[Federal Register Volume 88, Number 119 (Thursday, June 22, 2023)]
[Notices]
[Pages 40890-40893]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-13211]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97737; File No. SR-ICEEU-2023-014]


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 Procedures

June 15, 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 June 6, 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 new Futures and Options Default 
Management Procedures (the ``Procedures'').\5\ The new Procedures are 
intended to supplement the Clearing House's existing Futures and 
Options Default Management Policy by describing in further detail the 
actions the Clearing House may take in the event of a Clearing Member 
default.
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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 
Procedures.
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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 new Futures and Options 
Default Management Procedures, which would supplement the Clearing 
House's existing F&O Default Management Policy (the ``Default 
Management Policy'') and describe in further detail the actions the 
Clearing House will take if an Event of Default is declared in relation 
to an F&O Clearing Member. The Procedures are generally intended to 
document, in a consolidated way, the Clearing House's current practices 
around default management in the F&O clearing business and would not 
generally change those practices.
    The Procedures would outline the Clearing House's overall purposes 
and objectives when managing an Event of Default by a Clearing 
Member.\6\ The first objective is to take quick action to contain 
losses and liquidity pressures while returning the Clearing House to a 
matched book, as soon as reasonably practicable. In addition, the 
Clearing House may consider other objectives, depending on the 
characteristics of the default, including ensuring timely completion of 
settlement, limiting disruptions to the market, and managing and 
closing out the defaulter's positions and liquidating any applicable 
collateral in a prudent and orderly manner. The Clearing House's 
default management framework would be guided by ICE Clear Europe's 
default Rules and the Default Management Policy and supporting 
procedures (including the Procedures). The Procedures would further 
recognize that each default is unique and the Procedures do not provide 
an exhaustive list of actions ICE Clear Europe would take.
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    \6\ The Procedures would also provide that similar provisions 
would apply in the case of a Sponsored Principal default. The 
Procedures also note that in the case of a default of a customer of 
a Clearing Member, the default Rules would not be expected to apply.
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    The Procedures would detail the governance and responsibilities of 
various Clearing House personnel and committees with respect to default 
management, consistent with the Default Management Policy. (These 
provisions are intended to more clearly document existing practice, 
rather than change practice.) The Procedures 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 Procedures 
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. Following an Event of Default, the Board 
would have to be informed as soon as practicable of the relevant 
circumstances, key steps or actions taken or determinations made or 
approvals given.
    The Procedures would detail the actions that may be taken with 
respect

[[Page 40891]]

