[Federal Register Volume 88, Number 131 (Tuesday, July 11, 2023)]
[Notices]
[Pages 44171-44173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-14524]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97840; File No. SR-ICC-2023-009]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change Relating to the ICC Default Auction 
Procedures--Initial Default Auctions

July 5, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4,\2\ notice is hereby given that on June 
22, 2023, ICE Clear Credit LLC (``ICC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change, as 
described in Items I, II and III below, which Items have been prepared 
primarily by ICC. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    ICE Clear Credit LLC (``ICC'') proposes revisions to ICC's Default 
Auction Procedures--Initial Default Auctions (the ``Auction 
Procedures''). These revisions do not require any changes to the ICC 
Clearing Rules (the ``Rules'').\3\
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    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

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

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

(a) Purpose
    ICC proposes to revise its Auction Procedures. In the event of the 
default of an ICC Clearing Participant (``CP''), the Auction Procedures 
are designed to facilitate liquidation of the defaulter's portfolio 
through a multi-lot modified Dutch auction. ICC believes the proposed 
revisions will facilitate the prompt and accurate clearance and 
settlement of securities transactions and derivative agreements, 
contracts, and transactions for which it is responsible. ICC proposes 
to make such changes effective following Commission approval of the 
proposed rule change. The proposed revisions are described in detail as 
follows.
    The purpose of the proposed amendments is to incorporate feedback 
received from market participants during ICC's 2022 default test to 
revise the Auction Procedures to provide ICC greater flexibility to 
determine that a minimum bid requirement is not appropriate for an 
auction participant in certain circumstances and/or to decide for a 
particular auction lot that so-called ``juniorization'' of 
participants' guaranty fund contributions based on competitiveness of 
bidding is not appropriate. With respect to the minimum bid 
requirement, market participants expressed concern that certain market 
participants may not trade, or have the operational, risk management or 
other capacity to trade or otherwise manage, particular products 
cleared through ICC (e.g., index swaptions). If a participant were 
forced to bid for lots including such products, the participant might 
acquire in the default auction products for which it may not have the 
ready capability to manage the risk of its positions. Forcing 
participants to acquire such positions may result in an increase in 
systemic risk. Similarly, market participants have expressed concerns 
that while juniorization may in general incentivize robust bidding in 
the auction process, there may be particular situations where, in the 
light of the characteristics of the lot and participants involved in 
the auction, the risk of juniorization could make it more difficult to 
auction the lot successfully or might otherwise be undesirable or 
inappropriate for the auction.
    To address these concerns, ICC proposes the following amendments to 
the Auction Procedures. Currently, under Section 2.4 of the Auction 
Procedures, all non-defaulting CPs and Direct Participating Customers 
\4\ (collectively, ``Auction Participants'') are required to bid for a 
minimum notional amount of contracts for each auction lot determined 
pro rata based on its required contribution to the ICC guaranty fund 
(``Minimum Bid Requirement''), subject to certain exceptions. ICC 
proposes to amend Section 2.4 to provide an additional exception to the 
extent ICC determines that the Minimum Bid Requirement would be 
inappropriate for certain Auction Participant(s) in light of: (i) the 
operational and other capabilities of such Auction Participant(s) to 
clear contracts in the relevant auction lot, or (ii) the conditions in 
the market for the contracts in the relevant auction lot. These 
amendments would allow ICC to determine that a Minimum Bid

[[Page 44172]]

