Europe uses for end of day prices, which are 
inputs in calculating initial margin and guaranty fund requirements. 
The proposed rule change would make a number of modifications to this 
section.
    First, the Risk Model Description explains the order in which ICE 
Clear Europe accesses the various sources of price data. The proposed 
rule change would add to this explanation a further description of what 
ICE Clear Europe would do if end of day prices were not available from 
the usual sources, such as when clearing a new product without a long 
history of trading. In that case, ICE Clear Europe would estimate end 
of day prices by using proxy log-returns of existing clearable risk 
sub-factors from a similar or correlated industry/sector. Moreover, 
where ICE Clear Europe launches clearing of a product already cleared 
at ICE Clear Europe (for example, a new time series of an existing CDS 
contract), ICE Clear Europe would use the existing CDS spreads time 
series directly after reviewing the back-test results. Finally, the 
proposed rule change would clarify an existing statement regarding the 
availability of time series data for certain risk factors, by changing 
the term to ``risk sub-factors''.
    The proposed rule change would next add detail regarding the 
collection, analysis and back-testing of relevant pricing data for new 
products that ICE Clear Europe is beginning to clear, which the Risk 
Model Description refers to as risk sub-factors. Pursuant to the 
proposed additions, when launching clearing of new risk sub-factors, 
ICE Clear Europe would collect prices from Clearing Members on the 
benchmark tenors as per its normal end-of-day price discovery process 
before making the contracts eligible. ICE Clear Europe's Clearing Risk 
department would be responsible for reviewing the fixed maturity time 
series data on the benchmark tenors until the first day of the price 
collection. If ICE Clear Europe needed to fill in missing data, the 
proposed rule change would explain that ICE Clear Europe would back-
fill missing data in log-return space derived from the available end-
of-day fixed-maturity spread levels, and if needed, would apply 
interpolation and extrapolation techniques to derive the missing data. 
Once ICE Clear Europe had a complete fixed maturity time series, the 
Clearing Risk Department would then perform back-tests on hypothetical 
trading strategies and stress tests on hypothetical portfolios to 
further ensure that time series for the new risk sub-factors were 
appropriate. The results of the analyses would be presented to the CDS 
Product Risk Committee. The proposed rule change would also explain how 
ICE Clear Europe transforms fixed maturity time series to constant 
maturity time series to eliminate the impact of semi-annual rolls.
    The proposed rule change also would explain how fixed maturity time 
series would be transformed to constant maturity time series to 
eliminate the impact of semi-annual rolls. The amendments would provide 
further detail as to the manner in which constant maturity time series 
are determined and used for index and single-name risk factors.
    Finally, the proposed rule change would explain that back-testing 
results would be available to assess the quality of time series as well 
as the performance of the calibrated models. Currently, the Risk Model 
Description only provides that back-testing results are available to 
assess the performance of the calibrated models.
vi. Testing
    The testing section of the current Risk Model Description provides 
an overview of the tests that ICE Clear Europe uses to assess the 
soundness of its risk model, such as benchmarking the spread response 
requirement and back-testing other components of the model. For each 
test, the Risk Model Description explains the theoretical framework 
behind the test, how the test is executed, and how ICE Clear Europe 
uses the results of the test. The proposed rule change would not alter 
the substance of these various tests. The proposed rule change would, 
however, delete much of the detail about these tests from the Risk 
Model Description. Because these tests are already described in other 
ICE Clear Europe documentation, such as the Stress Testing Policy and 
Back-Testing Policy, ICE Clear Europe does not believe it is necessary 
to describe those tests again in the Risk Model Description. Instead, 
the Risk Model Description, as amended by the proposed rule change, 
would provide a short description of each of the tests and would 
explain which other ICE Clear Europe document contains the details for 
each of the tests. Thus, the amendments would not make a substantive 
change in ICE Clear Europe's approach to testing but would simplify the 
description and clarify relevant assumptions.
vii. Assessment of Assumptions and Limitations
    The assessment of assumptions and limitations section currently 
explains the assumptions that provide the theoretical foundation for 
ICE Clear Europe's risk model. The proposed rule change would not 
delete or amend this existing explanation. The proposed rule change 
would add, however, a further explanation of another assumption used to 
determine the size of the Guaranty Fund: the use of the same time 
series data in determining initial margin requirement and sizing the 
Guaranty Fund. The proposed rule change would explain that ICE Clear 
Europe uses the same time series to ensure a conservative approach to 
portfolio loss when sizing the Guaranty Fund and to avoid unnecessary 
complexity.\22\
---------------------------------------------------------------------------

    \22\ Notice, 86 FR at 13423.

