[Federal Register Volume 86, Number 232 (Tuesday, December 7, 2021)]
[Notices]
[Pages 69308-69311]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-26448]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93690; File No. SR-ICC-2021-023]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change Relating to the ICC Clearing Rules and 
ICC Exercise Procedures

December 1, 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 November 19, 
2021, ICE Clear Credit LLC (``ICC'') filed with the Securities and 
Exchange Commission (the ``Commission'') the proposed rule change as 
described in Items I, II and III below, which Items have been prepared 
primarily by ICC. 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.
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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 revise the 
ICC Clearing Rules (``Rules'') and Exercise Procedures \3\ in 
connection with the clearing of credit default index Swaptions (``Index 
Swaptions'').\4\
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    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules and Exercise Procedures.
    \4\ Index Swaptions are also referred to in ICC's policies and 
procedures as ``index options'' or ``index CDS options'', or in 
similar terms.
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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 revising the ICC Rules and Exercise Procedures related 
to the clearing of Index Swaptions.\5\ The proposed changes to the ICC 
Rules and Exercise Procedures enhance the restructuring component of 
iTraxx Index Swaptions and include other clarifications or updates, 
including with respect to fallback measures in the Exercise Procedures. 
ICC proposes to make the changes effective following Commission 
approval of the proposed rule change. The proposed revisions are 
described in detail as follows.
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    \5\ Pursuant to an Index Swaption, one party (the ``Swaption 
Buyer'') has the right (but not the obligation) to cause the other 
party (the ``Swaption Seller'') to enter into an index credit 
default swap transaction at a pre-determined strike price on a 
specified expiration date on specified terms. In the case of Index 
Swaptions cleared by ICC, the underlying index credit default swap 
is limited to certain CDX and iTraxx index credit default swaps that 
are accepted for clearing by ICC, and which would be automatically 
cleared by ICC upon exercise of the Index Swaption by the Swaption 
Buyer in accordance with its terms.
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I. Rule Amendments
    The proposed amendments revise Rule 26R-319, which addresses 
procedures for settlement of an exercised Index Swaption. ICC proposes 
clarifications to Rule 26R-319(b), under which additional settlements 
may be required. The proposed changes add a parenthetical with an 
exception and specify that clause (i) regarding the settlement of 
amounts owed is subject to

[[Page 69309]]

any modification with respect to fixed rate payments or accrual rebates 
as specified by ICC Circular.
    ICC proposes to revise Rule 26R-319(c) to amend the restructuring 
component of iTraxx Index Swaptions. Currently, the iTraxx Index 
Swaption delivers a single name position in addition to the re-
versioned underlying index. For bilateral iTraxx Index Swaptions, 
counterparties to Index Swaption contracts on the restructured single 
name decide what the Index Swaption will deliver in the future if 
exercised/assigned: Single name physical position, buyer triggered 
auction cash payment, or seller triggered auction cash payment. 
Following the changes, the cleared iTraxx Index Swaption would deliver 
a blend of all three outcomes such that the cleared instrument would 
more closely replicate the payout of the bilateral instrument.
    Namely, under the amendments, the blended deliverables apply for 
iTraxx Index Swaption expiries on or after the auction settlement date, 
such that the Index Swaption delivers a re-versioned underlying index 
plus a blend of cash payment and single name. In subsection (c), ICC 
proposes minor updates in introducing Existing Restructuring as a 
defined term. Clause (ii) continues to discuss the Underlying New Trade 
that comes into effect \6\ and includes a reference to new clause (v). 
Clause (iii) would be amended and divided into two clauses. Amended 
clause (iii) discusses the treatment of the Underlying New Trade 
described in clause (ii) if the expiration date occurs prior to 
commencement of the CEN Triggering Period (as defined in the 
Restructuring Procedures) \7\ for the Existing Restructuring. New 
clause (iv) discusses the treatment of the Underlying New Trade 
described in clause (ii) if the expiration date occurs on or following 
the commencement of such period but prior to the auction settlement 
date.
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    \6\ An Underlying New Trade remains defined in Rule 26R-102 as a 
new single name CDS trade that would arise upon exercise of an Index 
Swaption where a relevant Restructuring Credit Event, if applicable, 
has occurred with respect to a reference entity in the relevant 
index.
    \7\ ICC Restructuring Procedures available at: https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Restructuring_Procedures.pdf.
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    Proposed clause (v) sets out the framework for the blended 
deliverables and would be applicable if the expiration date occurs on 
or following the auction settlement date. The proposed language 
requires ICC to (1) determine the extent to which positions in relevant 
single name contracts of the relevant tenor referencing the reference 
entity subject to the Existing Restructuring are settled; (2) 
determine, if applicable, a cash settlement amount with respect to the 
corresponding portion of the notional amount of the Index Swaption 
applicable to such reference entity; and (3) with respect to the 
remaining portion of such notional amount, an Underlying New Trade to 
come into effect. Additional specifications with respect to the 
Underlying New Trade and a reference to the Exercise Procedures or 
other applicable procedures are included.

