[Federal Register Volume 86, Number 80 (Wednesday, April 28, 2021)]
[Notices]
[Pages 22481-22484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-08861]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91636; File No. SR-ICC-2021-012]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
the ICC Transition of the Rates Used for Calculating Price Alignment 
Amounts

April 22, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
\1\ and Rule 19b-4,\2\ notice is hereby given that on April 15, 2021, 
ICE Clear Credit LLC (``ICC'') filed with the Securities and Exchange 
Commission the proposed rule change as described in Items I, II, and 
III below, which Items have been prepared primarily by ICC. ICC filed 
the proposed rule change pursuant Section 19(b)(3)(A) of the Act \3\ 
and Rule 19b-4(f)(1) thereunder \4\ such that the proposed rule change 
was immediately effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(1).

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[[Page 22482]]

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The principal purpose of the proposed rule change is to change the 
interest rates used for computing price alignment amounts on Mark-to-
Market Margin Balances. These revisions do not require any changes to 
the ICC Clearing Rules (the ``Rules'').\5\
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    \5\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

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

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

(a) Purpose
    ICC proposes to change the interest rates used for computing price 
alignment amounts on Mark-to-Market (``MTM'') Margin Balances under ICC 
Rule 401(g). The target date of the transition is Monday, June 14, 
2021, subject to any regulatory review or approval process. On the 
transition date, ICC would begin calculating price alignment amounts 
for Euro (``EUR'') denominated instruments using the Euro Short-Term 
Rate (``[euro]STR'') rather than the Euro Overnight Index Average 
(``EONIA'') and for U.S. Dollar (``USD'') denominated instruments using 
the Secured Overnight Financing Rate (``SOFR'') rather than the 
Effective Federal Funds Rate (``EFFR''). Such changes do not require 
any revisions to the ICC Rules or other written policies and 
procedures. In accordance with ICC Rule 401(g), the rate in respect of 
price alignment amounts on any MTM Margin Balance is determined by ICC.
    The proposed changes are in response to requests by industry 
participants and follow similar changes for other cleared swap 
products. The European Central Bank's (``ECB'') working group on EUR 
risk-free rates recommended [euro]STR as the EUR risk-free rate and the 
replacement for EONIA in September 2018.\6\ The ECB began publishing 
[euro]STR in October 2019 and the working group is assisting the market 
in transitioning to [euro]STR before EONIA is discontinued on January 
3, 2022.\7\ The Alternative Reference Rates Committee (``ARRC'') was 
convened by the Federal Reserve Board and the Federal Reserve Bank of 
New York and identified SOFR as the rate representing best practice for 
use in certain new USD derivatives and other financial contracts in 
2017.\8\ The ARRC published a transition plan including specific steps 
and timelines to encourage the adoption of SOFR.\9\
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    \6\ Additional information on the working group and the 
transition to [euro]STR is available at: https://www.ecb.europa.eu/paym/interest_rate_benchmarks/WG_euro_risk-free_rates/html/index.en.html.
    \7\ Id.
    \8\ Additional information on the ARRC and transition to SOFR is 
available at: https://www.newyorkfed.org/arrc.
    \9\ Id.
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    In connection with the proposed transition, feedback from ICC 
clearing participants (``CPs'') has indicated a desire for one-time 
adjustment payments to or from the CP, as appropriate, to account for 
the reasonably expected valuation changes for Contracts associated with 