---------------------------------------------------------------------------

[[Page 21426]]

E. Parameters Review Procedures

    Finally, the proposed rule change would formalize the Parameters 
Review Procedures. The Parameters Review Procedures describe how ICE 
Clear Europe calibrates and reviews the parameters that underlie its 
risk model, as described in the Risk Model Description discussed above. 
For each of the components of the risk model, the Parameters Review 
Procedures would describe the parameters that ICE Clear Europe uses for 
those components as well as the procedures and processes ICE Clear 
Europe would use to update those parameters. As explained in the 
Parameters Review Procedures, ICE Clear Europe performs these updates 
monthly.
    The Parameters Review Procedures also would explain how ICE Clear 
Europe analyzes the sensitivity of the risk model to changes in certain 
parameters. Specifically, ICE Clear Europe would perform this 
sensitivity analysis on parameters that are calibrated on a more ad-hoc 
basis, rather than using a strictly statistical approach, such as the 
portfolio benefits provided during the computation of the spread 
response requirement. ICE Clear Europe would use this analysis to 
understand how an update or a change to these parameters might alter 
margin requirements. As with updates to the parameters, ICE Clear 
Europe performs this sensitivity analysis monthly.
    Finally, the Parameters Review Procedures would describe the 
distribution of the reports of this sensitivity analysis. Generally, 
the Parameters Review Procedures would require that summary reports be 
presented to the Risk Oversight Department. In the case of the 
sensitivity analysis of the dependence structure shifts, however, the 
Parameters Review Procedures would require that report to be presented 
to the Product Risk Committee and Risk Oversight Department. Similarly, 
in the case of the sensitivity analysis of the exponentially weighted 
moving average, the Parameters Review Procedures would require that 
report to be presented to the Risk Working Group.

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.\23\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \24\ and Rules 17Ad-22(e)(4)(ii), (e)(4)(vi)(A), 
(e)(4)(vi)(B), (e)(6)(i), (e)(6)(iv), and (e)(6)(vi)(B).\25\
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(2)(C).
    \24\ 15 U.S.C. 78q-1(b)(3)(F).
    \25\ 17 CFR 240.17Ad-22(e)(4)(ii), (e)(4)(vi)(A), (e)(4)(vi)(B), 
(e)(6)(i), (e)(6)(iv), and (e)(6)(vi)(B).
---------------------------------------------------------------------------

