[Federal Register Volume 88, Number 57 (Friday, March 24, 2023)]
[Notices]
[Pages 17886-17891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-06057]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97169; File No. SR-ICEEU-2023-004]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to Amendments to the ICE Clear 
Europe Counterparty Credit Risk Policy and Counterparty Credit Risk 
Procedures

March 20, 2023.

I. Introduction

    On January 20, 2023, ICE Clear Europe Limited (``ICE Clear 
Europe'') 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 amend its Counterparty Credit Risk Policy (the ``CC Risk 
Policy'') and Counterparty Credit Risk Procedures (the ``CC Risk 
Procedures''). The proposed rule change was published for comment in 
the Federal Register on

[[Page 17887]]

February 7, 2023.\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 Europe Limited; 
Notice of Filing of Proposed Rule Change Relating to Amendments to 
the ICE Clear Europe Counterparty Credit Risk Policy and 
Counterparty Credit Risk Procedures, Exchange Act Release No. 96787 
(Feb. 1, 2023); 88 FR 8018 (Feb. 7, 2023) (SR-ICEEU-2023-004) 
(``Notice'').
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II. Description of the Proposed Rule Change

i. Background

    ICE Clear Europe is registered with the Commission as a clearing 
agency for the purpose of clearing security-based swaps. In its role as 
a clearing agency for clearing security-based swaps, ICE Clear Europe 
provides services to its Clearing Members and receives banking, 
investment, custody, and other financial services from its Financial 
Service Providers (``FSPs'').\4\ In providing services to Clearing 
Members and receiving services from FSPs, ICE Clear Europe is exposed 
to counterparty risk. Counterparty risk is the risk that ICE Clear 
Europe suffers financial losses if a Clearing Member or FSP defaults on 
its obligations to ICE Clear Europe.
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    \4\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in the CC Risk Policy and CC Risk 
Procedures.
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    In 2021, ICE Clear Europe adopted the CC Risk Policy and CC Risk 
Procedures.\5\ The CC Risk Policy and CC Risk Procedures describe how 
ICE Clear Europe identifies, monitors, and mitigates counterparty risk. 
In addition to the CC Risk Policy and CC Risk Procedures, ICE Clear 
Europe has also established a Counterparty Credit Risk Parameters 
document (the ``CC Risk Parameters'').\6\
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    \5\ See Self-Regulatory Organizations; ICE Clear Europe Limited; 
Order Approving Proposed Rule Change Relating to Adoption of the 
Counterparty Credit Risk Policy and Counterparty Credit Risk 
Procedures, Exchange Act Release No. 93880 (Dec. 30, 2021), 87 FR 
513 (Jan. 5, 2022) (SR-ICEEU-2021-015) (``2021 Approval Order'').
    \6\ ICE Clear Europe included the CC Risk Parameters as a 
confidential Exhibit 3 to this filing and the 2021 Approval Order. 
The CC Risk Parameters contain details relevant to the processes set 
out in the CC Risk Policy and CC Risk Procedures. For example, the 
CC Risk Parameters contain the credit eligibility criteria that ICE 
Clear Europe uses to assess prospective counterparties.
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    The proposed rule change would amend the CC Risk Policy and the CC 
Risk Procedures to make a number of improvements to the versions 
adopted in 2021. As described more fully below, the proposed rule 
change would: (i) apply both documents to the risks arising from Links; 
\7\ (ii) revise credit eligibility criteria; (iii) clarify how 
frequently ICE Clear Europe reviews counterparties; (iv) add a new 
defined term for Systemically Important Institution; (v) consider the 
risks arising from cross-exposures and off-boarding; (vi) specify 
additional mitigating actions ICE Clear Europe may take in certain 
circumstances; and (vii) revise description of ICE Clear Europe's 
Counterparty Rating System.\8\
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    \7\ The proposed rule change would adopt the definition of 
``Link'' as found in Rule 17Ad-22(a)(8). Rule 17Ad-22(a)(8) defines 
a ``Link'' as ``a set of contractual and operational arrangements 
between two or more clearing agencies, financial market utilities, 
or trading markets that connect them directly or indirectly for the 
purposes of participating in settlement, cross margining, expanding 
their services to additional instruments or participants, or for any 
other purposes material to their business.'' 17 CFR 240.17Ad-
22(a)(8).
    \8\ The Counterparty Rating System is the system that ICE Clear 
Europe uses to model and determine a counterparty's risk. ICE Clear 
Europe uses the Counterparty Rating System to calculate a credit 
score, and this credit score represents a counterparty's risk, in 
terms of its overall credit quality.
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ii. Links