the use of the new interest rates. ICC thus proposes to calculate such 
one-time adjustment payments and make corresponding payments to and 
collections from CPs in connection with the transition of the rates 
used for calculating price alignment amounts.
Proposed Transition Process
    On the transition date, ICC proposes to begin using the new rates 
for calculation of price alignment amounts. CDS denominated in EUR will 
stop using EONIA and will start using [euro]STR, and CDS denominated in 
USD will stop using EFFR and will start using SOFR. The target 
transition date at the time of this filing is Monday, June 14, 2021 but 
may be delayed by ICC. Any revised transition date will fall on a 
Monday to maintain the proposed operational process and will be 
publicized by ICC. The [euro]STR and SOFR rates available on Monday, 
June 14, 2021 will be applied to MTM Margin Balances of Friday, June 
11, 2021 for the determination of the first day of price alignment 
amounts using the new rates.
    In connection with the transition of the rates, ICC proposes to 
calculate one-time adjustment amounts and pay or collect, as 
appropriate, such amounts to or from CPs to account for the reasonably 
expected valuation changes associated with the use of the new interest 
rates. In calculating the adjustment amounts, ICC will use the 
following methodology, which has been subject to substantial discussion 
and feedback from market participants.
One-Time Adjustment Methodology
    The proposed one-time adjustment methodology is set out as follows:
     ICC will obtain implied hazard term structures by using 
the end-of-day (``EOD'') settlement values and the near EOD discount 
rate term structure for the rate being replaced (EFFR for USD 
denominated and EONIA for EUR denominated products) in the ISDA CDS 
Standard Model (fair value).
     For single name Contracts, the EOD prices of the nine 
benchmark tenors will be used to create the corresponding implied 
hazard rate term structure. Standard industry recovery rates will also 
be used except for distressed names where the standard recovery rate 
cannot result in a consistent hazard rate term structure. In such case, 
a recovery rate will be used that is close to the standard recovery 
rate that can result in a consistent hazard rate term structure.
     For index Contracts, the implied hazard rates for the 
tenors available for clearing will be used to create an implied hazard 
rate term structure. Based on feedback requesting that ICC include the 
3-year tenor of iTraxx Crossover and CDX High Yield index in 
determining the hazard rate term structure, ICC has been collecting 
daily prices for these instruments even though they are not clearing 
eligible. ICC clears the 3-year tenor of the CDX High Yield Index 
Series 35 and later only. ICC will review the reasonability of the 
price collection with its Risk Committee near the transition date to 
determine whether to use these tenors in determining the hazard term 
structures for iTraxx Crossover and CDX High Yield indexes.
     ICC will calculate an adjusted EOD valuation using the 
implied hazard rate term structure and the replacement discount rate 
term structure (e.g., SOFR for USD and [euro]STR for EUR denominated 
products).
     The EOD valuation less the adjusted EOD valuation will be 
the adjustment amount.
     EOD London snapshots of EONIA and [euro]STR interest rate 
curves and EOD New York snapshots of EFFR and SOFR interest rate curves 
published by ICE Data Services will be used for the discount rate term 
structures.\10\
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    \10\ The proposed methodology, which has been subject to 
substantial discussion and feedback from market participants, has 
also been coordinated with ICE Clear Europe. Based on feedback to 
achieve congruent adjustment amounts for positions at ICC and ICE 
Clear Europe, EOD valuations for North American products will be 
taken from ICC's EOD process during its North American pricing 
window.