II. Exercise Procedures Amendments

    The Exercise Procedures supplement the provisions of Subchapter 26R 
of the Rules with respect to Index Swaptions. The proposed amendments 
define Minimum Intrinsic Value in paragraph 1 as a minimum intrinsic 
value below which an Index Swaption position would not be identified as 
``in the money'' for paragraph 2.2(e)(ii) or 2.8. ICC may establish a 
Minimum Intrinsic Value and/or permit an exercising party to specify a 
Minimum Intrinsic Value for its Index Swaptions for a relevant pre-
exercise notification period or exercise period. ICC would incorporate 
this term in respect of fallback provisions described in paragraphs 
2.2(e)(ii) and 2.8. Specifically, ICC would take into account any 
applicable Minimum Intrinsic Value as part of its procedures for the 
pre-exercise notification period (during which preliminary exercise 
notices can be submitted, modified, and/or withdrawn) in paragraph 
2.2(e)(ii) and for automatic exercise in paragraph 2.8. The proposed 
changes further specify that an ``in the money'' determination will be 
based on intrinsic value. In general, if intrinsic value is greater 
than the Minimum Intrinsic Value, the position will be exercised.
    ICC proposes paragraph 3, which would apply in connection with Rule 
26R-319(c)(v) where an Existing Restructuring has occurred with respect 
to a reference entity underlying an exercised Index Swaption and the 
Index Swaption expiration date occurs on or following the auction 
settlement date. Paragraph 3 provisions may be modified or supplemented 
pursuant to ICC Circular, as specified in paragraph 3.1.
    Paragraph 3.2 would set out the determination of settled portions. 
The proposed changes define Relevant CDS Transactions as single name 
contracts in the relevant reference entity cleared at ICC and such 
others as ICC may specify by Circular. ICC would determine the portion 
of the aggregate notional amount of Relevant CDS Transactions for which 
an eligible party timely delivered a credit event notice (``Triggered 
Portion'') and the portion as to which no such notice was timely 
delivered (``Untriggered Portion''). With respect to the Triggered 
Portion, paragraph 3.2 defines the Buyer and Seller Triggered Portions 
as the portions for which the protection buyer or seller delivered 
certain notices (i.e., prevailing credit event notice, prevailing 
notice to exercise movement option). The portion for which a movement 
option was applicable but for which neither protection buyer nor seller 
delivered a notice to exercise would be the Unmoved Portion, and 
together with the Untriggered Portion, the Untriggered/Unmoved Portion. 
ICC may establish by Circular a threshold pertaining to the 
Untriggered/Unmoved Portion under paragraph 3.2. This paragraph also 
sets out how the Buyer Triggered, Seller Triggered and Untriggered/
Unmoved Portions are defined as percentages, namely the Buyer 
Triggered, Seller Triggered, and Untriggered/Unmoved Percentages.
    Paragraph 3.3 would discuss settlement in respect of an exercised 
Index Swaption to which Rule 26R-319(c)(v) applies. Subsection (a) sets 
forth ICC's determination of the cash settlement amount owed pursuant 
to Rule 26R-319(c)(v)(2). ICC would sum the settlement amounts in cash 
applicable to the Buyer and Seller Triggered Portions, which would be 
calculated based on the Relevant Notional Amount (i.e., the notional 
amount under the Index Swaption applicable to such reference entity) 
multiplied by the Buyer and Seller Triggered Percentages. The cash 
settlement amount may be adjusted to take into account applicable fixed 
payments and accrual rebates as specified by ICC Circular. Under 
subsection (b), the notional amount of the Underlying New Trade 
established under Rule 26R-319(c)(ii) and (v)(3) would be the Relevant 
Notional Amount multiplied by the Untriggered/Unmoved Percentage.
(b) Statutory Basis
    ICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \8\ and the regulations 
thereunder applicable to it, including the applicable standards under 
Rule 17Ad-22.\9\ In particular, Section 17A(b)(3)(F) of the Act \10\ 
requires that the rule change be consistent with the prompt and 
accurate clearance and settlement of securities

[[Page 69310]]