    Currently, both the CC Risk Policy and the CC Risk Procedures 
define counterparty credit risk in relation to Clearing Members and 
FSPs. Specifically, both documents define counterparty credit risk as 
(i) the risk that a Clearing Member misses its next payment to ICE 
Clear Europe, leaving ICE Clear Europe under-collateralized and 
therefore increasing the risk of using the Guaranty Fund contributions 
of other Clearing Members and ICE Clear Europe to manage a potential 
default of that Clearing Member and (ii) the risk that a FSP defaults 
without returning cash to ICE Clear Europe, leaving ICE Clear Europe 
with a loss on its investments or expected return of cash. The proposed 
rule change would expand the definition of counterparty credit risk, in 
both the CC Risk Policy and the CC Risk Procedures, to include the risk 
that a Link defaults, leaving ICE Clear Europe to fund material 
contractual or operational arrangements associated with that Link.
    In addition to taking into account the risks arising from Links, 
the proposed rule change would revise the overall objective of ICE 
Clear Europe's counterparty credit risk management to include 
minimizing the risk arising from a Link defaulting. The current CC Risk 
Policy provides that the objective of ICE Clear Europe's counterparty 
credit risk management is minimizing the risk of ICE Clear Europe being 
materially under-collateralized as a result of a CM defaulting, or 
realizing a material loss due to an FSP defaulting. The proposed change 
would add Links to this objective, such that ICE Clear Europe's 
objective would include minimizing the risk of loss due to a Link 
defaulting.
    While revising the objective of ICE Clear Europe's counterparty 
credit risk management to include Links, the proposed rule change also 
would revise how ICE Clear Europe achieves this objective to include 
Links. Currently, ICE Clear Europe minimizes counterparty credit risk 
through the following actions: (i) setting and monitoring credit 
criteria for counterparties; (ii) establishing a credit score for each 
counterparty that represents each counterparty's credit risk and 
classifying each counterparty in relation to the risk it poses; (iii) 
taking mitigating actions to reduce ICE Clear Europe's exposure; (iv) 
performing reviews of counterparties; and (v) setting and monitoring 
exposure limits for counterparties. The proposed rule change would add 
to this list identifying, monitoring, and managing risks from Links. 
Thus, in addition to taking the actions set forth above to minimize 
counterparty risk, under the proposed rule change, ICE Clear Europe 
also would identify, monitor, and mange risks from Links.
    Similarly, the proposed rule change would add to ICE Clear Europe's 
mitigating actions certain actions specific to Links. The CC Risk 
Policy lists certain mitigating actions that ICE Clear Europe may take 
to reduce its exposure to a counterparty. These actions include, among 
other things, requiring a Clearing Member to reduce its positions and 
changing ICE Clear Europe's usage of a FSP. The proposed rule change 
would add to this list of mitigating actions changing ICE Clear 
Europe's usage of a Link, which ICE Clear Europe could undertake to 
reduce its exposure to a Link.
    In addition to revising the definition of counterparty risk, the 
counterparty risk management objective, and the list of mitigating 
actions, the proposed rule change also would revise how ICE Clear 
Europe monitors counterparties to account for Links. As mentioned 
above, currently ICE Clear Europe uses its Counterparty Rating System 
to calculate a credit score that represents a counterparty's risk, in 
terms of the overall credit quality of the counterparty. Under the 
proposed rule change, ICE Clear Europe would continue to use its 
Counterparty Rating System to calculate credit scores. The proposed 
rule change would add language to the CC Risk Policy and CC Risk 
Parameters, however, to note that ICE Clear Europe may use its 
Counterparty Rating System or related credit criteria to represent the 
credit quality of counterparties. The new

