[Federal Register Volume 78, Number 128 (Wednesday, July 3, 2013)]
[Notices]
[Pages 40220-40223]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15927]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69872]
Order Pursuant to Section 17A of the Securities Exchange Act of
1934 Granting Exemption From the Clearing Agency Registration
Requirement Under Section 17A(b) of the Exchange Act for ICE Clear
Europe Limited in Connection With Its Proposal To Clear Contracts
Traded on the LIFFE Administration and Management Market
June 27, 2013.
I. Introduction
Section 17A of the Securities Exchange Act of 1934 (``Exchange
Act'') \1\ sets forth the framework for the regulation of the clearance
and settlement of securities transactions and directs the Securities
and Exchange Commission (``Commission'') to facilitate the
establishment of a national system for the prompt and accurate
clearance and settlement of securities transactions. Pursuant to
Section 17A(b)(1) of the Exchange Act,\2\ absent an exemption, a
clearing agency that makes use of the mails or any means or
instrumentality of interstate commerce to perform the functions of a
clearing agency with respect to any security (other than an exempted
security) is required to register with the Commission. The Commission
has required a foreign clearing agency to register or obtain an
exemption from clearing agency registration if the foreign clearing
agency provides clearance and settlement services for U.S. securities
directly to U.S. persons.\3\ The Commission, by rule or order, upon its
own motion or upon application, may conditionally or unconditionally
exempt any clearing agency or security or any class of clearing
agencies or securities from any provisions of Section 17A or the rules
or regulations thereunder, if the Commission finds that such exemption
is consistent with the public interest, the protection of investors,
and the purposes of Section 17A, including the prompt and accurate
[[Page 40221]]
clearance and settlement of securities transactions and the
safeguarding of securities and funds.\4\
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\1\ 15 U.S.C. 78q-1.
\2\ 15 U.S.C. 78q-1(b)(1).
\3\ See Cross-Border Security-Based Swap Activities; Re-Proposal
of Regulation SBSR and Certain Rules and Forms Relating to the
Registration of Security-Based Swap Dealers and Major Security-Based
Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), 78
FR 30967 (May 23, 2013), Part V.B, n. 682; and Exemption of Certain
Foreign Brokers or Dealers, Exchange Act Release No. 58047 (Jun. 27,
2008), 73 FR 39182 (Jul. 8, 2008), Part III.F.3 (both discussing the
Commission's approach to the registration of foreign clearing
agencies).
\4\ See Section 17A(b)(1) of the Exchange Act, 15 U.S.C. 78q-
1(b)(1).
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ICE Clear Europe Limited (``ICE Clear Europe'') is an indirectly
wholly-owned subsidiary of IntercontinentalExchange, Inc. (``ICE'').
Incorporated in England and Wales in 2007 as a private limited company,
ICE Clear Europe is subject to supervision by the Bank of England as a
Recognised Clearing House (``RCH'') in the United Kingdom. Pursuant to
Section 763(b) of the Dodd-Frank Act,\5\ on July 16, 2011, ICE Clear
Europe became registered with the Commission as a clearing agency
solely for the purpose of clearing security-based swaps (``SBS'').\6\
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\5\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010, Public Law 111-203, 124 Stat. 1376 (2010).
\6\ Section 763(b) of the Dodd-Frank Act amended Section 17A of
the Exchange Act by adding new Section 17A(l) to the Exchange Act,
15 U.S.C. 78q-1(l), which provides that (i) a depository institution
registered with the Commodity Futures Trading Commission (``CFTC'')
that cleared swaps as a multilateral clearing organization prior to
the date of enactment of the Dodd-Frank Act and (ii) a derivatives
clearing organization registered with the CFTC that cleared swaps
pursuant to an exemption from registration as a clearing agency
prior to the date of enactment of the Dodd-Frank Act will be deemed
registered with the Commission as a clearing agency solely for the
purpose of clearing SBS.
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In connection with the proposed merger of ICE with NYSE Euronext,
ICE Clear Europe filed with the Commission a proposed rule change under
Section 19(b) of the Exchange Act \7\ and Rule 19b-4 \8\ thereunder to
clear futures and options contracts traded on the LIFFE Administration
and Management Market (``LIFFE A&M''), including contracts traded over-
the-counter and processed through LIFFE A&M's BClear \9\ service.\10\
The contracts traded on LIFFE A&M proposed to be cleared by ICE Clear
Europe (``LIFFE Contracts'') include instruments that constitute
securities for the purposes of U.S. securities laws (``LIFFE Securities
Products''), including U.S. securities, which for purposes of the
Proposal, include futures or options on underlying U.S. equities and
equity indices.