Requirement should not apply, among other cases, where the relevant 
Auction Participant does not have risk management or other operational 
capabilities to clear the relevant contracts. It also provides ICC with 
flexibility to eliminate a Minimum Bid Requirement in other 
circumstances it determines to be appropriate, to address market 
conditions and other circumstances that may be prevailing at the time.
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    \4\ A Direct Participating Customer is a customer of a CP that 
has been authorized to participate in an ICC default auction 
pursuant to the requirements set out in the Auction Procedures.
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    Furthermore, ICC proposes amending Section 2.6 of the Auction 
Procedures to allow ICC to determine that for a particular auction lot, 
all Auction Participants will be treated as Senior Bidders in 
circumstances where ICC determines that ``juniorization'' may 
negatively impact ICC's ability to conduct a successful default auction 
given the then current market conditions. The effect of such a 
determination would be that ``juniorization'' of Lot Guaranty Fund 
Contributions and Lot Assessment Contributions will not occur, such 
that all such contributions will be applied on a pro rata basis rather 
than based on the relative competitiveness of bids made. ICC believes 
this flexibility is appropriate to address potential scenarios where 
juniorization may make it more difficult to run a successful auction or 
is otherwise inappropriate or undesirable for the auction in light of 
the particular circumstances at the time.
    In addition, ICC received feedback from market participants during 
ICC's 2022 default test that making the foregoing revisions to ICC's 
Auction Procedures would better align such procedures with the default 
procedures of other clearing houses (e.g., LCH Ltd, LCH SA, and Eurex). 
According to such market participants, the foregoing clearing houses 
have rules and/or default procedures that, in general, exclude non-
defaulting clearing members from mandatory participation in default 
auctions where such non-defaulting clearing members do not have 
exposure to the products in the default auction portfolio.
(b) Statutory Basis
    Section 17A(b)(3)(F) of the Act \5\ 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; to assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible; in general, to protect investors and the public interest; 
and to comply with the provisions of the Act and the rules and 
regulations thereunder. ICC believes that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to ICC, in particular to Section 
17(A)(b)(3)(F),\6\ because ICC believes that the proposed changes to 
the Auction Procedures enhance ICC's ability to conduct a default 
auction in a manner that mitigates risk to Auction Participants. The 
proposed changes introduce additional options to ICC to disapply 
minimum bid requirements for certain Auction Participants and/or 
juniorization for certain auction lots in circumstances where such 
practices might otherwise lead to an increase in systemic risk or be 
inappropriate or undesirable in light of ICC's goal of running a 
successful auction. Such changes would maintain the incentives for 
competitive bidding in a default auction as Auction Participants are 
still incentivized to protect their guaranty fund deposits and 
assessment contributions, and juniorization would be expected to 
continue to apply in most circumstances. Such changes overall are 
designed to promote effective and efficient auctions to facilitate the 
close-out of the defaulter's portfolio, in light of feedback from 
market participants. As such, the proposed rule change is designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions, derivatives agreements, contracts, and transactions; to 
contribute to the safeguarding of securities and funds associated with 
security-based swap transactions in ICC's custody or control, or for 
which ICC is responsible; and, in general, to protect investors and the 
public interest within the meaning of Section 17A(b)(3)(F) of the 
Act.\7\
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
    \6\ Id.
    \7\ Id.
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    In addition, the proposed rule change is consistent with the 
relevant requirements of Rule 17Ad-22.\8\ Rule 17Ad-22(e)(4)(ii) \9\ 
requires ICC to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to maintain financial 
resources at the minimum to enable it to cover a wide range of 
foreseeable stress scenarios that include, but are not limited to, the 
default of the two participant families that would potentially cause 
the largest aggregate credit exposure for the covered clearing agency 
in extreme but plausible market conditions. ICC believes that the 
proposed revisions enhance its Auction Procedures. As described above, 
the proposed changes to the Auction Procedures enhance ICC's ability to 
conduct a default auction in a manner that mitigates risk to Auction 
Participants. The proposed changes introduce additional options to ICC 
to disapply minimum bid requirements for certain Auction Participants 
and/or juniorization for certain auction lots in circumstances where 
such practices may lead to an increase in risk or may otherwise be 
undesirable. Such changes promote effective and efficient auctions to 
facilitate the close-out of the defaulter's portfolio. In ICC's view, 
these changes represent options that strengthen ICC's ability to manage 
its financial resources and withstand the pressures of defaults, 
consistent with the requirements of Rule 17Ad-22(e)(4)(ii).\10\
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    \8\ 17 CFR 240.17Ad-22.
    \9\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \10\ Id.
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    Rule 17Ad-22(e)(23) \11\ requires ICC to publicly disclose all 
relevant rules and material procedures, including key aspects of its 
default rules and procedures, and provide sufficient information to 
enable participants to identify and evaluate the risks, fees, and other 
material costs they incur by participating in the covered clearing 
agency. ICC's default management rules and procedures contained in the 
ICC Rules, the Auction Procedures, and the Secondary Auction Procedures 
are publicly available on ICC's website. The proposed changes to the 
Auction Procedures described above provide further specificity and 
transparency to the ICC default auction process, all of which are 
publicly available. Moreover, the proposed changes provide additional 
information on the options available to ICC on the application of 
juniorization to default auctions, providing market participants 
additional information to allow them to evaluate the risks of 
participating at ICC. In ICC's view, these changes are consistent with 
the requirements of Rule 17Ad-22(e)(23).\12\
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    \11\ 17 CFR 240.17Ad-22(e)(23).
    \12\ Id.
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(B) Clearing Agency's Statement on the Burden on Competition

    ICC does not believe the proposed rule change would have any 
impact, or impose any burden, on competition. The proposed changes to 
ICC's Auction Procedures will apply uniformly across all market 
participants. Therefore, ICC does not believe the proposed rule change 
imposes any burden on

[[Page 44173]]

competition that is inappropriate 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 rule change have not been 
solicited or received. ICC will notify the Commission of any written 
comments received by ICC.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-ICC-2023-009 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to file number SR-ICC-2023-009. 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 a.m. and 3 
p.m. Copies of such filings will also be available for inspection and 
copying at the principal office of ICE Clear Credit and on ICE Clear 
Credit's website at https://www.theice.com/clear-credit/regulation.
    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-ICC-2023-009 and should 
be submitted on or before August 1, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-14524 Filed 7-10-23; 8:45 am]
BILLING CODE 8011-01-P