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, as well as 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.\26\ As discussed in more detail below, the 
Commission generally believes that the changes discussed above should 
improve ICE Clear Europe's management of the risks resulting from 
clearing and settling transactions and therefore believes that the 
proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act.\27\
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78q-1(b)(3)(F).
    \27\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes that the changes to the Price Discovery 
Policy discussed in Part II.A above should consolidate and clarify the 
process that ICE Clear Europe would use to determine prices for a 
particular instrument or risk sub-factor when fewer than three Clearing 
Members have open interest in that instrument or risk sub-factor. In 
doing so, the Commission believes that these changes should improve ICE 
Clear Europe's ability to derive reliable prices for instruments and 
sub-risk factors even where only a few Clearing Members have open 
interest. Similarly, the Commission believes that updating the names of 
ICE Clear Europe committees and requiring that the Board and Executive 
Risk Committee be notified of level red breaches immediately, would 
improve ICE Clear Europe's ability to oversee and respond to matters 
under the Price Discovery Policy. Finally, the Commission believes that 
the added Table 4, updated references, and updated defined terms should 
improve clarity and reduce the possibility for error in applying the 
Price Discovery Policy.
    The Commission further believes that the changes to the Stress 
Testing Policy discussed in Part II.B above should clarify ICE Clear 
Europe's stress testing practices regarding wrong way risk, the margin 
period of risk, and the assumptions used in stress testing. Moreover, 
with respect to stress testing scenarios, the Commission further 
believes that updating the process for adding and retiring scenarios 
and portfolios, revising the description of existing scenarios, and 
adding new scenarios based on market conditions during the COVID-19 
pandemic should help to ensure that ICE Clear Europe's scenarios 
reflect actual and recent stressed market conditions. Similarly, the 
Commission believes that clarifying the assumptions used in the 
analysis of Guaranty Fund adequacy and the determination of sample 
portfolios for stress testing should help to ensure that ICE Clear 
Europe's practices are applied accurately and consistently. Finally, 
the Commission believes that the updated governance of enhancements and 
review of stress testing results, the updated description of the ICE 
Clear Europe committees involved in the review of stress testing 
results and changes to the Stress Testing Policy, and the corrections 
of typographical errors, references, and titles, should improve the 
operation of the Stress Testing Policy.
    The Commission also believes that the changes made to the Risk 
Policy, as discussed in Part II.C above, should help to ensure that the 
Risk Policy accurately reflects ICE Clear Europe's risk methodology and 
is applied consistently with other ICE Clear Europe policies and 
procedures. Specifically, the Commission believes that adding further 
description of ICE Clear Europe's initial margin methodology, including 
the stress-based spread response, Monte Carlo simulation spread 
response, and anti-procyclicality considerations, should help to ensure 
that the Risk Policy accurately reflects ICE Clear Europe's current 
margin methodology. Moreover, the Commission believes that revising (i) 
the description of the Guaranty Fund, including the anti-procyclicality 
considerations, (ii) the explanation of ICE Clear Europe's stress 
testing, and (iii) the names of the ICE Clear Europe committees 
involved in the review of the stress testing should help to ensure that 
the Risk Policy is applied consistently with the revised Stress Testing 
Policy and Model Risk Governance Framework. Updating the description of 
the monitoring of the initial margin methodology and of the

[[Page 21427]]

