[Federal Register Volume 78, Number 5 (Tuesday, January 8, 2013)]
[Notices]
[Pages 1281-1284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-00084]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68563; File No. SR-ICEEU-2012-11]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing of Proposed Rule Change Relating to Enhanced Margin
Methodology
January 2, 2013.
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 December 28, 2012, ICE Clear Europe Limited (``ICE Clear Europe'')
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 ICE Clear Europe. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
ICE Clear Europe proposes to implement an enhanced margin
methodology (``Decomp Model'') that addresses the risk of both index
and
[[Page 1282]]
single-name credit default swaps (``CDS'') cleared by ICE Clear Europe
and permits appropriate portfolio margining between related index and
single-name CDS positions.
II. Self-Regulatory Organization'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 these statements.\3\
---------------------------------------------------------------------------
\3\ The Commission has modified the text of the summaries
prepared by ICE Clear Europe.
---------------------------------------------------------------------------
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
A fundamental aspect of the Decomp Model is the recognition that
index CDS instruments cleared by ICE Clear Europe are essentially a
composition of specific single-name CDS. The Decomp Model includes the
following enhancements to the ICE Clear Europe margin methodology for
index CDS instruments (which are already in place for single-name CDS):
Replacing standard deviation with mean absolute deviation (MAD) as a
measure of credit spread variability, use of an auto regressive process
to obtain multi-horizon risk measures, an increased number of spread
response scenarios, introduction of liquidity requirements and
introduction of enhanced concentration charge computations to reflect
net notional amounts in addition to the currently used 5-Year (``5Y'')
equivalent notional amount. These enhancements and the enhancements
referenced below have been reviewed and/or recommended by the ICE Clear
Europe risk management personnel, risk and model review working groups
and committees, the ICE Clear Europe Risk Committee and an independent
third-party risk expert (Finance Concepts). Implementation of these
enhancements to the ICE Clear Europe risk methodology will result
specifically in a better measurement of the risk associated with
clearing index CDS.
As a result of the decomposition of the index CDS, ICE Clear Europe
will also be able to (1) incorporate jump-to-default risk as a
component of the risk margin associated with index CDS (which is
already in place for single-name CDS) and (2) provide appropriate
portfolio margin treatment between index CDS and offsetting single-name
CDS positions. Incorporating jump-to-default risk as a component of the
Decomp Model will result in a better measurement of the risk associated
with clearing index CDS (as is already the case for single-name CDS).
Recognizing the highly correlated relationship between long-short
positions in index CDS and the underlying single-name CDS constituents
of an index CDS will provide for fundamental and appropriate portfolio
margin treatment.
Upon approval of the Decomp Model, ICE Clear Europe would initially
make appropriate portfolio margining available with respect to its
Clearing Members' proprietary positions. ICE Clear Europe does not
currently clear CDS positions of customers of its Clearing Members, but
it plans to introduce customer clearing for CDS upon receipt of
applicable regulatory approvals.\4\ The Commission has granted an
exemptive order permitting ICE Clear Europe to commingle customer
positions in index CDS and single-name CDS carried through FCM/BD
Clearing Members in a single account; \5\ in addition, ICE Clear Europe
has petitioned the Commodity Futures Trading Commission to permit such
commingling.\6\ Following the commencement of customer clearing for
CDS, and receipt of all necessary regulatory approvals, ICE Clear
Europe would make appropriate portfolio margining available to
commingled customer positions in index and single-name CDS using the
Decomp Model. Accordingly, the Decomp Model is an important component
of ICE Clear Europe's planned customer clearing offering.
---------------------------------------------------------------------------
\4\ ICE Clear Europe has filed separately with the Commission
proposed rule changes relating to customer clearing for CDS. See
Securities Exchange Act Release No. 34-68152 (November 5, 2012), 77
FR 67427 (November 9, 2012).
\5\ See Securities Exchange Act Release No. 34-68433 (December
14, 2012), 77 FR 75211 (December 19, 2012).
\6\ See letter from Paul Swann, President & Chief Operating
Officer, ICE Clear Europe to Mr. David Stawick, Secretary, Commodity
Futures Trading Commission, dated May 31, 2012.
---------------------------------------------------------------------------
ICE Clear Europe does not believe that the expected phased
implementation of the portfolio margining element of the proposed
Decomp Model (commencing with proprietary positions) raises an issue of
unfair discrimination. Importantly, the portfolio margining aspect of
the Decomp Model does not unfairly discriminate with respect to
similarly situated participants because it is available to any
participant for whom ICE Clear Europe is currently able to provide
portfolio margin treatment. ICE Clear Europe does not currently offer
customer clearing in CDS. Once it does so, and upon receipt of all
necessary regulatory approvals, ICE Clear Europe will offer portfolio
margining with respect to customer positions. The proposed rule
amendments are thus not designed to permit unfair discrimination among
participants in the use of ICE Clear Europe's clearing services.
