[Federal Register Volume 86, Number 89 (Tuesday, May 11, 2021)]
[Notices]
[Pages 25928-25931]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-09883]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91775; File No. SR-ICEEU-2021-012]


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

May 5, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 29, 2021, ICE Clear Europe Limited (``ICE Clear Europe'' or 
the ``Clearing House'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule changes described in 
Items I, II and III below, which Items have been prepared primarily by 
ICE Clear Europe. 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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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    ICE Clear Europe Limited (``ICEU'') proposes to change the interest 
rates used for computing CDS Price Alignment Amounts. These revisions 
do not require any changes to the ICEU Clearing Rules (the ``Rules'') 
or CDS Procedures (the ``CDS Procedures'').\5\
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    \5\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules or the CDS Procedures.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

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

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

(a) Purpose
    ICEU proposes to change the interest rates used for computing CDS 
Price Alignment Amounts on CDS Notional Margin Balances under paragraph 
3 of the CDS Procedures. The target date of the transition is Monday, 
June 14, 2021, subject to any regulatory review or approval process. On 
the transition date, ICEU 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 ICEU Rules or CDS Procedures or 
other written policies and procedures. In accordance with section 3.1 
of the ICEU CDS Procedures, the CDS Price Alignment Amount is based 
upon the applicable overnight rate notified by the Clearing House from 
time to time to CDS Clearing Members for each of the currencies in 
which Mark-to-Market Margin is paid.
    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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    Feedback from market participants has indicated a desire for one-
time adjustment payments to or from the Clearing Member (``CM''), as 
appropriate, to account for the reasonably expected valuation changes 
for Contracts associated with the use of the new interest rates. ICEU 
proposes to calculate such one-time adjustment payments to or from the 
CM, as appropriate, and to make the corresponding payments to and 
collections from CMs.
Proposed Transition Process
    On the transition date, ICEU 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 ICEU. Any revised transition date will fall on a 
Monday to maintain the proposed operational process and will be 
publicized by ICEU. The [euro]STR and SOFR rates available on

[[Page 25929]]

Monday, June 14, 2021 will be applied to CDS Notional 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, ICEU proposes to 
calculate one-time adjustment amounts and pay or collect, as 
appropriate, such amounts to or from CMs to account for the reasonably 
expected valuation changes associated with the use of the new interest 
rates. In calculating the adjustment amounts, ICEU will use the 
following methodology that 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:
     ICEU 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 ICEU include the 
3-year tenor of iTraxx Crossover and CDX High Yield index in 
determining the hazard rate term structure, ICEU has been collecting 
daily prices for these instruments even though they are not clearing 
eligible. ICEU will review the reasonability of the price collection 
with its CDS Product 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.
     ICEU 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]STER 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 Credit LLC (``ICE Clear 
Credit''). Based on feedback that the clearing houses should seek to 
achieve congruent adjustment amounts for positions at ICEU and ICE 
Clear Credit, EOD valuations for North American products will be 
taken from ICE Clear Credit's EOD process during its North American 
pricing window.
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Operational Process
    ICEU has defined the operational process for the one-time 
adjustment payments and corresponding collections. ICEU will include 
the ad-hoc adjustments in CM EOD processing on Monday, June 14, 2021, 
which will be netted with other cash payments to determine Monday, June 
14, 2021 EOD CM margin calls to be paid Tuesday, June 15, 2021. ICEU 
will provide CMs and clients with position level adjustment details 
after EOD Friday, June 11, 2021 and prior to Monday, June 14, 2021. 
ICEU will allow CMs 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 CMs. 
Further, ICEU will provide CMs 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 ICEU plans to hold 
future simulations closer to the transition date.
Market Participant Engagement and Outreach
    The proposed transition has been discussed and coordinated by ICEU 
with market participants, as well as with ICE Clear Credit, to achieve 
an orderly and efficient transition to the new rates. ICEU has sought 
feedback from and engaged with market participants to determine the 
proposed approach throughout 2020 and 2021, including through the CDS 
Product 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.
    As discussed below, ICEU has issued a public Consultation on the 
proposed approach on April 8, 2021 via a circular \11\ and made 
available on its website further details on the proposed 
transition.\12\
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    \11\ ICEU Circular 2021/055 on the Proposed change to Mark-to-
Market Margin Interest Rates, dated April 8, 2021, is available at: 
https://www.theice.com/publicdocs/clear_europe/circulars/C21055.pdf.
    \12\ A detailed presentation on the proposed transition is in 
the presentation located here: https://www.theice.com/publicdocs/ice/notifications/adhoc/110000348161/ICE_CDS_Clearing_PriceAlignmentTransition_20210324_v1.3_final.pdf.
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(b) Statutory Basis
    ICEU 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 ICEU, the 
safeguarding of securities and funds in the custody or control of ICEU 
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 CMs 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 ICEU with 
market participants to achieve an orderly and efficient transition to 
the new rates. In ICEU'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 ICEU. 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 the custody or control of ICEU or 
for which it is responsible, and the protection of

[[Page 25930]]

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 CDS Notional 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 ICEU's governance process. ICEU 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 ICEU. ICEU's governance process allows multiple 
stakeholders to provide input and feedback regarding such proposed rule 
changes. ICEU 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, 
ICEU 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 ICEU's Rules 
or written policies and procedures, including ICEU's risk management 
methodology, model, or practices. Moreover, the proposed transition, 
including the approach and timing, has been discussed and coordinated 
by ICEU with market participants to promote an orderly and efficient 
transition to the new rates. ICEU 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. ICEU has 
defined the operational process and considerations for the proposed 
transition, including the one-time adjustment payments. ICEU has 
publicized its process and planned for a pre-transition simulations to 
promote preparedness among itself and market participants. Such actions 
enhance ICEU'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. ICEU believes 
that the proposed transition is appropriately designed to reduce 
operational complexity and sufficiently coordinated among ICEU 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

    ICEU 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 CDS Notional 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. ICEU 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. ICEU does not believe 
the changes would adversely affect the ability of market participants 
to continue to clear contracts. ICEU also does not believe the changes 
would adversely affect the cost of clearing or otherwise limit market 
participants' choices for selecting clearing services. Therefore, ICEU 
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 amendments have not been 
solicited or received by ICE Clear Europe. ICE Clear Europe will notify 
the Commission of any comments received with respect to the proposed 
rule change.

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

[[Page 25931]]

change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ICEEU-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 20549-1090.

All submissions should refer to File Number SR-ICEEU-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 Europe and on ICE 
Clear Europe's website at https://www.theice.com/clear-europe/regulation.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ICEEU-2021-012 and should be 
submitted on or before June 1, 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(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-09883 Filed 5-10-21; 8:45 am]
BILLING CODE 8011-01-P