[[Page 17888]]

reference to related credit criteria captures the fact that ICE Clear 
Europe may need to consider additional credit criteria to fully 
consider the risks of Links. This additional credit criteria could 
include, for example, the nature of a Link's operational arrangement 
with ICE Clear Europe. Similarly, the proposed rule change would add 
language to the Counterparty Credit Risk Procedures to note that, in 
addition to monitoring counterparties through credit scores, ICE Clear 
Europe may monitor counterparties through public news sources. Public 
news sources could provide insight into events affecting the financial 
standing of Links.

iii. Credit Eligibility Criteria

    ICE Clear Europe assesses prospective counterparties against 
certain credit eligibility criteria. The criteria that ICE Clear Europe 
uses for this assessment are set out in the CC Risk Parameters. 
Overall, ICE Clear Europe uses this assessment against the credit 
eligibility criteria to assess the financial stability of Clearing 
Members and FSPs.\9\
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    \9\ See 2021 Approval Order, 87 FR at 514.
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    The current CC Risk Procedures note that, as part of this 
assessment, FSPs must be legal entities in approved jurisdictions and 
comply with the credit eligibility criteria and Unsecured Credit Limits 
found in the CC Risk Parameters. The proposed rule change would revise 
this language to state that in addition to complying with the credit 
eligibility criteria and Unsecured Credit Limits found in CC Risk 
Parameters, ICE Clear Europe screens FSPs for Know-Your-Customer 
(``KYC'') and Anti-Money Laundering (``AML'') purposes to confirm they 
are not registered in countries subject to monitoring by the Financial 
Action Task Force \10\ and to confirm that they have appropriate KYC 
processes. ICE Clear Europe is making this change to codify in the CC 
Risk Procedures its current practice of screening FSPs with respect to 
KYC and AML requirements.\11\
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    \10\ The Financial Action Task Force is an intergovernmental 
organization founded in 1989 on the initiative of the G7. It 
develops policies and international standards to prevent money 
laundering and terrorist financing. See https://www.fatf-gafi.org/en/home.html.
    \11\ Notice, 88 FR at 8018.
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    Moreover, the proposed rule change would add language to note that 
agreements with FSPs are subject to review by ICE Clear Europe's legal 
team, and this review includes consideration of legal risk associated 
with the governing law of the relevant agreement and the jurisdiction 
of the FSP. This new language would replace the statement, found in the 
current CC Risk Procedures, that FSPs must be legal entities in 
approved jurisdictions. Rather than only requiring FSPs be legal 
entities in approved jurisdictions, in practice ICE Clear Europe's 
legal team analyzes each agreement ICE Clear Europe has with its FSPs 
and considers the legal risk arising from the governing law of the 
agreement and the jurisdiction of the FSP. Thus, the new language would 
better describe ICE Clear Europe's current practice and codify this 
practice in the CC Risk Procedures.\12\
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    \12\ Notice, 88 FR at 8018.
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    Finally, the proposed rule change would note that all of the credit 
eligibility criteria, which ICE Clear Europe uses in assessing 
prospective counterparties, would be reviewed periodically. This change 
to the CC Risk Procedures would codify a periodic review requirement 
that is currently set out the CC Risk Parameters. That document sets 
out the frequency of reviews of the credit eligibility criteria as well 
as the ICE Clear Europe personnel responsible for conducting and 
approving such reviews. Specifically, the CC Risk Parameters contain a 
list of various minimum credit ratings that counterparties should meet, 
and provide that this criteria will be reviewed annually by ICE Clear 
Europe's Executive Risk Committee.

