[Federal Register Volume 87, Number 17 (Wednesday, January 26, 2022)]
[Notices]
[Pages 4069-4072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01463]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94014; File No. SR-ICC-2021-023]


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

January 20, 2021.

I. Introduction

    On November 19, 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 Rule 
26R-319 of the ICC Clearing Rules (``Rules'') and the ICC Exercise 
Procedures (``Exercise Procedures'') \3\ in connection with the 
clearing of credit default index options (``Index Swaptions''). The 
proposed rule change was published for comment in the Federal Register 
on December 7, 2021.\4\ The Commission did not receive comments 
regarding the proposed rule change. For the reasons discussed below, 
the Commission is approving the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules and Exercise Procedures.
    \4\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Proposed Rule Change Relating to the ICC Clearing Rules 
and ICC Exercise Procedures; Exchange Act Release No. 34-93690 (Dec. 
1, 2021); 86 FR 69308 (Dec. 7, 2021) (SR-ICC-2021-023) (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

A. Background

    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.

B. Revisions to Rule 26R-319

    ICC Rule 26R-319 describes what happens upon the exercise of an 
Index Swaption. ICC Rule 26R-319 consists of three parts: 26R-319(a), 
26R-319(b), and 26R-319(c). 26R-319(a) applies when a Swaption Buyer 
effectively exercises an Index Swaption and the underlying index is not 
subject to a restructuring due to a credit event, while (b) and (c) 
apply when an Index Swaption is effectively exercised and the 
underlying index is subject to a restructuring due to a credit event.
    Under 26R-319(a), upon the effective exercise of an Index Swaption, 
a contract in the form of the underlying index comes into effect 
between the Swaption Buyer and ICC and an exactly

[[Page 4070]]

offsetting contract comes into effect between ICC and the Swaption 
Seller. The proposed rule change would not amend 26R-319(a).
    26R-319(b) describes what happens when an Index Swaption is 
effectively exercised and one or more Event Determination Dates have 
occurred with respect to the underlying index on or prior to the 
Expiration Date. In that case, in addition to the new contracts that 
come into effect under 26R-319(a), certain additional settlements may 
be required, as further described in 26R-319(b).
    The proposed rule change would make two amendments to 26R-319(b). 
The proposed rule change would add a parenthetical to clarify that 26R-
319(b) does not apply to an Event Determination Date in respect of an 
M(M)R Restructuring Credit Event because 26R-319(c) would apply in that 
case, as described below. The proposed rule change would further modify 
subpart (i) of 26R-319(b) by adding a note that the settlement 
contemplated by that subsection would be subject to any modification 
with respect to fixed rate payments or accrual rebates as specified by 
ICC by Circular.
    26R-319(c) describes what happens when an Index Swaption is 
effectively exercised and one or more M(M)R Restructuring Credit Events 
have occurred with respect to the underlying index on or prior to the 
Expiration Date. 26R-319(c) is only applicable to iTraxx Index 
Swaptions. Under 26R-319(c) as currently written, upon settlement the 
Swaption Buyer would receive a re-versioned underlying index plus a 
single name CDS contract.
    The proposed rule change would amend 26R-319(c) so that, in certain 
circumstances, the Swaption Buyer would receive a re-versioned 
underlying index plus a single name CDS contract and a cash payment. 
Settlement under 26R-319(c) as amended therefore could result in the 
re-versioned underlying index and a blend of single name position and 
cash. This settlement would be similar to what occurs when a buyer and 
seller settle an index swaption bilaterally. Thus, the proposed 
amendments would make settlement of a cleared Index Swaption at ICC 
similar to the settlement that occurs in the bilateral market, outside 
of the clearinghouse.\5\
---------------------------------------------------------------------------

    \5\ Notice, 86 FR at 69309.
---------------------------------------------------------------------------

