[Federal Register Volume 88, Number 84 (Tuesday, May 2, 2023)]
[Notices]
[Pages 27539-27542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-09207]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97383; File No. SR-ICEEU-2023-012]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change Relating 
to Amendments to the Futures and Options Default Management Policy

April 26, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 13, 2023, ICE Clear Europe Limited (``ICE Clear Europe'' or 
the ``Clearing House'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule changes described in 
Items I, II and III below, which Items have been prepared by ICE Clear 
Europe. ICE Clear Europe filed the proposed rule change pursuant to 
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(4)(ii) 
thereunder,\4\ such that the proposed rule change was immediately 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4)(ii).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    ICE Clear Europe Limited (``ICE Clear Europe'' or the ``Clearing 
House'') is proposing to adopt a new Futures and Options Default 
Management Policy (``Policy''),\5\ to replace its existing Futures and 
Options Default Management Policy. The new Policy is intended to 
provide clearer procedures and guidance for managing a default by one 
or more Clearing Members.
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    \5\ Capitalized terms used but not defined herein have the 
meanings specified in the ICE Clear Europe Clearing Rules and the 
Futures and Options Management Policy.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

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

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

(a) Purpose
    ICE Clear Europe is proposing to adopt a new Futures and Options 
Default Management Policy, which would address procedures and 
requirements for the Clearing House's management of an Event of Default 
with respect to an F&O Clearing Member consistent with the requirements 
of Clearing House's Rules and Procedures. The Policy would replace the 
existing Futures and Options Default Management Policy. The new Policy 
is designed to more clearly reflect and describe various aspects of the 
Clearing House's existing default management practices and procedures 
for F&O Contracts (and would not generally change those practices and 
procedures). The new Policy would also clarify and enhance certain 
governance matters relating to F&O default management, as well as 
certain practices relating to hedging strategy following a default, as 
discussed below. The new Policy would also provide for certain 
additional scenarios to be used in default testing drills, as discussed 
below. The new Policy would also eliminate certain outdated or 
superseded provisions or the provisions that are no longer applicable.
    The Policy would include a background section describing the 
overall purpose of the document, which is to provide structure and 
guidance for ICE Clear Europe's management of an Event of Default 
within the framework

[[Page 27540]]