iv. Frequency of Reviews

    The proposed rule change would remove certain duplicative 
requirements from the CC Risk Procedures. As part of its monitoring of 
counterparty risk, ICE Clear Europe reviews prospective and current 
counterparties. These reviews consist of, among other actions, 
calculating credit scores for each counterparty and reviewing limits on 
ICE Clear Europe's financial exposure to a counterparty.\13\
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    \13\ See 2021 Approval Order, 87 FR at 514.
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    The current CC Risk Procedures contain duplicative requirements 
concerning credit scores, continuous monitoring, the watch list, and 
exposure limits. The current CC Risk Procedures provide, in Section 
2.3.1, that ICE Clear Europe uses its Counterparty Rating System to 
calculate credit scores for each counterparty on each day. The current 
CC Risk Procedures provide, in Section 2.4, that continuous monitoring 
is conducted daily and the Watch List and exposure limits are reviewed 
weekly, monthly and quarterly.
    With respect to Section 2.3.1, the proposed rule change would 
delete ``on each day'' and replace it with ``periodically.'' As 
amended, Section 2.3.1 would therefore state that ICE Clear Europe uses 
its Counterparty Rating System to calculate credit scores for each 
Counterparty periodically as set out in the Parameters. With respect to 
Section 2.4, the proposed rule change would delete ``weekly.'' As 
amended, Section 2.4 would state that continuous monitoring is 
conducted daily and the Watch List and exposure limits are reviewed 
monthly and quarterly.
    With respect to both changes, ICE Clear Europe maintains that it is 
not decreasing the frequency of its reviews.\14\ Rather, ICE Clear 
Europe is amending Section 2.3.1 to rely instead on the general 
statement in Section 2.4 that continuous monitoring is conducted daily. 
Thus, Section 2.4 would control, and ICE Clear Europe would still 
calculate credit scores on a daily basis, despite replacing ``on each 
day'' with ``periodically'' in Section 2.3.1. Moreover, ICE Clear 
Europe maintains that under amended Section 2.4, it would still conduct 
continuous monitoring and risk reviews on a daily basis.\15\ ICE Clear 
Europe is deleting ``weekly'' because it maintains that it would 
conduct the risk reviews daily, rather than weekly.
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    \14\ Notice, 88 FR at 8019.
    \15\ Notice, 88 FR at 8019.
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    Finally, the CC Risk Procedures currently state that ICE Clear 
Europe's findings and recommendations from its reviews of 
counterparties are approved based on the CC Risk Parameters. The 
proposed rule change would amend this statement in the CC Risk 
Procedures to provide that the review frequency and criteria, in 
addition to ICE Clear Europe's findings and recommendations from its 
reviews of counterparties, are approved based on the CC Risk 
Parameters. This change would better align the CC Risk Procedures with 
the CC Risk Parameters. Specifically, the CC Risk Parameters make 
certain ICE Clear Europe personnel responsible for reviewing and 
approving findings and recommendations from risk reviews, and sets out 
the frequency and criteria for the risk reviews.

v. Systemically Important Institution

    As part of mitigating its counterparty credit risk, ICE Clear 
Europe sets and monitors limits on its financial exposures to its 
counterparties. These exposure limits effectively cap ICE Clear 
Europe's risk of loss arising from a particular counterparty and 
therefore act as an overall mitigation of counterparty risk.\16\
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    \16\ See 2021 Approval Order, 87 FR at 514.
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    As explained in the current CC Risk Procedures, ICE Clear Europe 
sets an exposure limit for each Clearing

[[Page 17889]]

Member as a percentage of that Clearing Member's capital. As further 
explained in the current CC Risk Procedures, the capital that ICE Clear 
Europe considers for this purpose can include the balance sheet of a 
Clearing Member's parent company. ICE Clear Europe would consider the 
balance sheet of a Clearing Member's parent company if: (i) it 
considers the Clearing Member to be an integral part of a large 
systemically important institution headquartered in a robust legal 
jurisdiction; or (ii) it has a formal and enforceable recourse to the 
Clearing Member's parent company via a guarantee or equivalent 
undertaking. The proposed rule change would amend the first 
consideration, so that ICE Clear Europe would consider the balance 
sheet of a Clearing Member's parent company if it considers the 
Clearing Member to be an integral part of a large group that is a 
Systemically Important Institution. The proposed rule change would 
define a Systemically Important Institution as an institution with 
assets greater than 200 billion Euros that is treated as a Globally 
Systemically Important Institution by the European Banking Authority. 
These changes are aimed at objectively defining when ICE Clear Europe 
should consider the balance sheet of a parent company in eligible 
capital for the purposes of the exposure limit.\17\
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    \17\ Notice, 88 FR at 8019.
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vi. Cross-Exposures and Off-Boarding