to a potential defaulter prior to the occurrence of an Event of 
Default. The Procedures would reflect that the Clearing Risk Department 
(``CRD'') may perform heightened monitoring of the potential defaulter 
including an increase in daily credit risk monitoring, scenario 
planning for a potential default management strategy and appropriate 
risk mitigation through additional collateralization. The Treasury 
Department (``Treasury'') would also review its relationships and 
accounts with the potential defaulter in the context of auxiliary 
banking services. The Operations Department (``Operations'') may 
conduct a review of operational activities relevant to the potential 
defaulter. The Compliance Department (``Compliance'') would be expected 
to be in close contact with regulators at times when there is an 
anticipated default in relation to a Clearing Member. The Legal 
Department (``Legal'') may seek the advice of outside legal counsel 
regarding the laws of the defaulter's domicile country. Senior 
Management may inform the senior management of the other ICE clearing 
houses and exchanges of the increased monitoring of a potential 
defaulter and the President may provide the Board with an update on 
increased monitoring of a potential defaulter.
    The Procedures would also set out the Clearing House's actions in a 
declaration of an Event of Default, in accordance with the Rules. The 
President or its delegate would be expected to be in contact with the 
potential defaulter in order to ensure accurate and up to date 
information is available to declare an Event of Default. Prior to a 
declaration of an Event of Default, Compliance would consult with and 
keep informed the relevant regulatory authorities. The President or the 
President's delegate may convene the DMC to discuss the potential 
default. The Procedures would address internal reports that may be 
considered by the DMC in connection with a potential default. If the 
criteria for an Event of Default under the Rules are met, the President 
(or the President's delegate) would declare an Event of Default. The 
Procedures would address the process for issuing a Default notice to 
the Defaulter, communicating this issuance to the relevant regulators, 
issuing a Circular to the Clearing Members and a notice on its website, 
as well as for communication to the Board and other relevant ICE 
exchanges and clearing houses.
    The Procedures would also detail the actions ICE Clear Europe would 
take immediately following the Default Notice in order to protect 
itself from any further losses related to the default event. These 
actions would include the convening of the DMC, suspension of the 
Defaulter's trading access, prevention of payments to the Defaulter, 
communication with brokers that may be used in any liquidation strategy 
for default management, and confirmation of the Defaulter's positions.
    The Procedures would address procedures for client porting in 
circumstances where the defaulting Clearing Member provides clearing 
services to customers. Consistent with the Rules and applicable law, 
the Clearing House would attempt within a predefined period to port 
client positions and assets to another solvent Clearing Member, subject 
to specified conditions and requirements. The Procedures would set out 
certain requirements for porting notices to be provided to the Clearing 
House under the Rules with respect to customers' porting preferences. 
Consistent with the Rules, where porting is not performed, the Clearing 
House would liquidate customer positions.
    The Procedures would set out the responsibilities of various 
Clearing House departments for aspects of the default management 
process. For example, the CRD is responsible for assessing the 
defaulter's positions and proposing whether splitting the portfolio 
would be the appropriate strategy. In making its determination the CRD 
may consider combining offsetting positions of different accounts and 
liquidating or hedging the remaining positions. Moreover, the CRD would 
consider the portfolio's complexity and timing for the execution of the 
default management process. The Procedures would note that the CRD 
could determine to take various actions depending on market 
circumstances, such as liquidation through private sales or brokers or 
liquidation through default auctions with broader participation. The 
Procedures would further address considerations in circumstances where 
the Defaulter holds physically delivered contracts close to maturity 
and where the defaulter's positions are in products traded across 
different ICE exchanges.
    The Procedures would also address potential hedging strategies. The 
CRD has the responsibility to assess the Defaulter's positions and 
determine if hedge trades are useful to reduce the portfolio's risk 
prior to liquidation. Hedge trades could be executed through brokers, 
voluntary auctions or private sales. During the course of the hedging 
strategy, the CRD would periodically re-evaluate the risk exposure as 
hedges are executed and positions are liquidated. Hedging may continue 
until reaching hedging/liquidation targets.
    The Procedures would also address liquidation of remaining 
positions following hedging, through various strategies. The Procedures 
would set out the responsibilities of the President, with advice of the 
CRD, in deciding how the remaining positions can be liquidated. 
Liquidation options would include holding and financing open positions 
until maturity, liquidating positions or sub-portfolios via brokers, 
arranging a private sale of part or the entire book, and Default 
Auctions.
    The Procedures would describe the key features of the Default 
Auctions, which are more fully set out in the existing published 
Auction Terms for F&O Default Auctions. The Procedures would describe, 
among other features, the use of a modified Dutch auction methodology, 
the use of ``all or nothing'' bids, the establishment of minimum bid 
requirements, customer participation, use of mirrored auctions, and 
``juniorization'' of guaranty fund contributions, in accordance with 
the Auction Terms for F&O Default Auctions. The Procedures also address 
the process for establishing positions with winning bidders and payment 
of related amounts. An annex to the Procedures would set out examples 
of the operation of the auction methodology.
    The Procedures would also describe the Treasury's responsibility in 
proposing to the President a liquidation strategy of non-cash 
collateral provided by the Defaulter. The liquidation strategy would 
take into account the liquidity waterfall as defined under the 
Liquidity Stress testing methodology.
    The Procedures would also address the steps taken at the conclusion 
of the transfer and close out of all the Defaulter's positions, 
including an analysis of the cost of managing the event in accordance 
with the default Rules. The Procedures would reflect the requirement of 
the Rules that post-default, a net sum would be calculated separately 
for house and customer accounts according to the methodology in the 
Rules, and the net sum would be reported to the officer or 
administrator responsible for the Clearing Member in default.
    The Procedures would also provide for the testing and review of the 
Default Management Procedures on a quarterly basis, through practicing 
certain aspects of the default management process. In addition, the 
Procedures provide for the Clearing House to conduct a default test on 
an annual basis with mandatory participation of the Clearing Members. 
Additionally, the Procedures would list