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[[Page 22483]]

Operational Process
    ICC has defined the operational process for the one-time adjustment 
payments and corresponding collections. ICC will include the ad-hoc 
adjustments in CP EOD processing on Monday, June 14, 2021, which will 
be netted with other cash payments to determine Monday, June 14, 2021 
EOD CP margin calls to be paid Tuesday, June 15, 2021. ICC will provide 
CPs and clients with position level adjustment details after EOD 
Friday, June 11, 2021 and prior to Monday, June 14, 2021. ICC will 
allow CPs to allocate adjustments at the level of individual house or 
client accounts. The proposed approach is intended to enable clients to 
reconcile adjustments they may receive from their CP. Further, ICC will 
provide CPs and clients the opportunity to review and consume relevant 
files as part of pre-transition simulations. One simulation was 
completed for March 26, 2021, and ICC plans to hold future simulations 
closer to the transition date.
Market Participant Engagement and Outreach
    The proposed transition has been discussed and coordinated by ICC 
with market participants, as well as with ICE Clear Europe, to achieve 
an orderly and efficient transition to the new rates. ICC has sought 
feedback from and engaged with market participants to determine the 
proposed approach throughout 2020 and 2021, including through the ICC 
Risk Committee and the ISDA Credit Steering Committee. In relation to 
CDS valuations, feedback has indicated a desire for one-time adjustment 
payments to account for the reasonably expected valuation changes 
associated with the use of the new interest rates. The proposed one-
time adjustment methodology, among other details, has been subject to 
substantial discussion and feedback from market participants.
    ICC has made its proposed approach publicly available on its 
website \11\ and issued a circular on the topic.\12\ The proposed 
approach was approved by the ICC Board and is a product of the 
aforementioned consultation and governance processes. Based on the 
significant outreach by ICC, ICC believes that market participants 
support ICC's approach for the transition. There were no substantive 
opposing views expressed on the transition or proposed approach.
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    \11\ A detailed presentation, titled ICE CDS Clearing MTM 
Interest Rates Transition, Initially posted and dated March 24, 2021 
and updated April 8, 2021, is available at: https://www.theice.com/publicdocs/ice/notifications/adhoc/110000348161/ICE_CDS_Clearing_PriceAlignmentTransition_20210324_v1.3_final.pdf.
    \12\ ICC Circular 2021/029, titled CDS MTM Margin Interest Rates 
Transition, dated April 8, 2021, is available at: https://www.theice.com/publicdocs/clear_credit/circulars/Circular_2021_029.pdf.
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(b) Statutory Basis
    ICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \13\ and the regulations 
thereunder applicable to it, including the applicable standards under 
Rule 17Ad-22.\14\ In particular, Section 17A(b)(3)(F) of the Act \15\ 
requires that the rule change be consistent with the prompt and 
accurate clearance and settlement of securities transactions and 
derivative agreements, contracts and transactions cleared by ICC, the 
safeguarding of securities and funds in the custody or control of ICC 
or for which it is responsible, and the protection of investors and the 
public interest. As described above, the proposed rule change would 
transition the interest rates used for computing price alignment 
amounts and is in response to requests by industry participants in 
connection with the broader transition in the derivatives markets to 
the use of SOFR and [euro]STR in lieu of existing interest rate 
benchmarks. The proposed transition would include one-time adjustment 
payments to be made to or from CPs to account for the reasonably 
expected valuation changes associated with the use of the new rates. 
The proposed transition has been discussed and coordinated by ICC with 
market participants to achieve an orderly and efficient transition to 
the new rates. In ICC's view, the proposed approach reduces uncertainty 
in respect of the transition and the potential impact of the interest 
rate benchmark reforms and reduces the potential for market disruption 
given the industry outreach and operational testing done by ICC. As 
such, the proposed rule change is consistent with the prompt and 
accurate clearance and settlement of securities transactions, 
derivatives agreements, contracts, and transactions, the safeguarding 
of securities and funds in the custody or control of ICC or for which 
it is responsible, and the protection of investors and the public 
interest, within the meaning of Section 17A(b)(3)(F) of the Act.\16\
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    \13\ 15 U.S.C. 78q-1.
    \14\ 17 CFR 240.17Ad-22.
    \15\ 15 U.S.C. 78q-1(b)(3)(F).
    \16\ Id.
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    The amendments would also satisfy relevant requirements of Rule 
17Ad-22.\17\ Rule 17Ad-22(e)(2)(i), (iii) and (v) \18\ requires each 
covered clearing agency to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide for 
governance arrangements that are clear and transparent; support the 
public interest requirements of Section 17A of the Act \19\ applicable 
to clearing agencies, and the objectives of owners and participants; 
and specify clear and direct lines of responsibility. The proposed 
changes are in response to requests by industry participants. Such 
changes to transition the rates used for computing price alignment 
amounts on MTM Margin Balances, including one-time adjustment payments 
to account for the reasonably expected valuation changes associated 
with the use of the new interest rates, were determined in accordance 
with ICC's governance process. ICC believes that the proposed approach 
reduces uncertainty in respect of the transition and the potential 
impact of the benchmark reforms and reduces the potential for market 
disruption given the industry outreach and operational testing done by 
ICC. ICC's governance process allows multiple stakeholders to provide 
input and feedback regarding such proposed rule changes. ICC has sought 
feedback from and engaged with market participants on the transition 
and the proposed approach is a product of the aforementioned 
consultation and governance processes. As such, ICC believes that the 
proposed rule change is consistent with the requirements of Rule 17Ad-
22(e)(2)(i), (iii) and (v).\20\
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    \17\ 17 CFR 240.17Ad-22.
    \18\ 17 CFR 240.17Ad-22(e)(2)(i), (iii) and (v).
    \19\ 15 U.S.C. 78q-1.
    \20\ 17 CFR 240.17Ad-22(e)(2)(i), (iii) and (v).
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    Rule 17Ad-22(e)(4)(ii) \21\ requires each covered clearing agency 
to 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 
the covered clearing agency in extreme but plausible market conditions. 
The proposed rule change does not require any changes to ICC's Rules or 
written policies and procedures, including ICC's risk