    As discussed above, ICE Clear Europe monitors counterparties daily. 
This monitoring includes a number of items, such as daily credit scores 
and reviews of public news.\18\ The proposed rule change would expand 
the CC Risk Procedures to include monitoring for cross-exposures, which 
are exposures that a counterparty may have to its affiliates that are 
also ICE Clear Europe counterparties, and the risks that could arise 
when off-boarding counterparties.
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    \18\ See 2021 Approval Order, 87 FR at 514.
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    Specifically, the proposed rule change would add language to 
Section 2.4 to note that ICE Clear Europe's monitoring of counterparty 
credit risk includes monitoring of cross-exposures among a Clearing 
Member and its affiliates. The proposed rule change also would add 
language to Section 3.1.1 of the CC Risk Procedures stating that ICE 
Clear Europe monitors at least monthly credit Cross-Exposures among 
counterparties and their affiliates in all their capacities as 
counterparties to ICE Clear Europe.
    The proposed rule change also would expand the CC Risk Procedures 
to consider the potential risks to ICE Clear Europe that could arise 
when it terminates its relationship with a counterparty. These risks 
could include, for example, open contractual obligations or money owed 
to ICE Clear Europe. The proposed rule change would add language to 
Section 2.1 of the CC Risk Procedures stating that ICE Clear Europe 
ensures all counterparty risks are eliminated prior to off-boarding 
counterparties.

vii. Mitigating Actions

    In addition to assessing and monitoring counterparties, ICE Clear 
Europe also has the authority to take actions with respect to 
counterparties to mitigate risks presented by those counterparties.\19\ 
For example, ICE Clear Europe may subject a counterparty to additional 
monitoring or reduce its usage of an FSP. ICE Clear Europe may also add 
counterparties to the Watch List, which is a list of counterparties 
that ICE Clear Europe subjects to enhanced monitoring and mitigating 
action if necessary. The proposed rule change would amend the CC Risk 
Procedures to note two additional mitigating actions that ICE Clear 
Europe could take against counterparties in certain circumstances.
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    \19\ See 2021 Approval Order, 87 FR at 514.
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    First, the proposed rule change would add a statement to Section 
2.3.2 of the CC Risk Procedures that Clearing Members are added 
automatically to the Watch List if they reach the Watch List Criteria. 
Specifically, Clearing Members whose credit scores meet certain 
thresholds indicating financial weakness are automatically added to the 
Watch List. This criteria is set out in the CC Risk Parameters.
    Second, the proposed rule change would add language to Section 
2.3.1 to note that submissions of quarterly financial statements by 
counterparties later than the days mandated by ICE Clear Europe's Rules 
will be communicated and escalated as set out in the CC Risk 
Parameters. The CC Risk Parameters require communication with 
counterparties and escalation to ICE Clear Europe's Head of Regulation 
and Compliance of late quarterly financial submissions.

viii. Counterparty Rating System

    Finally, the proposed rule change would clarify the description of 
ICE Clear Europe's Counterparty Rating System found in the CC Risk 
Procedures. As mentioned above, the Counterparty Rating System is the 
system that ICE Clear Europe uses to model and determine a 
counterparty's credit risk. ICE Clear Europe uses the Counterparty 
Rating System to calculate a credit score, and this credit score 
represents a counterparty's credit risk.
    The proposed rule change would delete a statement in the CC Risk 
Procedures that ICE Clear Europe's Counterparty Rating System may 
incorporate exposure information reflecting the risk of the Clearing 
Member's portfolio held with ICE Clear Europe. The proposed rule change 
is deleting this statement because ICE Clear Europe is revising its 
relevant risk model to consider the credit quality of a Clearing 
Member, rather than the risk associated with a Clearing Member's 
portfolio. ICE Clear Europe is making this change to better align the 
credit scores with the credit quality of Clearing Members.\20\
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    \20\ ICE Clear Europe manages the risk associated with a 
Clearing Member's portfolio through its margin and guaranty fund 
requirements.
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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.\21\ For the reasons discussed below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act,\22\ and Rules 17Ad-22(e)(3)(i) and (e)(20) thereunder.\23\
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    \21\ 15 U.S.C. 78s(b)(2)(C).
    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ 17 CFR 240.17Ad-22(e)(3)(i) and (e)(20).
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i. 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 ICE Clear Europe be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and, to 
the extent applicable, derivative agreements, contracts, and 
transactions.\24\ Based on its review of the record, and for the 
reasons discussed below, the Commission believes the proposed changes 
to the CC Risk Policy and CC Risk Procedures are consistent with the 
promotion of the prompt and accurate clearance and settlement of 
securities transactions.
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    \24\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes the proposed rule change overall would 
improve ICE Clear Europe's ability to manage counterparty risk using 
the CC Risk Policy and CC Risk Procedures. One way the proposed rule 
change would do that is by expanding the risks