    26R-319(c) as currently written has an introductory sentence and 
four subparts. The proposed rule change first would revise the 
introductory sentence of 26R-319(c) to incorporate text currently found 
in subparts (ii) and (iii) of 26R-319(c). Specifically, the proposed 
rule change would incorporate from subpart (ii) language referring to 
the effective exercise of the Index Swaption and rights and obligations 
under 26-319(b). The proposed rule change also would incorporate from 
subpart (iii) language regarding the Relevant Index Swaption Untranched 
Terms Supplement.
    Subpart (i) of 26R-319(c) as currently written is intentionally 
omitted. The proposed rule change would not revise subpart (i).
    Under subpart (ii) as currently written, if an Index Swaption is 
effectively exercised, then in addition to the rights and obligations 
under 26R-319(b), a Contract constituting an Underlying New Trade for 
purposes of the Relevant Index Swaption Untranched Terms Supplement 
comes into effect between the exercising Swaption Buyer and ICC and an 
exactly offsetting Contract constituting an Underlying New Trade comes 
into effect between ICC and the assigned Swaption Seller. As mentioned 
above, the proposed rule change would move to the introductory clause 
of 26R-319(c) language currently found in subpart (ii), and therefore, 
the proposed rule change would delete this language from subpart (ii). 
The proposed rule change also would add a statement to subpart (ii) 
that it would be subject to a new subpart (v), as applicable (discussed 
below).
    Subpart (iii) as currently written applies to two situations. 
First, it applies when the Expiration Date occurs prior to the 
commencement of the CEN Triggering Period (as defined in the 
Restructuring Procedures) for Open Positions in single-name Contracts 
referencing the relevant Reference Entity. Second, it applies when the 
Expiration Date occurs on or following the commencement of the CEN 
Triggering Period for Open Positions in single-name Contracts 
referencing the relevant Reference Entity. The proposed rule change 
would split current subpart (iii) into a revised subpart (iii) and a 
new subpart (iv).
    Like the current subpart (iii), revised subpart (iii) would apply 
when the Expiration Date occurs prior to the commencement of the CEN 
Triggering Period (as defined in the Restructuring Procedures) for Open 
Positions in single-name Contracts referencing the relevant Reference 
Entity. Under subpart (iii) as revised, the Underlying New Trade 
described in subpart (ii) would be subject to the provisions of the CDS 
Restructuring Rules (and may become a Triggered Restructuring CDS 
Transaction thereunder) in the same manner as other Open Positions in 
single-name Contracts referencing the relevant Reference Entity. This 
would be the same as currently found in subpart (iii). Moreover, the 
proposed rule change would delete from subpart (iii) language regarding 
the Relevant Index Swaption Untranched Terms Supplement, which would be 
moved to the introductory sentence of 26R-319(c), as described above. 
The proposed rule change also would add a reference to the Existing 
Restructuring (a termed defined in the introductory sentence of 26R-
319(c)) and a reference to subpart (ii) of 26R-319(c).
    New subpart (iv) generally would apply to the second situation 
described in current subpart (iii)--when the Expiration Date occurs on 
or following the commencement of the CEN Triggering Period. The 
proposed rule change would specify further that subpart (iv) only 
applies when the Expiration Date occurs on or following the 
commencement of the CEN Triggering Period and prior to the Auction 
Settlement Date. Under new subpart (iv), with respect to the Underlying 
New Trade described in subpart (ii), neither party would be permitted 
to deliver an MP Notice in respect of the Existing Restructuring for 
such Underlying New Trade, such Underlying New Trade could not become a 
Triggered Restructuring CDS Transaction with respect to the Existing 
Restructuring, and no Event Determination Date or settlement would 
occur in respect of the Existing Restructuring for purposes of the 
Underlying New Trade. This language generally would be the same as 
currently found in subpart (iii).
    New subpart (v) would apply in the situation not covered by subpart 
(iii) or subpart (iv)--if the Expiration Date occurs on or following 
the Auction Settlement Date. In that situation, ICC would: (a) 
determine the extent to which positions in relevant single-name CDS 
contracts of the relevant tenor referencing the Reference Entity 
subject to the Existing Restructuring are settled based on CDS auctions 
for particular maturity categories and (b) determine, if applicable, a 
cash settlement amount payable from one party to the other with respect 
to the corresponding portion of the notional amount of the Index 
Swaption applicable to such Reference Entity, with such settlement to 
be based on the applicable final settlement prices under such auctions. 
Moreover, with respect to the remaining portion of such notional 
amount, an Underlying New Trade would come into effect, provided that 
neither party would be permitted to deliver an MP Notice in respect of 
the Existing Restructuring for such

[[Page 4071]]

Underlying New Trade, such Underlying New Trade could not become a 
Triggered Restructuring CDS Transaction with respect to the Existing 
Restructuring, and no Event Determination Date or settlement would 
occur in respect of the Existing Restructuring for purposes of the 
Underlying New Trade, as set forth in further detail in the ICC 
Exercise Procedures or other applicable ICC Procedures. Thus, this new 
subpart (v) would set out the framework for the blend of deliverables 
described above and would be applicable if the expiration date occurs 
on or following the Auction Settlement Date.