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\7\ 15 U.S.C. 78s(b).
\8\ 17 CFR 240.19b-4.
\9\ BClear is a service operated by LIFFE A&M, which enables
LIFFE A&M clearing members to report certain bilaterally agreed off-
exchange trades to LIFFE A&M. After ICE Clear Europe launches its
clearing business for LIFFE A&M, trades would be eligible for
clearing by ICE Clear Europe upon being reported.
\10\ On May 13, 2013, ICE Clear Europe filed a proposed rule
change with the Commission. On May 22, 2013, ICE Clear Europe
submitted Amendment No. 1 to the proposed rule change to, among
other things, clarify the scope of products proposed to be cleared,
add new Rule 207(f) prohibiting broker-dealer/futures commission
merchant Clearing Members and other Clearing Members organized in
the U.S. from clearing LIFFE Contracts that are futures or options
on underlying U.S. securities, add additional clarification
surrounding the operation of the combined F&O Guaranty Fund and the
margining of LIFFE Contracts, and supplement the statutory basis for
the proposed rule change. See Exchange Act Release No. 69628 (May
23, 2013), 78 FR 32287 (May 29, 2013) (SR-ICEEU-2013-09) (``Original
Filing''). On June 4, 2013, ICE Clear Europe submitted Amendment No.
2 to the proposed rule change to set forth more fully the statutory
basis for the proposed rule changes and to make certain additional
rule changes relevant to changes in margin requirements. See
Exchange Act Release No. 69703 (Jun. 5, 2013), 78 FR 35335 (Jun. 12,
2013) (SR-ICEEU-2013-09) (``Amendment No. 2''). On June 20, 2013,
ICE Clear Europe filed Amendment No. 3 to the proposed rule change,
which modified proposed Rule 207(f) to further define the persons
that are subject to the restriction from clearing U.S. securities to
include any clearing member having a U.S. residence, based upon the
location of its executive office or principal place of business,
including, without limitation, (i) a U.S. bank (as defined by
Section 3(a)(6) of the Exchange Act) and (ii) a foreign branch of a
U.S. bank or U.S. registered broker-dealer. The initial rule filing
and all subsequent amendments filed are collectively referred to
hereinafter as the ``Proposal.''
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In this context, ICE Clear Europe has filed with the Commission an
application on Form CA-1 for exemption from clearing agency
registration under Section 17A(b) of the Exchange Act and Rule 17Ab2-1
thereunder in connection with ICE Clear Europe's proposed clearing
activity involving LIFFE Securities Products.\11\ Based on the rules
and procedures contained in the Proposal, the representations made and
information submitted by ICE Clear Europe in the Proposal, its Form CA-
1 application, including the ICE Clear Europe Letter, and additional
supplemental materials (collectively, the ``Exemptive Application''),
and for the reasons discussed in this Order, the Commission is
exempting ICE Clear Europe from the registration requirement under
Section 17A(b)(1) of the Exchange Act solely with respect to ICE Clear
Europe's provision of clearance and settlement services for LIFFE
Securities Products, subject to certain conditions.
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\11\ ICE Clear Europe's Form CA-1 incorporates a letter from
Paul Swann, President, ICE Clear Europe, to Elizabeth Murphy,
Secretary, SEC, dated June 11, 2013, requesting exemptive relief
from clearing agency registration in connection with the clearing of
LIFFE Securities Products (``ICE Clear Europe Letter'').
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II. Discussion
A. Applicable Standards
Section 17A(b)(1) of the Exchange Act \12\ prohibits any clearing
agency from directly or indirectly making use of the mails or any means
or instrumentality of interstate commerce to perform the functions of a
clearing agency with respect to any security (other than an exempted
security), unless it is registered with the Commission. Section
17A(b)(1) further provides that the Commission, by rule or order, may
conditionally or unconditionally exempt any clearing agency or security
or any class of clearing agencies or securities from any provisions of
Section 17A of the Exchange Act or the rules or regulations thereunder,
if the Commission finds that such exemption is consistent with the
public interest, the protection of investors, and the purposes of
Section 17A, including the prompt and accurate clearance and settlement
of securities transactions and the safeguarding of securities and
funds.\13\
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\12\ 15 U.S.C. 78q-1(b)(1).