of the Rules and applicable law, and without attempting to specify the 
actions the Clearing House would take in all or any particular 
situations. The background section would also set out the scope of the 
Policy, which is to set out the key factors to consider in declaring 
and managing an Event of Default. In addition, it would present the 
Clearing House's three lines of defense model for managing risks. The 
First Line of defense would be responsible for ensuring the Policy 
requirements are met and would consist of the Clearing Risk, Treasury, 
Operations, Legal, Compliance and Finance Departments. The Second Line 
of defense would be responsible for challenging the First Line on 
adherence to the requirements of the Policy and would be the Risk 
Oversight Department. The Third Line would provide independent and 
objective assurance to the Board and would be the Internal Audit 
Function.
    The Policy would set out the Clearing House's overall objectives 
when declaring and managing an Event of Default, which are generally to 
take timely action to return the Clearing House, as soon as reasonably 
practicable, to a matched book while aiming to contain losses and 
liquidity pressures. Depending on the circumstances, other objectives 
may include ensuring timely completion of settlement, limiting 
disruption to the market and closing out the defaulter's positions and 
liquidating collateral in a prudent and orderly manner. The objectives 
reflect that the default management framework will be guided by the 
relevant Rules as well as the Policy and any supporting procedures that 
may be adopted.
    The Policy would detail the governance and responsibilities of 
various personnel and committees with respect to default management. 
(These provisions are intended to more clearly document existing 
practice, rather than change that practice.) The Policy would in 
particular reflect the following: the Board of Directors has delegated 
to the President the authority to declare an Event of Default and take 
all actions the Clearing House may take under the rules in managing an 
event of default. The President has the discretion to consult the ERC 
Default Management Committee (``DMC''), which is a subcommittee of the 
Executive Risk Committee. The President has the authority to make final 
decisions but may delegate powers as appropriate. The DMC would also 
assume the responsibilities of the President in the declaration and 
management of an Event of Default if the President is unavailable. The 
DMC would require a quorum of the majority of voting members of the 
Executive Risk Committee for the DMC to make decisions and the 
decisions would have to be by unanimous agreement of the voting members 
of the Executive Risk Committee present in the meeting. If there are 
dissenting views at the DMC level, the issue must be escalated to the 
Board. Consistent with the requirements of the Rules, the Policy would 
state that a declaration of an Event of Default would be limited to 
circumstances where an event in Rule 901(a) has occurred with respect 
to a Clearing Member.
    The Policy would also outline various aspects of default management 
for which processes and procedures should be in place (which processes 
and procedures are not set out in the Policy itself). The Policy would 
state that procedures for pre-default monitoring must be in place in 
order to identify early circumstances that may develop into Events of 
Default, and procedures should be in place to quickly suspend a 
defaulting Clearing Member's access to trading and prevent payments or 
collateral transfers to the defaulting Clearing Member. Furthermore, 
the Policy would set out that management information would have to be 
available on short notice to support the President and must be 
sufficiently detailed to allow for risk management decisions, including 
key risk details on positions, collateral and liquidity. The Policy 
would also state that processes should be in place to establish hedging 
strategies and support timely liquidation of positions. Pursuant to the 
existing Rules, the Clearing House may engage in hedging trades ahead 
of liquidating the defaulter's portfolio. The Policy would provide that 
advice on hedging strategy may be sought from relevant exchanges or 
market participants. Any hedging strategy would need to be approved by 
the President before execution. In terms of liquidation, the Policy 
would provide that a process to liquidate positions via auctions or 
private sale would have to be in place. For an auction, the Policy 
would state that factors such as participation and possible risk of 
auction failure should be considered in determining auction 
composition. If there is a dependency on a third party, arrangements 
would have to be in place in case the third party is not available.
    The Policy would also address the need for a defined process for 
client porting (and for liquidation where porting cannot occur). A 
notification of the opening of the porting window would also have to be 
communicated to the market in order to allow clients of the defaulting 
Clearing Member to participate in the porting process. A process would 
have to be defined to support the porting of client positions and 
collateral pursuant to the Rules and Standard Terms but subject to 
applicable law.
    The Policy would also address the Clearing House's communication 
strategy around defaults. Prior to an Event of Default, the Clearing 
House would endeavor to prevent communications with the concerned 
Clearing Member becoming public, unless allowed under Rule 106 or 
required by the Clearing Member's regulators, the Clearing House's 
regulators, and/or other government authorities. The Clearing House 
would serve a default notice on the defaulter as soon as practicable 
after declaring a default and issue a circular in respect of any 
default notice, consistent with the Rules. ICE Clear Europe would 
engage with other ICE exchanges, clearing organizations, and external 
legal advisors when appropriate.
    The Policy would reflect the requirement of the Rules that post-
default, a net sum would to be calculated according to the methodology 
in the Rules.
    The policy would also require the test and review of the default 
procedures on a quarterly basis, through practicing certain aspects of 
the default management process. In addition, the Clearing House would 
have to conduct a default test on an annual basis with mandatory 
participation of the Clearing Members. Moreover, a multi-year default 
management plan would have to be maintained and approved by the 
Executive Risk Committee and shared with the Board Risk Committee. The 
multi-year default management plan would have to consider Default 
Member Scenarios (looking at representative credit and market risk 
scenarios over the testing cycle), Other Variables (such as the timing 
of the default and other potential constraints), Liquidity Management 
(including liquidity issues arising from sourcing liquidity, collateral 
liquidation and investment counterparty failure), End of Default and 
Recovery (including testing powers of assessment and recovery 
mechanisms), People (including relevant personnel and testing the 
ability of departments to support default management), and Governance 
(including testing executive governance, communication with the Board 
and Board approval). Additional testing should be conducted following 
material changes in the default management process or otherwise where 
necessary, and more extreme scenarios

