[Federal Register Volume 77, Number 58 (Monday, March 26, 2012)]
[Notices]
[Pages 17536-17537]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-7206]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66631; File No. SR-ICC-2012-03]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change to Its Risk Model To Reduce the Current
Level of Risk Mutualization Among Its Clearing Participants and To
Modify the Initial Margin Risk Model so That It Is Easier for Market
Participants To Measure Their Risk
March 20, 2012.
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 March 8, 2012, 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. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The purpose of the proposed rule change (i.e., modifications to the
ICC risk model) is to (1) reduce the current level of risk
mutualization among ICC's clearing participants (Modification
1) and (2) modify the initial margin risk model approach in a
manner that will make it easier for market participants to measure
their risk (Modification 2).
As discussed in more detail in Item II below, Modification
1 reduces the level of default resources held in the
mutualized ICC guaranty fund and significantly increases the level of
resources held in initial margin. Modification 2 modifies the
initial margin risk model by removing the conditional Recovery Rate
stress-scenarios and adding a new Recovery Rate sensitivity component
that is computed by considering changes in Recovery Rate assumptions
that impact the Net Asset Value of the portfolio.
II. Self-Regulatory Organization'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 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. ICC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.\3\
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\3\ The Commission has modified the text of the summaries
prepared by ICC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The counterparty risk brought to ICC by any of its clearing
participants is ``collateralized'' in the first instance by the
clearing participant counterparty through its initial margin. In the
event that any defaulting clearing participant's initial margin and
guaranty fund contributions are insufficient to cover its obligations,
any such deficit is mutualized across all non-defaulting clearing
participants through their respective guaranty fund contributions.\4\
The respective initial margin contributions of non-defaulting clearing
participants are not mutualized and would not be used to satisfy the
deficit of another clearing participant's default.
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\4\ ICC has also contributed a total of $50 million to the
guaranty fund. $25 million of ICC's contribution is exposed prior to
the mutualization of the non-defaulting clearing participants'
contributions and the second $25 million of ICC's contribution is
mutualized along with the non-defaulting clearing participants'
contributions to the guaranty fund on a pro rata basis.
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Since its launch, ICC has maintained a very high percentage of its
default resources in the mutualized guaranty fund. On average, the size
of the guaranty fund has been roughly 50% of the initial margin held by
ICC. Whereas, historically, traditional futures clearinghouse have
maintained guaranty funds in an amount equal to roughly 5-7% of the
initial margin held. In other words, at ICC, the clearing participant
resources available to be mutualized in the guaranty fund versus the
resources available as initial margin have been approximately ten times
greater on a
[[Page 17537]]
percentage basis than at traditional futures clearinghouses.
Modification 1 reduces the level of default resources held
in the mutualized ICC guaranty fund and increases the level of
resources held in initial margin (collateral).
The ICC guaranty fund is relatively much larger, as compared to
traditional futures clearinghouses, in part because the guaranty fund
model is currently designed to cover the uncollateralized losses that
would result from the three single names that would cause the greatest
losses when entering a state of default. Modification 1
incorporates into the initial margin risk model the single name that
causes the greatest loss when entering a state of default (i.e., the
single name that results in the greatest amount of loss when stress-
tested). This change effectively collateralizes the loss that would
occur from the single name that causes the greatest loss entering a
state of default. Consequently, the amount of uncollateralized loss
that would result from the three single names causing the greatest
losses when entering a state of default is reduced, thereby reducing
the amount of required guaranty fund contributions.
This change to the guaranty fund and initial margin risk model
will, as noted above, result in a reduction of the guaranty fund
requirements and an increase in the initial margin requirements.
However, it is important to note that the decrease in the guaranty fund
and the increase in initial margin requirements are not symmetrical.
Instead, based upon current portfolios, for every $1 decrease to the
guaranty fund there will be a corresponding increase to the initial
margin requirements of approximately $5.
Modification 2 modifies the initial margin risk model by
removing the conditional Recovery Rate stress-scenarios and adding a
new Recovery Rate sensitivity component that is computed by considering
changes in the Recovery Rate assumptions and their impact on the Net
Asset Value of the Credit Default Swap portfolio. This modification
will make it easier for market participants to measure their risk.
ICC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act and the rules and regulations
thereunder applicable to it. ICC believes that by reducing the level of
default resources held in the guaranty fund and increasing the level of
default resources held as initial margin and by modifying the initial
margin risk model as described above, it is able to safeguard
securities and funds in its custody or control or for which it is
responsible.
(B) Self-Regulatory Organization's Statement on Burden on Competition
ICC does not believe the proposed rule change would have any
impact, or impose any burden, on competition.
(C) Self-Regulatory Organization'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 the 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 (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-ICC-2012-03 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ICC-2012-03. 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 Web site (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 Web site viewing and
printing in the Commission's Public Reference Section, 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 ICC and on ICC's Web
site at https://www.theice.com/publicdocs/regulatory_filings/ICEClearCredit_030812.pdf.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-ICC-2012-03
and should be submitted on or before April 16, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-7206 Filed 3-23-12; 8:45 am]
BILLING CODE 8011-01-P