[[Page 17890]]

that ICE Clear Europe considers when it is evaluating counterparties. 
For example, the proposed rule change would require that ICE Clear 
Europe consider the risks arising from Links and consider the risks 
associated with KYC and Anti-Money Laundering requirements when 
evaluating FSPs. Similarly, the proposed rule change would require that 
ICE Clear Europe consider the risks arising from its agreements with 
FSPs, specifically legal risk associated with the governing law of the 
agreement and the jurisdiction of the FSP, rather than only requiring 
FSPs be legal entities in approved jurisdictions. Finally, the proposed 
rule change would require ICE Clear Europe to monitor counterparties' 
cross exposures and the risks created when off-boarding a counterparty. 
The Commission believes all of these changes would expand ICE Clear 
Europe's counterparty risk monitoring and management to include risks 
that are not currently considered by ICE Clear Europe.
    The Commission believes that the proposed rule change would improve 
ICE Clear Europe's counterparty risk management by establishing actions 
ICE Clear Europe would take to monitor and mitigate counterparties that 
present increased risk, such as requiring that ICE Clear Europe add a 
counterparty to the Watch List if it meets criteria set out in the CC 
Risk Parameters. Moreover, the proposed rule change would require ICE 
Clear Europe to internally escalate a counterparty's late submission of 
quarterly financial statements for further review and action. The 
Commission believes requiring these actions would help ensure that ICE 
Clear Europe takes immediate steps to monitor counterparties that 
present additional risk, either by meeting the criteria for inclusion 
on the Watch List or failing to timely file the required quarterly 
financial statements.
    In addition to expanding the risks that ICE Clear Europe considers 
and establishing actions to take with respect to counterparties that 
present increased risk, the Commission believes the proposed rule 
change would improve ICE Clear Europe's counterparty risk management by 
clarifying the frequency of the various reviews conducted by ICE Clear 
Europe. Specifically, the proposed rule change would require that ICE 
Clear Europe review all credit eligibility criteria periodically and 
that review frequency and criteria be approved based on the CC Risk 
Parameters. Similarly, the proposed rule change would clarify that ICE 
Clear Europe calculates credit scores, looks at public news, conducts 
continuous monitoring, and completes risk reviews daily. The Commission 
believes these changes would help ensure ICE Clear Europe is using 
correct and current criteria to evaluate counterparties and reviewing 
and monitoring counterparties daily.
    Finally, the Commission believes that two other changes discussed 
above would clarify important aspects of ICE Clear Europe's 
counterparty risk management. First, the Commission believes that 
adding a definition for Systemically Important Institution and no 
longer considering whether a Systemically Important Institution is in a 
robust legal jurisdiction would define objective criteria for 
considering the balance sheet of a Clearing Member's parent company in 
setting the exposure limit for that Clearing Member. Defining objective 
criteria with regard to the setting of exposure limits, in turn, would 
improve the consistency with which ICE Clear Europe applies such limits 
to control the potential loss that could arise out of a Clearing Member 
default. Second, the proposed rule change would clarify the description 
of ICE Clear Europe's Counterparty Rating System because it considers 
the credit quality of a Clearing Member, rather than the risk 
associated with a Clearing Member's portfolio. The proposed change 
would better align the measurement (credit ratings) with what it seeks 
to measure (a member's credit quality).
    The Commission believes counterparty risk poses a risk to ICE Clear 
Europe's financial resources. For example, default by a Clearing Member 
could leave ICE Clear Europe under-collateralized, and default by an 
FSP could cause ICE Clear Europe to lose its investments or expected 
return of cash. Similarly, default by a Link could require ICE Clear 
Europe to fund material contractual or operational arrangements 
associated with that Link. The Commission believes that such losses 
could threaten ICE Clear Europe's ability to operate and clear and 
settle transactions. Thus, the Commission believes that effective 
management of ICE Clear Europe's counterparty risk could help ICE Clear 
Europe mitigate risks to the financial resources needed to continue 
clearing and settling transactions. The Commission therefore believes 
that, by improving ICE Clear Europe's ability to manage and mitigate 
counterparty risk, the proposed rule change would thereby promote the 
prompt and accurate clearance and settlement of securities 
transactions.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act.\25\
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
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ii. Consistency With Rule 17Ad-22(e)(3)(i) Under the Act