[[Page 22484]]

management methodology, model, or practices. Moreover, the proposed 
transition, including the approach and timing, has been discussed and 
coordinated by ICC with market participants to promote an orderly and 
efficient transition to the new rates. ICC will continue to maintain 
its financial resources and withstand the pressures of defaults, 
consistent with the requirements of Rule 17Ad-22(e)(4)(ii).\22\
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    \21\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \22\ Id.
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    Rule 17Ad-22(e)(17) \23\ requires, in relevant part, each covered 
clearing agency to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to manage its operational 
risks by (i) identifying the plausible sources of operational risk, 
both internal and external, and mitigating their impact through the use 
of appropriate systems, policies, procedures, and controls; and (ii) 
ensuring that systems have a high degree of security, resiliency, 
operational reliability, and adequate, scalable capacity. ICC has 
defined the operational process and considerations for the proposed 
transition, including the one-time adjustment payments. ICC has 
publicized its process and planned for pre-transition simulations to 
promote preparedness among itself and market participants. Such actions 
enhance ICC's ability to identify relevant sources of operational risk 
and mitigate their impact in respect of the proposed transition and to 
ensure that systems have a high degree of security, resiliency, 
operational reliability, and adequate, scalable capacity. ICC believes 
that the proposed transition is appropriately designed to reduce 
operational complexity and sufficiently coordinated among ICC and 
market participants to achieve an orderly and efficient transition to 
the new rates. The proposed rule change is thus consistent with the 
requirements of Rule 17Ad-22(e)(17).\24\
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    \23\ 17 CFR 240.17Ad-22(e)(17)(i)-(ii).
    \24\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    ICC does not believe the proposed rule change would have any 
impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purpose of the Act. The proposed 
changes are in response to requests by industry participants in the 
context of the broader transition in interest rate benchmark rates and 
follow similar changes for other cleared swap products. Such changes 
are designed to transition the interest rates used for computing price 
alignment amounts on MTM Margin Balances and include one-time 
adjustment payments to account for the reasonably expected valuation 
changes associated with the use of the new interest rates. ICC has 
sought feedback from and engaged with market participants on the 
transition and the proposed approach is a product of the aforementioned 
consultation and governance processes. The proposed rule change will 
apply uniformly across all market participants. ICC does not believe 
the changes would adversely affect the ability of market participants 
to continue to clear contracts. ICC also does not believe the changes 
would adversely affect the cost of clearing or otherwise limit market 
participants' choices for selecting clearing services. Therefore, ICC 
does not believe the proposed rule change would impose any burden on 
competition not necessary or appropriate in furtherance of the purpose 
of the Act.

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

    Written comments relating to the proposed rule change have not been 
solicited or received. ICC will notify the Commission of any written 
comments received by ICC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \25\ and paragraph (f) of Rule 19b-4 \26\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \25\ 15 U.S.C. 78s(b)(3)(A).
    \26\ 17 CFR 240.19b-4(f)(1).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ICC-2021-012 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ICC-2021-012. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings will also be available for inspection 
and copying at the principal office of ICE Clear Credit and on ICE 
Clear Credit's website at https://www.theice.com/clear-credit/regulation.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ICC-2021-012 and should be 
submitted on or before May 19, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(9)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-08861 Filed 4-27-21; 8:45 am]
BILLING CODE 8011-01-P


