[Federal Register Volume 86, Number 175 (Tuesday, September 14, 2021)]
[Notices]
[Pages 51206-51207]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-19727]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92895; File No. SR-ICC-2021-016]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC Exercise Procedures

September 8, 2021.

I. Introduction

    On July 8, 2021, ICE Clear Credit LLC (``ICC'') 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 revise the 
Exercise Procedures in connection with the clearing of credit default 
index swaptions (``Index Swaptions''). The proposed rule change was 
published for comment in the Federal Register on July 28\,\ 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 Credit LLC; Notice 
of Filing of Proposed Rule Change Relating to the ICC Exercise 
Procedures; Exchange Act Release No. 92468 (July 28, 2021); 86 FR 
40665 (July 28, 2021) (SR-ICC-2021-016) (``Notice'').
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II. Description of the Proposed Rule Change

    The Exercise Procedures supplement the provisions of Subchapter 26R 
of the ICC Clearing Rules (the ``Rules'') with respect to Index 
Swaptions and provide further detail as to the manner in which Index 
Swaptions may be exercised by Swaption Buyers, the manner in which ICC 
will assign such exercises to Swaption Sellers, and certain actions 
that ICC may take in the event of technical issues.\4\ The proposed 
rule change would amend two sections of the Exercise Procedures: 
Paragraph 2.6 Exercise System Failure and Paragraph 2.8 Automatic 
Exercise for Exercise System Failure.\5\
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    \4\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in the ICC Rules, as applicable.
    \5\ The description of the proposed rule change is excerpted 
substantially from the Notice.
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A. Paragraph 2.6 Exercise System Failure

    Currently, in the event that ICC's electronic system for the 
submission and assignment of Swaption Exercise Notices (ICC's 
``Exercise System'') fails to be in operation under certain 
circumstances, the Exercise Procedures provide ICC with the following 
options: (i) Cancel and reschedule the Exercise Period (i.e., the 
period on the expiration date of an Index Swaption during which the 
Swaption Buyer may deliver an exercise notice to ICC to exercise all or 
part of such Index Swaption); (ii) determine that automatic exercise 
will apply; and/or (iii) take such other action as ICC determines to be 
appropriate to permit exercising parties to submit exercise notices and 
to permit ICC to assign such notices. The proposed rule change would 
remove ICC's ability to cancel and reschedule the Exercise Period under 
such circumstances and renumber the paragraph. This would facilitate 
exercise when there is a system's failure and avoid uncertainty that 
could arise if an Exercise Period is rescheduled.

B. Paragraph 2.8 Automatic Exercise for Exercise System Failure

    Currently, if automatic exercise applies pursuant to Paragraph 2.6, 
Paragraph 2.8 specifies the parameters under which such automatic 
exercise will apply. Under Paragraph 2.8, ICC maintains the ability to 
effect an automatic exercise on the expiration date on each open 
position (of all exercising parties) in an Index Swaption that is 
determined by ICC to be ``in the money'' on such date. Currently, 
whether an Index Swaption is ``in the money'' is based on the average 
of the end-of-day (``EOD'') price of the underlying CDS contract on the 
preceding business day and on the expiration date, and where relevant, 
also based on the average of the EOD price on the preceding business 
day and

[[Page 51207]]

on the expiration date of each single name constituent contract with 
respect to which an Existing Restructuring has occurred. In practice, 
this could result in an exercise not occurring during a systems failure 
if the EOD reference prices are not in the money even if they would 
have been in the money based on intra-day pricing. Under the proposed 
rule change, whether an Index Swaption is ``in the money'' would be 
based on the relevant market-observed prices for the underlying CDS 
contract determined by ICC using the intraday market data available to 
it at the time of the Expiration Period, or the EOD price of the 
underlying CDS contract on the expiration date established at any 
Intercontinental Exchange, Inc. (``ICE'') clearinghouse, and where 
relevant, also based on the last available ICE EOD price of each single 
name constituent contract with respect to which an Existing 
Restructuring has occurred. This approach provides ICC more flexibility 
to ensure exercise is based on various reference prices.

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.\6\ For the reasons given below, the Commission finds that 
the proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act \7\ and Rule 17Ad-22(e)(17)(i).\8\
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    \6\ 15 U.S.C. 78s(b)(2)(C).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 17 CFR 240.17Ad-22(e)(17)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of ICC 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 ICC or for which it is responsible.\9\
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    As noted above, ICC is proposing to make changes to certain 
exercise procedures related to systems failures. The Commission 
believes that by removing the option to cancel and reschedule the 
Exercise Period under Paragraph 2.6, the proposed rule change would 
help to streamline and simplify the Exercise Procedures in the case of 
an Exercise System Failure and thereby clarify that cancellations and 
rescheduling will not occur and that exercises will take place during 
systems failures. The Commission believes that this in turn will 
enhance ICC's ability to promptly and accurately clear and settle 
transactions during systems failures.
    Additionally, automatic exercise applies to an Index Swaption that 
is determined by ICC to be in the money. As noted above, under the 
proposed rule change, whether an Index Swaption is ``in the money'' 
will be based on the relevant market-observed prices for the underlying 
CDS contract determined by ICC using the intraday market data available 
to it at the time or the EOD price of the underlying CDS contract on 
the expiration date established at any ICE clearinghouse, and where 
relevant, also based on the last available ICE EOD price of each single 
name constituent contract with respect to which an Existing 
Restructuring has occurred. This will allow ICC additional flexibility 
for determining whether an Index Swaption is in the money and 
facilitate exercise based on various reference prices, which the 
Commission believes provides the ability to reflect accurate prices 
thereby enhancing ICC's ability to promptly and accurately settle and 
clear transactions during systems failures.
    For the reasons stated above, the Commission finds that the 
proposed rule changes are consistent with Section 17A(b)(3)(F) of the 
Act.\10\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(17)(i)

    Rule 17Ad-22(e)(17) requires, in relevant part, each covered 
clearing agency to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to, as applicable, manage 
its operational risks by 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.\11\
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    \11\ 17 CFR 240.17Ad-22(e)(17)(i).
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    The Commission believes that by revising its Index Swaption 
Exercise Procedures, as noted above, to remove the ability to cancel or 
reschedule exercises and to add flexibility to use various reference 
prices for determining if an Index Swaption is in the money during 
systems failures, the proposal allows ICC to manage the risks posed by 
a systems failure by (i) increasing certainty around the timing of the 
Exercise Period and (ii) increasing the likelihood that an Index 
Swaption would be categorized as being in-the-money, and therefore 
automatically exercised, as expected. The Commission believes that this 
in turn supports ICC's ability to mitigate the consequences of a 
systems failure and promote systems that have a high degree of 
resiliency and operational reliability.
    For these reasons, the Commission believes the proposed rule change 
is consistent with Rule 17Ad-22(e)(17)(i).\12\
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    \12\ Id.
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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 \13\ and Rules 17Ad-22(e)(17)(i).\14\
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 17 CFR 240.17Ad-22(e)(17)(i).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\15\ that the proposed rule change (SR-ICC-2021-016), be, and hereby 
is, approved.\16\
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 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).
    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-19727 Filed 9-13-21; 8:45 am]
BILLING CODE 8011-01-P