[[Page 27541]]

or combinations of scenarios should be considered to identify weakness 
in the default management process. The multi-year default management 
plan along with the scope, results and lessons learned of each default 
test would be shared with the Board Risk Committee and the Board. In 
order to ensure the Board maintains oversight of the default management 
process, the default drills that include direct participation of the 
Board members would be done at least on an annual basis.
    Finally, the Policy would describe governance, breach management 
and exception handling, in a manner generally consistent with other ICE 
Clear Europe policies. The document owner identified by the Clearing 
House would be responsible for ensuring that the Policy remains up-to-
date and reviewed in accordance with the Clearing House's governance 
processes. Document reviews would encompass at the minimum regulatory 
compliance, documentation and purpose, implementation, use and open 
items from previous validations or reviews. Results of the review would 
have to be reported to the Executive Risk Committee or in certain cases 
to the Model Oversight Committee. The document owner would also aim to 
remediate the findings, complete internal governance and receive 
regulatory approvals before the following annual review is due. The 
document owner would also be responsible for reporting any material 
breaches or deviations to the Head of Department, Chief Risk Officer 
and Head of Regulation and Compliance in order to determine the 
appropriate governance escalation and notification requirements. 
Exceptions to the Policy would also be approved in accordance with such 
governance processes.
    The Policy would also recognize that the management of any 
particular default will depend on factors and circumstances that may be 
difficult to predict. As a result, the President would be allowed to 
override elements of the Policy to declare and manage an Event of 
Default in accordance with the provisions of the Rules.
(b) Statutory Basis
    ICE Clear Europe believes that the Policy is consistent with the 
requirements of Section 17A of the Securities Exchange Act of 1934 
(``Act'') \6\ and the regulations thereunder applicable to it. In 
particular, Section 17A(b)(3)(F) of the Act \7\ requires, among other 
things, that the rules of a clearing agency be designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and, to the extent applicable, derivative agreements, contracts, and 
transactions, the safeguarding of securities and funds in the custody 
or control of the clearing agency or for which it is responsible, and 
the protection of investors and the public interest.
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    \6\ 15 U.S.C. 78q-1.
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Policy is designed to set out the objectives and overall 
practices and processes of the Clearing House in declaring and managing 
an Event of Default, recognizing that the details of any particular 
default will vary. The new Policy would more clearly set out the 
responsibilities of the President and DMC in declaring and managing a 
default. The Policy would also outline various aspects of the default 
management process, including communications, hedging, client porting 
and liquidation. The Policy would also address default testing, and the 
Clearing House's multi-year testing plan to address various scenarios 
and aspects of the default management process. In ICE Clear Europe's 
view, the Policy will thus facilitate management of the risks related 
to a default or anticipated default from a Clearing Member, so that the 
Clearing House can promptly restore a matched book and contain losses. 
The new Policy will thus promote the prompt and accurate clearing and 
settlement of cleared transactions and is consistent with the 
protection of investors and the public interest in the continued 
operation of the Clearing House in the event of a Clearing Member 
default. (ICE Clear Europe would not expect the adoption of the Policy 
to materially affect the safeguarding of securities and funds in ICE 
Clear Europe's custody or control or for which it is responsible.) 
Accordingly, the Policy satisfies the requirements of Section 
17A(b)(3)(F).\8\
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Policy is also consistent with relevant provisions of Rule 
17Ad-22.\9\ Rule 17Ad-22(e)(2) provides that ``[e]ach covered clearing 
agency shall establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, as applicable [. . .] 
provide for governance arrangements that are clear and transparent'' 
\10\ and ``[s]pecify clear and direct lines of responsibility.\11\ As 
discussed, the Policy would clearly state certain responsibilities of 
the President, Board, DMC, and Executive Risk Committee, among others, 
in relation to oversight of the Clearing House's declaration and 
management of an Event of Default. Specifically, and consistent with 
current practice, the President would have full authority in declaring 
and managing an Event of Default, with the ability to delegate if 
necessary or for the DMC to assume certain responsibilities if the 
President is unavailable. In line with the Clearing House's other 
policies and procedures, the Policy would also describe the 
responsibilities of the document owner and appropriate escalation and 
notification requirements for responding to exceptions and deviations 
from the Policy. In ICE Clear Europe's view, the Policy is therefore 
consistent with the requirements of Rule 17Ad-22(e)(2).\12\
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    \9\ 17 CFR 240.17 Ad-22.
    \10\ 17 CFR 240.17 Ad-22(e)(2)(i).
    \11\ 17 CFR 240.17 Ad-22(e)(2)(v).
    \12\ 17 CFR 240.17 Ad-22(e)(2).
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    Rule 17A-22(e)(13) [sic] provides that the ``covered clearing 
agency shall establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, as applicable [. . .] 
ensure that [sic] the covered clearing agency has the authority and 
operational capacity to take timely action to contain losses and 
liquidity demands and continue to meet its obligations by, at a 
minimum, requiring the covered clearing agency's participants and, 
where [sic] practicable, other stakeholders to participate [sic] the 
testing and review of its default procedures, including any close-out 
procedures, at least annually and following material changes thereto.'' 
\13\ As discussed above, the Policy would address the Clearing House's 
procedures for testing its default management framework, which includes 
annual default tests in which participation by Clearing Members is 
mandatory, and further provides for additional testing in the event of 
material changes in the default management process. The new Policy 
would outline the Clearing House's overall multi-year testing plan and 
address key scenarios and considerations to be included in the default 
testing process. In ICE Clear Europe's views, these testing procedures, 
together with the other aspects of the Policy and the underlying Rules, 
will facilitate its ability to take timely action to contain losses and 
liquidity pressure in the event of a Clearing Member default. As such, 
the Policy is consistent with the requirements of Rule 17Ad-
22(e)(13).\14\
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    \13\ 17 CFR 240.17Ad-22(e)(13).
    \14\ 17 CFR 240.17Ad-22(e)(16). [sic]