In addition, as part of the implementation of the proposed Decomp
Model, ICE Clear Europe proposes to (1) reduce the current level of
risk mutualization among ICE Clear Europe's CDS Clearing Members
through the default resources held in the mutualized CDS Guaranty Fund
and significantly increase the level of resources held as initial
margin for CDS Contracts (``Guaranty Fund/IM Modification''), (2)
modify the initial margin risk model approach in a manner that will
make it easier for market participants to measure their risks, by
removing the conditional recovery rate stress scenarios and adding a
new recovery rate sensitivity component (``IM Recovery Rate
Modification''), (3) introduce the 5Y equivalent notional amount (``5Y
ENA'') per single-name/index with the worst of concentration charge
based on 5Y ENA or net notional amount (``NNA'') being applied (``IM
Concentration Charge Modification''), (4) add a new basis risk
component from single-name CDS positions that are offset by index-
derived single-name CDS positions (``IM Basis Risk Modification'') and
(5) combine a single guaranty fund calculation for index CDS and
single-name CDS positions (``Guaranty Fund Modification'').
Currently, ICE Clear Europe maintains a high percentage of its
default resources for CDS Contracts in the CDS Guaranty Fund, as
compared to initial margin for CDS Contracts. This reflects the fact
that the current CDS Guaranty Fund model is 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.
The Guaranty Fund/IM Modification 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 to undergo a credit event). This
change effectively collateralizes the loss that would occur from this
single name upon default. Consequently, the amount of
[[Page 1283]]
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 contributions to the
CDS Guaranty Fund.
It is important to note that the decrease in the CDS Guaranty Fund
and the increase in initial margin requirements are not equivalent in
terms of magnitudes. Instead, based on current portfolios, it is
expected that for every $1 decrease in the CDS Guaranty Fund
requirement there will be a corresponding increase of approximately $5
in initial margin requirements.
The IM Recovery Rate Modification 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 CDS portfolio. This modification will
make it easier for market participants to replicate their initial
margin requirements.
The IM Concentration Charge Modification defines concentration
charge thresholds in terms of NNA as well as 5Y ENA and takes the more
conservative concentration requirement based on either notional amount.
This modification captures the risk of large directional CDS positions
that may not be captured by the calculation based on NNA. For example,
a set of large NNA positions, whose maturity date is close to the
current date, may not be subject to concentration charges based on 5Y
ENA if the estimated 5Y ENA is below the established threshold. The
alternative NNA-based concentration charge computations may yield
significant additional initial margin requirements as the NNA exceeds
the established threshold.
As index-derived single-name positions and outright single-name
positions are offset, an additional basis risk requirement is
introduced to account for the fact that the index instruments are more
actively traded than single-name instruments and thus are the preferred
instruments to express changing views about the credit market as a
whole, or even about specific single-name components of the indices.
The IM Basis Risk Modification captures the risk associated with
differences between outright single-name CDS positions and index-
derived single-name CDS positions. In other words, a ``perfectly
hedged'' portfolio consisting of an index CDS position and opposite
index replicating single-name CDS positions will still attract an
initial margin requirement due to the basis risk that exists.
Currently, ICE Clear Europe estimates separate guaranty fund sizes
for index CDS positions and single-name positions. The Guaranty Fund
Modification takes into account the portfolio benefits between index
and single-name positions, and incorporates the worst 2-member
uncollateralized losses coming from the jump-to-default, spread
response, basis and interest rate stress scenario considerations.
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, and 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. ICE Clear Europe believes that the changes will
facilitate the prompt and accurate settlement and risk management of
security-based swaps and contribute to the safeguarding of securities
and funds associated with security-based swap transactions. As
discussed above, ICE Clear Europe does not believe that the portfolio
margining-related proposed changes raise an issue of unfair
discrimination in the use of ICE Clear Europe's clearing services by
similarly situated participants.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
ICE Clear Europe does not believe the proposed changes to its
margin methodology 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
ICE Clear Europe will notify the Commission of any written comments
received by ICE Clear Europe. As noted above, ICE Clear Europe has
consulted extensively with CDS Clearing Members and others in
developing the Decomp Model.
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-ICEEU-2012-11 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-ICEEU-2012-11. 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 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 Web site at https://www.theice.com/publicdocs/regulatory_filings/ICEU_SEC_122812.pdf.
All comments received will be posted without change; the Commission
does
[[Page 1284]]
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-ICEEU-2012-11 and should be
submitted on or before January 29, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
---------------------------------------------------------------------------
\8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00084 Filed 1-7-13; 8:45 am]
BILLING CODE 8011-01-P