governance concerning changes to the initial margin methodology, 
including the names of ICE Clear Europe committees involved in such 
governance, should help ensure that the Risk Policy reflects ICE Clear 
Europe's current governance processes. The Commission further believes 
that removing the description of certain matters related to mark-to-
market margin that are already described in other ICE Clear Europe 
documentation should reduce duplication and the possibility for 
inconsistency between the Risk Policy and other ICE Clear Europe 
policies. Similarly, updating the governance regarding review of the 
back-testing and stress testing of models and the description of stress 
test scenarios should help to ensure consistency with the Model Risk 
Governance Framework and the Stress Testing Policy. Finally, updating 
the titles of defined terms should help to ensure that the Risk Policy 
is applied consistently with other ICE Clear Europe policies and 
procedures.
    The Commission further believes that the other changes discussed in 
Part II.C above should help ensure that ICE Clear Europe can apply the 
Risk Policy in a manner consistent with the particular facts and 
circumstances at any given time. Updating the description of intra-day 
monitoring and the intraday risk limit, including replacing the fixed 
minimum and maximum, should allow ICE Clear Europe to alter the minimum 
and maximum limit, as needed, in accordance with changes to the 
Guaranty Fund minimum or as set by ICE Clear Europe senior management 
and the CDS Product Risk Committee. Similarly, the Commission believes 
that removing the requirement that ICE Clear Europe investigate and 
closely monitor a Clearing Member once that Clearing Member's estimated 
intraday profit/loss equals half of the intraday risk limit, and 
removing the requirement that ICE Clear Europe's Risk Management 
Department notify the ICE Clear Europe Treasury Department of a special 
margin call, should improve provide ICE Clear Europe's ability to 
respond to changes in a Clearing Member's intraday risk limit. Amending 
the allocation of the Guaranty Fund requirements so ICE Clear Europe 
would allocate them weekly, instead of every Thursday, also should give 
ICE Clear Europe the ability to determine the best day of the week to 
allocate the requirements while still requiring a weekly allocation. 
Finally, the Commission believes that specifying that ICE Clear Europe 
requires a portion of the Guaranty Fund to be in US dollars to 
accommodate US dollar denominated CDS contracts, not just sovereign CDS 
contracts, should help to ensure that the Risk Policy can accommodate 
all of the US dollar contracts that ICE Clear Europe clears.
    The Commission also believes that the changes to the Risk Model 
Description discussed in Part II.D above should help to ensure that ICE 
Clear Europe's risk methodology is up-to-date and consistent with 
related ICE Clear Europe policies. Specifically, the revised time 
horizon for the interest rate sensitivity requirement of the initial 
margin methodology of 5 days for house accounts and 7 days for client 
accounts should help to ensure consistency with ICE Clear Europe's 
revised Stress Testing Policy. Moreover, the Commission believes that 
revising the anti-procyclicality measures to include scenarios from the 
revised Stress Testing Policy should help to ensure consistency with 
the revised Stress Testing Policy and help to ensure that the anti-
procyclicality measures consider the most recent scenarios and market 
data. Similarly, updating the loss given default risk analysis to 
specify initial values of certain parameters and to note that certain 
parameters are reviewed by the Risk Working Group on at least a monthly 
basis would help to ensure consistency with the Parameters Review 
Procedures. Finally, the Commission believes that revising the testing 
section of the Risk Model Description to provide an overview of the 
tests that ICE Clear Europe uses to assess the soundness of its risk 
model and to explain which other ICE Clear Europe policies contain the 
details for each of the tests should help to ensure consistency with 
other ICE Clear Europe documentation with respect to such testing.
    The Commission similarly believes that certain other changes to the 
Risk Model Description discussed in Part II.D above should help to 
ensure that ICE Clear Europe's risk methodology is up-to-date and 
consistent with ICE Clear Europe operational practices. Specifically, 
clarifying the volatility floor to the recovery rate sensitivity 
requirement and the data used to set a threshold in calculating the 
concentration charge would help to ensure that the Risk Model 
Description reflects ICE Clear Europe's current operational practices. 
Similarly, clarifying the 20% portfolio gross margin floor required 
under relevant European regulation and adoption of the same haircut in 
line with ICE Clear Credit LLC to multi-currency portfolios in both the 
initial margin and Guaranty Fund methodologies would help to ensure the 
accuracy of the Risk Model Description without substantively changing 
ICE Clear Europe's practices. Adding further explanation of the 
assumption regarding the same time series of data, which is used to 
determine the size of the Guaranty Fund, should also clarify the Risk 
Model Description. In outlining the steps ICE Clear Europe would take 
if end-of-day prices were not available from the usual sources, 
including the back-testing of pricing data, the proposed rule change 
should help to ensure that the Risk Model Description matches ICE Clear 
Europe's operational practices when clearing a new product. Updating 
the loss threshold calculation in the determination of specific wrong 
way risk and general wrong way risk (to be based on price minus 
recovery rate as opposed to one minus recovery rate) should make the 
calculation more precise. Finally, by revising the description of ICE 
Clear Europe's Monte Carlo approach, including copula simulation, 
simulated P/L scenarios, and the use of sub-portfolios, the Commission 
believes the proposed rule change should help to ensure that the Risk 
Model Description matches ICE Clear Europe's operational practices, and 
is thus consistent and comprehensive.
    Finally, as discussed in Part II.E above, the proposed rule change 
would formalize the Parameters Review Procedures. The Commission 
believes the Parameters Review Procedures should help ICE Clear Europe 
to maintain its risk model, as set forth in the Risk Model Description, 
by setting out procedures for calibrating and reviewing the parameters 
that underlie the risk model and analyzing the sensitivity of the risk 
model to changes in certain parameters, each on a monthly basis. 
Moreover, the Parameters Review Procedures would require reporting of 
this review and analyses, which the Commission believes should help to 
inform decision-makers at ICE Clear Europe and allow them to take 
action as needed to adjust the risk model.
    Because ICE Clear Europe uses the Price Discovery Policy, Stress 
Testing Policy, Risk Policy, Risk Model Description, and Parameters 
Review Procedures to manage the risks associated with clearing and 
settling transactions, the Commission believes that the changes 
described above would be consistent with Section 17A(b)(3)(F) of the 
Act.\28\ Specifically, ICE Clear Europe uses the methodologies 
described in the Price Discovery Policy, Risk Policy, and Risk Model 
Description

