[Federal Register Volume 78, Number 26 (Thursday, February 7, 2013)]
[Notices]
[Pages 9088-9090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-02711]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68812; File No. SR-ICEEU-2012-09]
Self-Regulatory Organizations; ICE Clear Europe Limited; Order
Approving Proposed Rule Change To Provide for a Customer Clearing Model
for CDS Products and To Amend, Clarify, and Consolidate Certain Rules
and Procedures
February 1, 2013.
I. Introduction
On October 22, 2012, ICE Clear Europe Limited (``ICE Clear
Europe'') filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change SR-ICEEU-2012-09 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder.\2\ The proposed rule change was published
for comment in the Federal Register on November 9, 2012.\3\ The
Commission received one comment letter to the proposed rule change.\4\
This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 68152 (November 5,
2012), 77 FR 67427 (November 9, 2012).
\4\ Letter from Kermit Kubitz (November 30, 2012).
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II. Description of the Proposed Rule Change
The principal purpose of the proposed rule change is to provide for
a Customer CDS Clearing Model whereby customers of ICE Clear Europe
Clearing Members have the ability to clear CDS products through ICE
Clear Europe. In addition, ICE Clear Europe is amending its Rules and
CDS Procedures in order to implement certain rule changes that are
unrelated to Customer CDS Clearing Model.
Currently, ICE Clear Europe Clearing Members may clear CDS products
at ICE Clear Europe through their proprietary accounts only and not on
behalf of their customers. The Customer CDS Clearing Model extends ICE
Clear Europe's
[[Page 9089]]
customer clearing models that are currently available for other
products to CDS products, with certain modifications appropriate for
the nature of the product.
The Customer CDS Clearing Model builds on the customer clearing
framework available for other products at ICE Clear Europe. US
customers must clear through a registered futures commission merchant
and/or broker-dealer (depending on whether the product is an index CDS
or single-name CDS), consistent with the requirements of the Commodity
Exchange Act and the Act, as applicable. Non-US customers may clear
through a non-US clearing member in accordance with applicable local
laws or through a registered futures commission merchant and/or broker-
dealer.
The terms of the Customer CDS Clearing Model, as well as various
related enhancements to the clearing model, were proposed as amendments
to the ICE Clear Europe Rules and CDS Procedures. Changes to Part 1 of
the Rules clarify and conform existing definitions to the Customer CDS
Clearing Model, create new CDS-specific definitions used in new
operative provisions, clarify customer and proprietary account class
definitions that are relevant to CDS, and clarify general standards of
Clearing Member responsibility and liability. Other changes reflect the
incorporation into the Rules of provisions that had been in a separate
master agreement entered into between the Clearing Member and ICE Clear
Europe. Changes to Part 2 of the Rules provide updates related to anti-
money laundering legislation applicable to customers, clarify
membership standards for Clearing Members, clarify the obligations of
Clearing Members with respect to customer accounts and proprietary
accounts and clarify and/or restate certain provisions relating to
Clearing Member default and termination of clearing membership. Changes
to Part 3 of the Rules clarify certain payment mechanics for Clearing
Members with respect to amounts owed by their customers and include a
waiver of set-off by Clearing Members. Changes to Part 4 of the Rules
reflect amendments to the contract rights and obligations of ICE Clear
Europe and Clearing Members, particularly in the context of the
clearing of CDS on behalf of customers. Changes to Part 5 of the Rules
address the delivery of margin from customers to Clearing Members and
add provisions dealing with transfer of margin by security interest
rather than title transfer. Changes to Part 6 of the Rules clarify the
procedures for providing notice of position limits and clarify further
how position limits apply in instances where contracts arise due to
firm trades, voiding, or error policies. Changes to Parts 7 and 8 of
the Rules clarify that references in those parts of the Rules (covering
Settlement and Delivery of Futures (Part 7) and Options (Part 8)),
which relate solely to Energy contracts, do not apply to CDS Customer
Accounts or customers in the context of CDS clearing. Changes to Part 9
of the Rules consolidate and clarify the respective rights and
obligations of ICE Clear Europe and Clearing Members in the case of a
Clearing Member or ICE Clear Europe default and the procedures to be
followed in determining a net sum payable to or receivable from a
defaulting Clearing Member. Changes to Part 10 of the Rules provide
more detail regarding how a disciplinary or appeals panel could impose
a sanction on a customer and determine liability or responsibility in
any instance where there is joint misfeasance. Changes to Part 11
relate to the operation of the ICE Clear Europe guaranty funds,
including changes relating to the introduction of customer clearing.
ICE Clear Europe will continue to operate separate guaranty funds for
CDS products and for energy products. Changes to Part 12 of the Rules
conform to the new terms and definitions that are part of the Customer
CDS Customer Model. Changes to Part 15 of the Rules provide provisions
dealing with CDS contracts cleared in the customer account (including
the representation of customer transactions in relevant books and
records and treatment of customer transactions in the case of credit
events) and the elimination of the separate master agreement previously
entered into between CDS Clearing Members and ICE Clear Europe. Changes
to Part 16 of the Rules address the addition of CDS clearing to the ICE
Clear Europe FCM customer clearing model and certain other
clarifications and enhancements requested by CDS Clearing Members.