\13\ Id.
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The Commission has required a foreign clearing agency to register,
or obtain an exemption from clearing agency registration, when the
foreign clearing agency provides clearance and settlement services for
U.S. securities directly to U.S. persons.\14\
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\14\ See supra n. 3. See, also, e.g., Order Approving
Application for Exemption from Registration as a Clearing Agency,
Exchange Act Release No. 38328 (Feb. 24, 1997), 62 FR 9225 (Feb. 28,
1997) (granting an exemption from registration as a clearing agency
under Section 17A in connection with performing the functions of a
clearing agency with respect to transactions involving U.S.
government and agency securities for U.S. entities); Order Approving
Application for Exemption from Registration as a Clearing Agency,
Exchange Act Release No. 39643 (Feb. 11, 1998), 63 FR 8232 (Feb. 18,
1998); and Order Approving Application to Modify an Existing
Exemption from Clearing Agency Registration, Exchange Act Release
No. 43775 (Dec. 28, 2000), 66 FR 819 (Jan. 4, 2001).
Cf. Order Approving Proposed Rule Change to Allow The Depository
Trust Company to Provide Settlement Services to European Central
Counterparty Limited for U.S. Securities Traded on European Trading
Venues, Exchange Act Release No. 61593 (Feb. 25, 2010), 75 FR 9987
(Mar. 4, 2010) (SR-DTC-2009-17) (approving a proposed rule change to
allow The Depository Trust Company (``DTC'') to provide settlement
services to European Central Counterparty Limited, a separately
incorporated foreign subsidiary of The Depository Trust and Clearing
Corporation and a RCH, for U.S. securities).
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B. ICE Clear Europe's Request for Exemption
ICE Clear Europe is a foreign clearing agency registered in the
U.S. solely for the purpose of clearing SBS. The Commission has not
previously addressed the registration requirements applicable to a
foreign clearing agency registered solely for the purpose of clearing
SBS that proposes to clear non-SBS securities products. However, the
Commission believes that the proposed clearing of the LIFFE Securities
Products would exceed the scope of activities permitted by ICE Clear
[[Page 40222]]
Europe's registration as a SBS clearing agency under Section 17A(l) of
the Exchange Act, and therefore ICE Clear Europe may not clear the
LIFFE Securities Products pursuant to its existing Commission
registration. In addition, because the LIFFE Securities Products
include certain products that are considered U.S. securities, and ICE
Clear Europe clearing members include financial institutions that are
organized or resident in the United States, the Commission has
determined that ICE Clear Europe must register or seek an exemption
from registration as a clearing agency under Section 17A(b)(1) of the
Exchange Act prior to providing clearing services for the LIFFE
Securities Products.
In light of the Commission's precedents pertaining to registration
requirements for foreign clearing agencies, ICE Clear Europe is
proposing to amend its rule book to prohibit U.S. clearing members
(``U.S. participants'') from clearing U.S. securities. Specifically,
new ICE Clear Europe Rule 207(f) would prohibit U.S. participants \15\
from clearing U.S. securities. In addition, ICE Clear Europe has
developed policies and procedures to enforce proposed Rule 207(f),
including market access controls that prevent U.S. participants from
creating or holding cleared positions in U.S. securities and,
consequently, from engaging in any clearing-related activity (including
give-ups or take-ups in respect of those products).\16\ In addition,
when a new U.S. participant is approved for clearing, LIFFE A&M and ICE
Clear Europe will be jointly responsible to ensure that these access
limitations are properly in place.\17\ ICE Clear Europe represents that
it will report any incidents not in compliance with such proposed Rule
207(f).\18\
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\15\ The term ``U.S. participant'' was previously defined for
the limited purposes of a clearing agency exemptive order as a
person having a U.S. residence, based upon the location of its
executive office or principal place of business, including, without
limitation, (i) a U.S. bank (as defined by Section 3(a)(6) of the
Exchange Act), (ii) a foreign branch of a U.S. bank or U.S.
registered broker-dealer, and (iii) any broker-dealer registered as
such with the Commission even if such broker-dealer does not have a
U.S. residence. See Exchange Act Release No. 39643 (Feb. 11, 1998),
63 FR 8232 (Feb. 18, 1998) (order exempting Euroclear Bank's
predecessor, Morgan Guaranty Trust Company, as operator of the
Euroclear system, from clearing agency registration), n. 62.