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[[Page 27542]]

(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the Policy would have any impact, 
or impose any burden, on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Policy is being adopted to 
document the Clearing House's practices relating to declaring and 
managing an Event of Default of a Clearing Member. The Policy does not 
change the rights or obligations of Clearing Members or the Clearing 
House under the Rules or Procedures. The Policy does set out certain 
requirements for Clearing Members to participate in annual default 
testing (reflecting current practice), but the Clearing House does not 
believe this requirement would impose a material burden on Clearing 
Members (and in any event such participation is required of all 
Clearing Members under Commission regulations as set out above). 
Accordingly, ICE Clear Europe does not believe that adoption of the 
Policy would adversely affect competition among Clearing Members, 
materially affect the costs of clearing, adversely affect the ability 
of market participants to access clearing or the market for clearing 
services generally, or otherwise adversely affect competition in 
clearing services. Therefore, ICE Clear Europe does not believe the 
proposed rule change imposes any burden on competition that is not 
necessary or appropriate in furtherance of the purposes 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 amendment has not been 
solicited or received by ICE Clear Europe. ICE Clear Europe will notify 
the Commission of any comments received with respect to the proposed 
rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \15\ and paragraph (f) of Rule 19b-4 \16\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, security-based swap submission or advance notice is consistent 
with the Act. Comments may be submitted by any of the following 
methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml) or
     Send an email to [email protected]. Please include 
File Number SR-ICEEU-2023-012 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
    All submissions should refer to File Number SR-ICEEU-2023-012. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change, security-
based swap submission or advance notice that are filed with the 
Commission, and all written communications relating to the proposed 
rule change, security-based swap submission or advance notice between 
the Commission and any person, other than those that may be withheld 
from the public in accordance with the provisions of 5 U.S.C. 552, will 
be available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549, on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
Copies of such filings will also be available for inspection and 
copying at the principal office of ICE Clear Europe and on ICE Clear 
Europe's website at https://www.theice.com/notices/Notices.shtml?regulatoryFilings.
    Do not include personal identifiable information in submissions; 
you should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection. 
All submissions should refer to File Number SR-ICEEU-2023-012 and 
should be submitted on or before May 23, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-09207 Filed 5-1-23; 8:45 am]
BILLING CODE 8011-01-P