[[Page 21428]]

to derive end-of-day prices and produce initial margin and Guaranty 
Fund requirements, all of which ICE Clear Europe uses to manage risks 
arising from clearing and settling transactions. Moreover, ICE Clear 
Europe uses the Stress Testing Policy and Parameters Review Procedures 
to identify potential weaknesses and sensitivities in its risk 
methodologies. Thus, the Commission believes that in making the 
improvements to the Price Discovery Policy, Stress Testing Policy, Risk 
Policy, and Risk Model Description as discussed above, and in 
formalizing the Parameters Review Procedures, the proposed rule change 
should improve ICE Clear Europe's ability to manage the risks 
associated with clearing and settling transactions.
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    \28\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission further believes the proposed rule change should 
thereby help ICE Clear Europe avoid potential losses that could result 
from the mismanagement of such risks. Because these potential losses, 
if realized, could impair ICE Clear Europe's ability to promptly and 
accurately clear and settle transactions and safeguard securities and 
funds, the Commission believes the proposed rule change should promote 
the prompt and accurate clearance and settlement of transactions and 
help assure the safeguarding of securities and funds in ICE Clear 
Europe's custody or control.
    Therefore, 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 ICE Clear Europe's custody and control, consistent with the 
Section 17A(b)(3)(F) of the Act.\29\
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    \29\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4)(ii)

    Rule 17Ad-22(e)(4)(ii) requires that ICE Clear Europe establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to 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 the 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 for ICE Clear 
Europe in extreme but plausible market conditions.\30\ As discussed 
above, the Commission believes the proposed rule change should improve 
ICE Clear Europe's Risk Methodology Description by, among other things, 
clarifying that ICE Clear Europe would adopt the same haircut in line 
with ICE Clear Credit LLC to multi-currency portfolios in the Guaranty 
Fund methodology and adding a further explanation of another assumption 
used to determine the size of the Guaranty Fund. Moreover, as discussed 
above, the proposed rule change would amend the Risk Policy to allow 
ICE Clear Europe to allocate Guaranty Fund requirements weekly, instead 
of every Thursday, thus allowing ICE Clear Europe to determine the best 
day of the week to allocate the requirements while still requiring a 
weekly allocation. Through application of its risk model, as described 
in the Risk Methodology Description, ICE Clear Europe produces Guaranty 
Fund requirements for Clearing Members that it then allocates to, and 
collects from, Clearing Members. Such Guaranty Fund requirements, in 
turn, enable ICE Clear Europe to maintain additional financial 
resources at the 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 for ICE Clear Europe in extreme 
but plausible market conditions. Thus, the Commission finds that these 
aspects of the proposed rule change are consistent with Rule 17Ad-
22(e)(4)(ii).\31\
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    \30\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \31\ 17 CFR 240.17Ad-22(e)(4)(ii).
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C. Consistency With Rule 17Ad-22(e)(4)(vi)(A)