Consistent with this definition of U.S. participant, ICE Clear
Europe's Proposal contains rule changes that would prohibit a person
(i) that is a FCM/BD, (ii) organized in the United States of
America, or (iii) having a U.S. residence, based on the location of
its executive office or principal place of business, including,
without limitation, a U.S. bank (as defined by Section 3(a)(6) of
the Exchange Act) or a foreign branch of a U.S. bank or U.S.
registered broker-dealer, from participating in clearing U.S.
securities.
\16\ See Amendment No. 2 at 35337.
\17\ Id.
\18\ See Exemptive Application.
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In connection with its clearing of the LIFFE Contracts, ICE Clear
Europe has represented that it is not seeking an exemption from
substantive regulation that it is currently subject to as a registered
clearing agency.\19\ ICE Clear Europe states that it will clear LIFFE
Contracts in a manner consistent with the requirements of Section 17A
of the Exchange Act and Rule 17Ad-22 thereunder, including the
requirements as to financial resources, operational and managerial
resources, participant requirements, settlement procedures,
safeguarding of funds and default procedures, among others.\20\ ICE
Clear Europe further represents that it will manage its clearing
activities involving the LIFFE Contracts, including LIFFE Securities
Products, to the standards applicable to registered clearing
agencies.\21\ ICE Clear Europe has noted that, since ICE Clear Europe
is a registered clearing agency for SBS, ICE Clear Europe's clearing of
LIFFE Contracts, including LIFFE Securities Products, will be subject
to the requirements under the Exchange Act applicable to a registered
clearing agency, including the rule approval requirements under Section
19(b) of the Exchange Act, regardless of whether ICE Clear Europe is
exempt from the registration requirement of Section 17A(b)(1).\22\ ICE
Clear Europe also acknowledges the Commission's current supervision and
examination authority over ICE Clear Europe's business generally,
including the authority to conduct regular on-site examination.\23\
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\19\ Id.
\20\ Id. See also Original Filing, supra n. 10.
\21\ See Exemptive Application.
\22\ Id.
\23\ Id.
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In its exemptive request, ICE Clear Europe has expressed concerns
that a delay in its ability to clear the LIFFE Contracts beginning July
1, 2013, would cause disruption to the market for these products.\24\
In addition, ICE Clear Europe noted that by September 2013, all
European clearing agencies will need to apply for authorization under
the European Markets and Infrastructure Directive (EMIR).\25\ ICE Clear
Europe states that the current LIFFE A&M clearing arrangements are not
built out for EMIR compliance, and therefore LIFFE A&M, ICE Clear
Europe, LCH.Clearnet Limited, and market participants are relying on
this transition taking place to be compliant with EU law.\26\
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\24\ Id.
\25\ Id.
\26\ Id.
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C. Effect of Exemption
Based on ICE Clear Europe's representations to clear LIFFE
Contracts in a manner consistent with the standards applicable to
clearing agencies registered under Section 17A, and the Commission's
existing authority over ICE Clear Europe as a registered clearing
agency under Section 17A(l), granting an exemption from the clearing
agency registration requirement under Section 17A(b) to ICE Clear
Europe for the clearing of LIFFE Securities Products would operate as
an exemption from the registration process and not from the
Commission's statutory authority to substantively oversee and regulate
such activities.
Furthermore, ICE Clear Europe's proposed limitations to prevent
U.S. participants from clearing U.S. securities, including proposed
Rule 207(f) and related policies, procedures, and market access
controls, are consistent with clearing arrangements involving foreign
clearing agencies for which the Commission has granted exemptive relief
from registration requirements under Section 17A(b).\27\
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\27\ See supra n. 14.