[[Page 40892]]

the aims of the annual default test and quarterly reviews, and the 
elements that may be included in a default management test plan.
    Finally, the Procedures would describe the process for reviews, 
breach management, exception handling and document governance 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 Procedures remain up-to-date and reviewed in 
accordance with the Clearing House's governance processes. Any changes 
to the document would have to be approved in accordance with ICE Clear 
Europe's governance process and will be implemented after the 
completion of all required internal and regulatory approvals. 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. Exceptions to the Procedures 
would also be approved in accordance with such governance processes.
(b) Statutory Basis
    ICE Clear Europe believes that the Procedures are consistent with 
the requirements of Section 17A of the Act \7\ and the regulations 
thereunder applicable to it. In particular, Section 17A(b)(3)(F) of the 
Act \8\ 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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    \7\ 15 U.S.C. 78q-1.
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Procedures are designed to supplement the Default Management 
Policy by setting out in additional detail the actions 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 
Procedures would more clearly set out the responsibilities of the 
President, DMC and various ICE Clear Europe departments, including the 
CRD, in declaring and managing an Event of Default. The Procedures 
would also outline various aspects of the default management process, 
including convening and use of the DMC, suspension of the Defaulter's 
trading access, prevention of payments to the Defaulter, confirmation 
of the Defaulter's positions, liquidity considerations, hedging 
strategy and liquidation strategy (including as to various means of 
liquidation, such as the use of brokers, private sales and auctions). 
The Procedures would also address annual default testing with mandatory 
involvement of Clearing Members, and quarterly reviews to address 
various aspects of the default management process. In ICE Clear 
Europe's view, the Procedures 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 Procedures will thus promote the prompt and 
accurate clearing and settlement of cleared transactions and are 
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 Procedures 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 Procedures satisfy the 
requirements of Section 17A(b)(3)(F).\9\
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Procedures are also consistent with relevant provisions of Rule 
17Ad-22.\10\ 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'' 
\11\ and ``[s]pecify clear and direct lines of responsibility''.\12\ As 
discussed, the Procedures would state relevant responsibilities of the 
President, Board, DMC, Executive Risk Committee, CRD and other ICE 
Clear Europe departments in relation to oversight of default management 
processes in the period leading up and following an Event of Default. 
Specifically, and consistent with the Rules, Default Management Policy 
and 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. The CRD would have the responsibility 
of advising the President throughout various actions and decisions when 
managing an Event of Default. In line with the Clearing House's other 
policies and procedures, the Procedures would also describe the 
responsibilities of the document owner and appropriate escalation and 
notification requirements for responding to exceptions and deviations 
from the Procedures. In ICE Clear Europe's view, the Procedures are 
therefore consistent with the requirements of Rule 17Ad-22(e)(2).\13\
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    \10\ 17 CFR 240.17Ad-22. [sic]
    \11\ 17 CFR 240.17Ad-22(e)(2)(i). [sic]
    \12\ 17 CFR 240.17Ad-22(e)(2)(v). [sic]
    \13\ 17 CFR 240.17Ad-22(e)(2). [sic]
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    Rule 17Ad-22(e)(13) 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.'' \14\ As discussed 
above, the Procedures would address the Clearing House's practices for 
testing its default management framework, which includes annual default 
tests in which participation by Clearing Members is mandatory, and 
further provides for additional quarterly reviews. In ICE Clear 
Europe's views, these testing measures, together with the other aspects 
of the Procedures 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 Procedures are 
consistent with the requirements of Rule 17Ad-22(e)(13).\15\
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    \14\ 17 CFR 240.17Ad-22(e)(13).
    \15\ 17 CFR 240.17Ad-22(e)(13).
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the Procedures would have any 
impact, or impose any burden, on competition not

[[Page 40893]]

necessary or appropriate in furtherance of the purposes of the Act. The 
Procedures are being adopted to document the Clearing House's practices 
and actions in the event of an Event of Default in relation to a 
Clearing Member. The Procedures do not change the rights or obligations 
of Clearing Members or the Clearing House under the Rules or 
Procedures. The Procedures set out certain requirements for Clearing 
Members to participate in annual default testing, but these 
requirements reflect current practices and Clearing House does not 
believe this requirement would impose a material burden on Clearing 
Members. (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 Procedures 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 \16\ and paragraph (f) of Rule 19b-4 \17\ 
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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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 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 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-ICEEU-2023-014 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-2023-014. 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 Europe and on ICE 
Clear Europe's website at https://www.theice.com/clear-europe/regulation.
    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-2023-014 and 
should be submitted on or before July 13, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-13211 Filed 6-21-23; 8:45 am]
BILLING CODE 8011-01-P