    Rule 17Ad-22(e)(4)(vi)(A) requires that ICE Clear Europe establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to effectively identify, measure, monitor, and 
manage its credit exposures to participants and those arising from its 
payment, clearing, and settlement processes, including by testing the 
sufficiency of its total financial resources available to meet the 
minimum financial resource requirements under Rule 17Ad-22(e)(4)(i) 
through (iii), as applicable, by conducting stress testing of its total 
financial resources once each day using standard predetermined 
parameters and assumptions.\32\ As discussed above, the Commission 
believes the proposed rule change should improve ICE Clear Europe's 
Stress Testing Policy by, among other things, revising the description 
of existing stress testing scenarios and adding new scenarios based on 
market conditions during the COVID-19 pandemic. Because ICE Clear 
Europe uses the Stress Testing Policy and the stress testing scenarios 
to conduct daily stress testing of its total financial resources, the 
Commission believes this aspect of the proposed rule change should help 
to ensure that ICE Clear Europe conducts stress testing of its total 
financial resources once each day using standard predetermined 
parameters and assumptions. Thus, the Commission finds that this aspect 
of the proposed rule change is consistent with Rule 17Ad-
22(e)(4)(vi)(A).\33\
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    \32\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
    \33\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
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D. Consistency With Rule 17Ad-22(e)(4)(vi)(B)

    Rule 17Ad-22(e)(4)(vi)(B) requires that ICE Clear Europe establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to effectively identify, measure, monitor, and 
manage its credit exposures to participants and those arising from its 
payment, clearing, and settlement processes, including by testing the 
sufficiency of its total financial resources available to meet the 
minimum financial resource requirements under Rule 17Ad-22(e)(4)(i) 
through (iii), as applicable, by conducting a comprehensive analysis on 
at least a monthly basis of the existing stress testing scenarios, 
models, and underlying parameters and assumptions, and considering 
modifications to ensure they are appropriate for determining ICE Clear 
Europe's required level of default protection in light of current and 
evolving market conditions.\34\ As discussed above, the Commission 
believes the proposed rule change should improve ICE Clear Europe's 
Stress Testing Policy by, among other things, updating the governance 
of enhancements and review of stress testing results and the 
description of the ICE Clear Europe committees involved in the review 
of stress testing results and changes to the Stress Testing Policy. 
Moreover, as discussed above, the Parameters Review Procedures would 
require that ICE Clear Europe, on a monthly basis, calibrate and review 
the parameters that underlie the risk model and analyze the sensitivity 
of the risk model to changes in certain parameters. The Parameters 
Review Procedures would also require reporting of these reviews and 
analyses. The Commission therefore believes these aspects of the 
proposed rule change should help to ensure that ICE Clear Europe 
conducts

[[Page 21429]]

a comprehensive analysis on at least a monthly basis of its existing 
stress testing scenarios, models, and underlying parameters and 
assumptions, and considers modifications to ensure they are appropriate 
for determining its required level of default protection in light of 
current and evolving market conditions. Thus, the Commission finds that 
these aspects of the proposed rule change are consistent with Rule 
17Ad-22(e)(4)(vi)(B).\35\
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    \34\ 17 CFR 240.17Ad-22(e)(4)(vi)(B).
    \35\ 17 CFR 240.17Ad-22(e)(4)(vi)(B).
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E. Consistency With Rule 17Ad-22(e)(6)(i)

    Rule 17Ad-22(e)(6)(i) requires that ICE Clear Europe establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to cover its credit exposures to its participants 
by establishing a risk-based margin system that, at a minimum, 
considers, and produces margin levels commensurate with, the risks and 
particular attributes of each relevant product, portfolio, and 
market.\36\ As discussed above, the Commission believes the proposed 
rule change should improve ICE Clear Europe's Risk Methodology 
Description by, among other things, clarifying components of the 
initial margin methodology. Through application of its risk model, as 
described in the Risk Methodology Description, ICE Clear Europe 
produces initial margin requirements commensurate with, the risks and 
particular attributes of each relevant product, portfolio, and market. 
Thus, the Commission finds that this aspect of the proposed rule change 
is consistent with Rule 17Ad-22(e)(6)(i).\37\
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    \36\ 17 CFR 240.17Ad-22(e)(6)(i).
    \37\ 17 CFR 240.17Ad-22(e)(6)(i).
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F. Consistency With Rule 17Ad-22(e)(6)(iv)