    Rule 17Ad-22(e)(3)(i) requires that ICE Clear Europe establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to, among other things, maintain a sound risk 
management framework for comprehensively managing legal, credit, 
liquidity, operational, general business, investment, custody, and 
other risks that arise in or are borne by ICE Clear Europe, which 
includes risk management policies, procedures, and systems designed to 
identify, measure, monitor, and manage the range of risks that arise in 
or are borne by ICE Clear Europe, that are subject to review on a 
specified periodic basis and approved by the board of directors 
annually.\26\ As discussed above, the proposed rule change would make a 
number of improvements to the CC Risk Policy and the CC Risk 
Procedures. The Commission believes these improvements would enhance 
ICE Clear Europe's ability to comprehensively measure and manage the 
risks posed by counterparties.
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    \26\ 17 CFR 240.17Ad-22(e)(3)(i).
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    With respect to measuring counterparty risks, the Commission 
believes that requiring ICE Clear Europe to consider KYC and AML 
requirements when reviewing prospective and existing FSPs would enable 
ICE Clear Europe to consider the risks arising from compliance with 
these requirements. The Commission further believes that requiring ICE 
Clear Europe to consider legal risk associated with the governing law 
of the agreement and the jurisdiction of the FSP would help ensure that 
ICE Clear Europe considers this associated risk. Similarly, the 
Commission believes that taking into consideration counterparties' 
cross-exposures, and the risks that arise when terminating a 
relationship with a counterparty, would enable ICE Clear Europe to 
identify and manage the risks posed by counterparties' affiliates and 
the risks that could arise when ICE Clear Europe terminates a 
counterparty.
    With respect to managing counterparty risks, the Commission 
believes that requiring ICE Clear Europe to add counterparties to the 
Watch List when meeting certain criteria and to escalate late 
submission of quarterly financial statements for further review and 
action would help ICE Clear Europe to identify at-risk counterparties 
for

[[Page 17891]]

further monitoring and mitigating action.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Rule 17Ad-22(e)(3)(i).\27\
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    \27\ 17 CFR 240.17Ad-22(e)(3)(i).
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iii. Consistency With Rule 17Ad-22(e)(20) Under the Act

    Rule 17Ad-22(e)(20) requires that ICE Clear Europe establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to identify, monitor, and manage risks related to 
any link ICE Clear Europe establishes with one or more other clearing 
agencies, financial market utilities, or trading markets.\28\ As 
discussed above, the proposed rule change would amend the CC Risk 
Policy and the CC Risk Procedures to account for the risks arising from 
Links. Among other things, ICE Clear Europe would consider as a 
counterparty credit risk the risk that a Link defaults; take steps to 
minimize the risk of loss due to a Link defaulting; and identify, 
monitor, and mange risks arising from Links. The Commission believes 
these actions are reasonably designed to identify, monitor, and manage 
risks related to any Link that ICE Clear Europe may establish.
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    \28\ 17 CFR 240.17Ad-22(e)(20).
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    Therefore, the Commission finds that the proposed rule change is 
consistent with Rule 17Ad-22(e)(20).\29\
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    \29\ 17 CFR 240.17Ad-22(e)(20).
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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,\30\ and Rules 17Ad-22(e)(3)(i) and (e)(20) thereunder.\31\
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    \30\ 15 U.S.C. 78q-1(b)(3)(F).
    \31\ 17 CFR 240.17Ad-22(e)(3)(i) and (e)(20).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\32\ that the proposed rule change (SR-ICEEU-2023-004), be, and hereby 
is, approved.\33\
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    \32\ 15 U.S.C. 78s(b)(2).
    \33\ 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.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-06057 Filed 3-23-23; 8:45 am]
BILLING CODE 8011-01-P