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. ICC proposes changes to the Rules 
and Exercise Procedures to support the clearing of Index Swaptions, 
including to amend the restructuring component of iTraxx Index 
Swaptions. Currently, the iTraxx Index Swaption delivers a single name 
position in addition to the re-versioned underlying index. Under the 
amendments, the blended deliverables apply for iTraxx Index Swaption 
expiries on or after the auction settlement date, such that the Index 
Swaption delivers a re-versioned underlying index plus a blend of cash 
payment and single name. These changes enhance the restructuring 
component such that the cleared instrument more closely replicates the 
payout of bilateral instruments, which would provide additional 
consistency to market participants. The additional clarifications or 
updates ensure that the Rules and Exercise Procedures remain effective, 
clear, and up-to-date. The changes clearly identify where ICC may 
modify or supplement procedures by Circular. The amended Exercise 
Procedures incorporate Minimum Intrinsic Value in respect of fallback 
provisions in paragraphs 2.2(e)(ii) and 2.8. ICC believes that defining 
this value would enhance the procedures to ensure that ICC's cleared 
Index Swaptions are appropriately exercised. Moreover, the changes 
continue to specify ICC's role in identifying ``in the money'' 
positions, taking into account Minimum Intrinsic Value, to ensure that 
the processes associated with the pre-exercise notification period and 
automatic exercise operate reliably. In ICC's view, the proposed rule 
change will ensure that ICC's Rules and policies and procedures clearly 
reflect the terms and conditions applicable to Index Swaptions and is 
thus consistent with the prompt and accurate clearing and settlement of 
the contracts cleared by ICC, including Index Swaptions, 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.\11\
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    \8\ 15 U.S.C. 78q-1.
    \9\ 17 CFR 240.17Ad-22.
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ Id.
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    The amendments would also satisfy relevant requirements of Rule 
17Ad-22.\12\ Rule 17Ad-22(e)(1) \13\ requires each covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to provide for a well-founded, 
clear, transparent, and enforceable legal basis for each aspect of its 
activities in all relevant jurisdictions. The proposed changes support 
the clearing of Index Swaptions by ICC, including by enhancing the 
restructuring component of iTraxx Index Swaptions and making other 
clarifications or updates, to ensure that the Rules and Exercise 
Procedures clearly and accurately reflect the requirements and 
procedures applicable to iTraxx Index Swaptions and Index Swaptions 
more generally. Moreover, the changes to the Rules and Exercise 
Procedures clearly identify where ICC may modify or supplement 
procedures by Circular. The proposed rule change would thus continue to 
support the legal basis for ICC's clearance of Index Swaptions and 
operation of the exercise and assignment process. As such, the proposed 
rule change would satisfy the requirements of the Rule 17Ad-
22(e)(1).\14\
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    \12\ 17 CFR 240.17Ad-22.
    \13\ 17 CFR 240.17Ad-22(e)(1).
    \14\ Id.
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    Rule 17Ad-22(e)(10) \15\ requires each covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to establish and maintain transparent 
written standards that state its obligations with respect to the 
delivery of physical instruments, and establish and maintain 
operational practices that identify, monitor, and manage the risks 
associated with such physical deliveries. The Rules continue to clearly 
set out the procedures for settlement of Index Swaptions on exercise. 
Under the amendments, the blended deliverables apply for iTraxx Index 
Swaption expiries on or after the auction settlement date, such that 
the Index Swaption delivers a re-versioned underlying index plus a 
blend of cash payment and single name. Moreover, the amended Exercise 
Procedures clearly set out procedures associated with the determination 
of the cash settlement amount owed pursuant to Rule 26R-319(c)(v)(2) 
and the notional amount of the Underlying New Trade established under 
Rule 26R-319(c)(ii) and (v)(3). In ICC's view, the Rules and Exercise 
Procedures continue to enable ICC to identify and manage the risks of 
settlement of Index Swaptions on exercise. As such, the amendments 
would satisfy the requirements of Rule 17Ad-22(e)(10).\16\
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    \15\ 17 CFR 240.17Ad-22(e)(10).
    \16\ Id.
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    Rule 17Ad-22(e)(17) \17\ 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. The enhanced 
restructuring component in Rule 26R-319 would avoid introducing 
unnecessary complexity or operational risk, as the iTraxx Index 
Swaption would deliver a re-versioned underlying index plus a blend of 
cash payment and single name, and proposed paragraph 3 of the Exercise 
Procedures would further set out associated procedures. Moreover, the 
Exercise Procedures allow ICC to manage the operational risks 
associated with the exercise and assignment process by establishing 
procedures for the exercise and assignment of Index Swaptions and 
including fallback measures, which help mitigate the impact from 
operational or technical issues and ensure that the system has a high 
degree of security, resiliency, operational reliability, and adequate, 
scalable capacity. The amendments to the Exercise Procedures add 
clarity by specifying a minimum intrinsic value below which an Index 
Swaption position would not be identified as ``in the money'' in 
respect the pre-exercise notification period and automatic exercise and 
would further ensure that the processes associated with these fallback 
measures operate reliably. ICC's procedures continue to be designed to 
help mitigate the impact from technical issues to ensure that the 
system has a high degree of security, resiliency, operational 
reliability, and adequate, scalable capacity. The proposed rule change 
is therefore reasonably designed to meet the requirements of Rule 17Ad-
22(e)(17).\18\
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    \17\ 17 CFR 240.17Ad-22(e)(17)(i) and(ii).
    \18\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    ICC does not believe the proposed amendments 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 to the ICC 
Rules and Exercise Procedures will apply uniformly across all market 
participants. Therefore, ICC does not believe the proposed rule

[[Page 69311]]

change imposes 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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 [email protected]. Please include 
File Number SR-ICC-2021-023 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-2021-023. 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-2021-023 and should be 
submitted on or before December 28, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-26448 Filed 12-6-21; 8:45 am]
BILLING CODE 8011-01-P