    Rule 17Ad-22(e)(6)(iv) requires that ICE Clear Europe establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to cover its credit exposures to its participants 
by establishing a risk-based margin system that, at a minimum, uses 
reliable sources of timely price data and uses procedures and sound 
valuation models for addressing circumstances in which pricing data are 
not readily available or reliable.\38\ As discussed above, the 
Commission believes that the changes to the Price Discovery Policy 
should consolidate and clarify the process that ICE Clear Europe would 
use to determine prices for a particular instrument or risk sub-factor 
when fewer than three Clearing Members have open interest in that 
instrument or risk sub-factor and therefore should improve ICE Clear 
Europe's ability to derive reliable prices for instruments and sub-risk 
factors even where only a few Clearing Members have open interest. In 
addition, the updated references and defined terms should improve 
clarity and reduce the possibility for error in applying the Price 
Discovery Policy.
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    \38\ 17 CFR 240.17Ad-22(e)(6)(iv).
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    Moreover, as discussed above, the Commission believes the proposed 
rule change should improve ICE Clear Europe's Risk Methodology 
Description by outlining the steps ICE Clear Europe would take if end-
of-day prices were not available from the usual sources, such as when 
clearing a new product without a long history of trading, and providing 
a description of the collection, analysis, and back-testing of relevant 
pricing data for new products.
    The Commission believes that both of these aspects of the proposed 
rule change--the changes to the Price Discovery Policy and the changes 
to the Risk Methodology Description--should help to ensure that ICE 
Clear Europe collects, and uses, reliable and timely price data. 
Moreover, the Commission believes that the procedures outlined in the 
Price Discovery Policy should help to address the situation where such 
data are not available because too few Clearing Members have open 
interest. The Commission similarly believes that procedures outlined in 
the Risk Methodology Description should help to address the situation 
where such data are not available, such as when clearing a new product 
without a long history of trading.
    Thus, the Commission finds that these aspects of the proposed rule 
change are consistent with Rule 17Ad-22(e)(6)(iv).\39\
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    \39\ 17 CFR 240.17Ad-22(e)(6)(iv).
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G. Consistency With Rule 17Ad-22(e)(6)(vi)(B)

    Rule 17Ad-22(e)(6)(vi)(B) requires that ICE Clear Europe establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to cover its credit exposures to its participants 
by establishing a risk-based margin system that, at a minimum, is 
monitored by management on an ongoing basis and is regularly reviewed, 
tested, and verified by conducting a sensitivity analysis of its margin 
model and a review of its parameters and assumptions for backtesting on 
at least a monthly basis, and considering modifications to ensure the 
backtesting practices are appropriate for determining the adequacy of 
ICE Clear Europe's margin resources.\40\ As discussed above, the 
Parameters Review Procedures would require that ICE Clear Europe, on a 
monthly basis, calibrate and review the parameters that underlie the 
risk model and analyze the sensitivity of the risk model to changes in 
certain parameters. Thus, the Commission finds that this aspect of the 
proposed rule change is consistent with Rule 17Ad-22(e)(6)(vi)(B).\41\
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    \40\ 17 CFR 240.17Ad-22(e)(6)(vi)(B).
    \41\ 17 CFR 240.17Ad-22(e)(6)(vi)(B).
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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 \42\ and Rules 17Ad-22(e)(4)(ii), (e)(4)(vi)(A), (e)(4)(vi)(B), 
(e)(6)(i), (e)(6)(iv), and (e)(6)(vi)(B).\43\
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    \42\ 15 U.S.C. 78q-1(b)(3)(F).
    \43\ 17 CFR 240.17Ad-22(e)(4)(ii), (e)(4)(vi)(A), (e)(4)(vi)(B), 
(e)(6)(i), (e)(6)(iv), and (e)(6)(vi)(B).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\44\ that the proposed rule change (SR-ICEEU-2021-006), be, and hereby 
is, approved.\45\
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    \44\ 15 U.S.C. 78s(b)(2).
    \45\ 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.\46\
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    \46\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2021-08315 Filed 4-21-21; 8:45 am]
BILLING CODE 8011-01-P