C. Revisions to the Exercise Procedures

    The Exercise Procedures supplement the provisions of Subchapter 26R 
of the Rules with respect to Index Swaptions. The proposed rule change 
would amend the Exercise Procedures in connection with amended 26R-319 
discussed above, as well as to incorporate a new defined term, 
``Minimum Intrinsic Value''.
    With respect to amended 26R-319, the proposed rule change would add 
a new paragraph 3 (Restructuring Settlement) to the Exercise 
Procedures. New paragraph 3 would apply in connection with 26R-
319(c)(v), discussed above. Under new paragraph 3.1, however, ICC could 
modify or supplement these provisions pursuant to an ICC Circular.
    New paragraph 3.3 (Settlement with respect to Existing 
Restructuring under Exercised Index Swaption) would describe how ICC 
would determine the amount of the cash settlement and the notional 
amount of the Underlying New Trade contemplated under new 26R-
319(c)(v). ICC would determine these amounts using the Triggered 
Portion and Untriggered Portion of the aggregate notional amount of 
Relevant CDS Transaction. New paragraph 3.2 (Determination of Settled 
Portions) would describe how ICC would determine such Triggered Portion 
and Untriggered Portion.
    With respect to the new defined term Minimum Intrinsic Value, the 
proposed rule change would define it 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 could 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.
    The proposed rule change would incorporate this new term into the 
existing fallback provisions described in paragraphs 2.2(e)(ii) and 2.8 
of the Exercise Procedures. Specifically, ICC would take into account 
any applicable Minimum Intrinsic Value as part of its procedures for 
submitting preliminary exercise notices on behalf of the Exercising 
Party during the pre-exercise notification period (during which 
preliminary exercise notices can be submitted, modified, and/or 
withdrawn) in paragraph 2.2(e)(ii). ICC also would take into account 
any applicable Minimum Intrinsic Value in determining whether an Index 
Swaption is ``in the money'' for automatic exercise during an Exercise 
System Failure in paragraph 2.8.

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 discussed 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)(1).\8\
---------------------------------------------------------------------------

    \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)(1).
---------------------------------------------------------------------------

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.\9\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As discussed above, the proposed rule change would revise Rule 26R-
319 and the Exercise Procedures to allow for a settlement consisting of 
the re-versioned underlying index and a blend of single name position 
and cash, similar to settlement in the bilateral market outside of the 
clearinghouse. The Commission believes that increasing consistency 
between cleared and non-cleared transactions should in general 
encourage market participants to clear transactions in Index Swaptions. 
The Commission therefore believes these changes would promote the 
prompt and accurate clearance and settlement of such transactions.
    Similarly, the Commission believes that amending the Exercise 
Procedures to incorporate the new defined term Minimum Intrinsic Value 
should encourage market participants to clear transactions in Index 
Swaptions. As discussed above, Minimum Intrinsic Value would be a value 
below which an Index Swaption position would not be identified as ``in 
the money,'' and therefore would not be exercised by ICC under 
paragraphs 2.2(e)(ii) and 2.8 of the Exercise Procedures. The 
Commission therefore believes that incorporating this new defined term 
could help establish a threshold below which ICC would not exercise 
Index Swaptions, thereby allowing Clearing Participants to better 
understand and anticipate when ICC would exercise their Index Swaption 
positions. The Commission believes that this change should in general 
encourage market participants to clear transactions in Index Swaptions, 
thereby promoting the prompt and accurate clearance and settlement of 
such transactions.
    Moreover, the Commission believes that both sets of changes would 
establish clear and predictable procedures for settlement and exercise 
of Index Swaptions by ICC, thereby promoting ICC's prompt and accurate 
clearance and settlement of such transactions. Specifically, the 
Commission believes the amendments to Rule 26R-319 and the Exercise 
Procedures would establish clear and effective procedures for ICC to 
use in effecting settlement with a re-versioned underlying index and a 
blend of single name position and cash. Similarly, the Commission 
believes that incorporating a Minimum Intrinsic Value below which ICC 
would not exercise Index Swaptions positions, in the circumstances 
contemplated by paragraphs 2.2(e)(ii) and 2.8 of the Exercise 
Procedures, would make ICC's exercise of Index Swaptions in such 
situations more predictable and reliable.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act.\10\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(1) Under the Act

    Rule 17Ad-22(e)(1) requires that ICC 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.\11\ As discussed above, the Commission believes 
that the amendments to Rule 26R-319 and the Exercise Procedures would 
establish

[[Page 4072]]

clear and effective procedures for ICC to use in effecting settlement 
with a re-versioned underlying index and a blend of single name 
position and cash, and therefore would provide a clear and transparent 
basis for ICC's settlement of Index Swaptions. Moreover, the Commission 
believes that incorporating Minimum Intrinsic Value into paragraphs 
2.2(e)(ii) and 2.8 of the Exercise Procedures would make ICC's exercise 
of Index Swaptions in such circumstances more predictable and reliable, 
and therefore well-founded and clear.
---------------------------------------------------------------------------

    \11\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

    Therefore, the Commission finds that the proposed rule change is 
consistent with Rule 17Ad-22(e)(1).\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

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 Rule 17Ad-22(e)(1).\14\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\15\ that the proposed rule change (SR-ICC-2021-023), be, and hereby 
is, approved.\16\
---------------------------------------------------------------------------

    \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).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-01463 Filed 1-25-22; 8:45 am]
BILLING CODE 8011-01-P