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An exemption granted to ICE Clear Europe from the clearing agency
registration requirement under Section 17A(b)(1) of the Exchange Act
provides legal certainty for ICE Clear Europe as to its activities
associated with the clearing of LIFFE Securities Products, avoids
disruption in the European markets, and facilitates compliance with
EMIR, consistent with promoting the prompt and accurate clearance and
settlement of securities transactions and derivative agreements,
contracts, and transactions. In addition, the Commission's continued
supervision over ICE Clear Europe as a registered clearing agency,
notwithstanding the exemption from the registration requirement,
permits the Commission to oversee that ICE Clear Europe provides
clearance and settlement services with respect to LIFFE Contracts,
including LIFFE Securities Products, in a manner consistent with the
requirements of Section 17A of the Exchange Act. Accordingly, based on
the foregoing, the amended rules and procedures contained in the
Proposal, and the representations made by ICE Clear Europe in its
Exemptive Application, the Commission finds that an exemption from
registration with respect to the clearing activity for the LIFFE
Securities Products under Section 17A(b)(1) is
[[Page 40223]]
consistent with the public interest, the protection of investors, and
the purposes of Section 17A, including the prompt and accurate
clearance and settlement of securities transactions and the
safeguarding of securities and funds.
III. Scope and Modification of Order
This exemption granted by this order is solely with respect to the
registration requirement in Section 17A(b)(1) applicable to the
clearance and settlement services to be provided by ICE Clear Europe
for LIFFE Securities Products as described in ICE Clear Europe's
Proposal, and does not in any way affect the Commission's existing
supervisory authority over ICE Clear Europe as a registered clearing
agency. ICE Clear Europe as a registered clearing agency continues to
be subject to the applicable provisions of the Exchange Act, including
Sections 17A,\28\ 17(a),\29\ 17(b),\30\ and 19(b),\31\ and the rules
and regulations thereunder applicable to clearance and settlement
activities and registered clearing agencies.
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\28\ 15 U.S.C. 78q-1.
\29\ 15 U.S.C. 78q(a).
\30\ 15 U.S.C. 78q(b).
\31\ 15 U.S.C. 78s(b).
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The Commission may modify by order the terms, scope, or condition
of this exemptive order if the Commission determines that such
modification is necessary or appropriate in the public interest, for
the protection of investors, or otherwise in furtherance of the
purposes of the Exchange Act. Furthermore, the Commission may limit,
suspend, or revoke this exemption if the Commission finds that ICE
Clear Europe has violated or is unable to comply with the conditions of
this Order or applicable provisions in the Exchange Act with respect to
a registered clearing agency, if such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Exchange Act.
IV. Conclusion
The Commission finds that ICE Clear Europe's application for
exemption from the registration requirement under Section 17A(b)(1) is
consistent with the public interest, the protection of investors, and
the purposes of Section 17A.
It is hereby ordered, pursuant to Section 17A(b)(1) of the Exchange
Act, that the application for exemption from registration under Section
17A(b)(1) filed by ICE Clear Europe Limited be, and hereby is, approved
within the scope described in this order subject to the following
conditions:
(1) ICE Clear Europe shall have rules, policies, and procedures
reasonably designed to prohibit the clearing of U.S. securities by U.S.
participants, including market access controls preventing U.S.
participants from creating or holding cleared positions in U.S.
securities and, consequently, from engaging in any clearing-related
activity for such products.
(2) ICE Clear Europe shall immediately notify the Commission of
incidents of non-compliance with its rules, policies, or procedures
prohibiting U.S. participants from clearing U.S. securities, whether
intentional or otherwise, including any failure of any operational
controls proposed by ICE Clear Europe to prevent U.S. participants from
creating or holding cleared positions in U.S. securities.
(3) ICE Clear Europe shall clear LIFFE Contracts, including LIFFE
Securities Products, in a manner consistent with the requirements of
Section 17A of the Exchange Act and Rule 17Ad-22 thereunder.
(4) ICE Clear Europe, as a registered clearing agency, shall
continue to be subject to the applicable provisions of the Exchange
Act, including Sections 17A,\32\ 17(a),\33\ 17(b),\34\ and 19(b),\35\
and the rules and regulations thereunder applicable to clearance and
settlement activities and registered clearing agencies.
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\32\ 15 U.S.C. 78q-1.
\33\ 15 U.S.C. 78q(a).
\34\ 15 U.S.C. 78q(b).
\35\ 15 U.S.C. 78s(b).
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15927 Filed 7-2-13; 8:45 am]
BILLING CODE 8011-01-P