ICE Clear Europe is also establishing in Exhibit 1 of the Rules
certain standard terms (the Customer-CM CDS Transactions Standard
Terms) that will be applicable to Customer-CM CDS Transactions, which
are CDS transactions between a Non-FCM/BD Clearing Member and a non-
U.S. customer. Under the changes to Rule 1516, all Non-FCM/BD Clearing
Members must agree to the applicability of these terms as between them
and each of their customers. The Standard Terms provisions, among other
things, ensure that the terms of Customer-CM CDS Transactions mirror
the terms of the cleared transaction, enable a clearing member to pass
on clearing-house performance (or non-performance) to their customers,
facilitate the provision of margin to ICE Clear Europe, and amend
provisions in underlying agreements relating to events of default and
close-out in order to ensure that the porting of contracts and margin
under the default rules will be effective. In addition, various
consents must be supplied for ICE Clear Europe to update customer
records in DTCC and receive other information as required relating to
customers.\5\
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\5\ As noted above, US customers must clear through an FCM/BD
Clearing Member. The Customer-CM CDS Transactions Standard Terms
will not apply to that relationship.
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ICE Clear Europe is also modifying its CDS Procedures. Changes to
Part 1 of the CDS Procedures clarify and conform existing definitions
to the Customer CDS Clearing Model, as well as add new definitions used
in new operative provisions. Changes to Part 2 of the CDS Procedures
clarify and conform membership requirements to standards implemented as
a result of the Dodd-Frank Act. Changes to Part 3 of the CDS Procedures
delete a reference to CDS Operational Procedures, which document has
become obsolete in light of the changes related to customer clearing.
Changes to Part 4 of the CDS Procedures update information that must be
provided with respect to CDS contracts and procedures for submission of
CDS contracts for clearing. Changes to Part 5 of the CDS Procedures
address customer clearing in the context of the CDS Default Committee
procedures. Part 6 of the CDS Procedures was removed because it is no
longer necessary in light of ICE Clear Europe's use of determinations
made by the ISDA Determinations Committees with respect to credit and
succession events. Changes to Part 7 address restructuring as a credit
event with respect to CDS contracts cleared in the customer account,
including the processing for triggering settlement of such contracts.
Changes to Part 8 of the CDS Procedures clarify the procedures for
listing new CDS Contracts, in particular to enable ICE Clear Europe to
respond in timely fashion to any prohibition on trading in CDS imposed
under the EU Short Selling Regulation (Regulation 236/2012 dated 14
March 2012). Changes to Part 9 of the CDS Procedures include various
provisions previously included in the separate master agreement between
CDS Clearing Members and ICE Clear Europe as well as certain tax
provisions relevant to customer clearing. These updated provisions
apply to both customer
[[Page 9090]]
positions and proprietary positions of CDS Clearing Members. Changes to
Part 10 of the CDS Procedures update the cross-references and
definitions relevant to customer clearing as they relate to Index CDS
Contracts. Changes to Part 11 of the CDS Procedures update the cross-
references and definitions relevant to customer clearing as they relate
to Single Name CDS Contracts. Changes to Part 12 of the CDS Procedures
update the cross-references and the definitions relevant to customer
clearing with respect to Sovereign Contracts. Changes to Part 13 of the
CDS Procedures add certain general procedures relating to customer
clearing of CDS contracts.
III. Comment
The Commission received one comment to the proposed rule change.
The comment concerned ICE Clear Europe's requirements under the
Exchange Act, including but not limited to recordkeeping and reporting
requirements that are outside of the scope of this proposal. The
Commission notes, however, that ICE Clear Europe, as a clearing agency
registered with the Commission, is fully subject to the Exchange Act
and all applicable rules and regulations promulgated thereto.
IV. Discussion
Section 17A(b)(3)(F) of the Act \6\ requires that, among other
things, a clearing agency be organized and its rules 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 protect investors and the public
interest. After careful consideration, the Commission finds that the
proposed rule change is consistent with the Act and the rules and
regulations thereunder. The implementation of the Customer CDS Clearing
Model may promote the prompt and accurate clearance of securities
transactions, derivatives agreements, contracts, and transactions by
extending clearing to a broader segment of the CDS market.
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\6\ 15 U.S.C. 78q-1(b)(3)(F).
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V. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \7\ and the
rules and regulations thereunder.
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\7\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\8\ that the proposed rule change (File No. SR-ICEEU-2012-09) be,
and hereby is, approved.\9\
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\8\ 15 U.S.C. 78s(b)(2).
\9\ In approving this proposed rule change the Commission has
considered the proposed rule's impact of efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-02711 Filed 2-6-13; 8:45 am]
BILLING CODE 8011-01-P