[Federal Register Volume 78, Number 128 (Wednesday, July 3, 2013)]
[Notices]
[Pages 40243-40248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15999]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69888; File No. SR-ICEEU-2013-09]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing of Amendment No. 3 and Order Approving Proposed Rule Change,
as Modified by Amendment Nos. 1, 2 and 3 Thereto, To Clear Contracts
Traded on the LIFFE Administration and Management Market
June 28, 2013.
I. Introduction
On May 13, 2013, ICE Clear Europe Limited (``ICE Clear Europe'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-ICEEU-2013-09 pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\
and Rule 19b-4 thereunder \2\ to implement a clearing relationship in
which ICE Clear Europe will clear contracts traded on the LIFFE
Administration and Management (``LIFFE A&M'') market \3\ (``LIFFE
Contracts'').\4\ On May 22, 2013, ICE Clear Europe filed Amendment No.
1 to the proposed rule change.\5\ Notice of the proposed rule change,
as modified by Amendment No. 1 thereto, was published for comment in
the Federal Register on May 29, 2013.\6\ On June 4, 2013, ICE Clear
Europe filed Amendment No. 2 to the proposed rule change.\7\ Notice of
Amendment No. 2 to the proposed rule change was published for comment
in the Federal Register on June 12, 2013.\8\ On June 20, 2013, ICE
Clear Europe filed Amendment No. 3 to the proposed rule change.\9\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ LIFFE A&M is a recognized investment exchange under the UK
Financial Services and Markets Act of 2000.
\4\ The LIFFE Contracts include interest rate and government
bond futures and options, certain agricultural futures and options,
and futures and options on underlying equity securities and equity
indices.
\5\ In Amendment No. 1, ICE Clear Europe, among other things,
clarified the scope of products proposed to be cleared, added new
Rule 207(f) prohibiting its U.S. Clearing Members from clearing
LIFFE Contracts that are futures or options on underlying U.S.
securities, added additional clarification surrounding the operation
of the combined F&O Guaranty Fund and the margining of LIFFE
Contracts, and supplemented the statutory basis for the proposed
rule change.
\6\ Exchange Act Release No. 69628 (May 23, 2013), 78 FR 32287
(May 29, 2013) (SR-ICEEU-2013-09).
\7\ In Amendment No. 2, ICE Clear Europe elaborated on certain
aspects of the proposed clearing activities as they relate to LIFFE
Contracts that are securities products and made a partial amendment
to certain rules and procedures that would clarify the
considerations under which certain margin and risk management
requirements would be established and modified from time to time.
\8\ Exchange Act Release No. 69703 (Jun. 5, 2013), 78 FR 35335
(Jun. 12, 2013) (SR-ICEEU-2013-09).
\9\ In Amendment No. 3, ICE Clear Europe 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 amendment is technical in nature and
meant to clarify the scope of Rule 207(f) so that it is consistent
with prior Commission actions. See infra n. 11 and accompanying
text. Amendment No. 3 therefore did not require an additional
comment period. The initial rule filing and all subsequent
amendments filed are collectively referred to hereinafter as the
``Proposal.''
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The Commission did not receive comments on the proposed rule
change. This order approves the proposed rule change, as modified by
Amendment Nos. 1, 2 and 3.
II. Description of the Proposed Rule Change
A. Background
As announced on December 20, 2012, ICE Clear Europe has agreed to
act as the clearing organization for futures and option contracts
traded on LIFFE A&M, including contracts traded over-the-counter and
processed through LIFFE A&M's BClear service.\10\ The LIFFE Contracts
proposed to be cleared by ICE Clear Europe 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. The purpose of the Proposal is to implement this
clearing relationship.
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\10\ 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.
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In the Proposal, ICE Clear Europe submitted revised Parts 1, 2, 4,
5, 7, 8, 11, and 12 and new Part 18 of the ICE Clear Europe Clearing
Rules (``Rules'') (along with other clarifying and conforming Rule
amendments) and revisions to its Finance Procedures, Clearing
Procedures, Delivery Procedures and Membership Procedures. The other
proposed changes in the Rules and procedures reflect conforming changes
to definitions and related provisions and other drafting
clarifications, and do not affect the substance of the Rules and
procedures.
B. ICE Clear Europe Clearing Rules
The Proposal revises Part 1 of the Rules, in which Rule 101, which
provides definitions for certain terms, is modified to add new defined
terms and revise existing definitions. Included in the changes to Rule
101 are the designation of LIFFE A&M as a Market for which ICE Clear
Europe provides clearing services, the addition of defined terms and
other revisions to cover LIFFE Contracts and the creation of a new
category ``F&O Contracts'' that will include Energy Contracts and LIFFE
Contracts (and related definitions). The Energy Guaranty Fund will be
re-designated as the F&O Guaranty Fund, which fund will be sub-divided
with respect to Energy Contracts and LIFFE Contracts.
Part 2 of the Rules has been revised to address requirements for
LIFFE Clearing Members and other conforming changes. New Rule 207(f),
as modified by Amendment No. 3 of the Proposal,
[[Page 40244]]
would be adopted to provide that Clearing Members that are U.S. persons
will not be permitted to clear LIFFE Contracts that are futures or
options on underlying U.S. securities (other than futures contracts on
broad-based security indices). Specifically, Rule 207(f) defines the
persons that are subject to this restriction to include any (i) FCM/BD
Clearing Members; (ii) other Clearing Members that are organized in the
United States of America; and (iii) other Clearing Members having a
U.S. residence, based upon the location of their executive office or
principal place of business, including, without limitation, (a) a U.S.
bank (as defined by Section 3(a)(6) of the Exchange Act) and (b) a
foreign branch of a U.S. bank or U.S. registered broker-dealer. As
modified by Amendment No. 3, the proposed rule would restrict the
clearing of U.S. securities by U.S. participants consistent with prior
Commission actions.\11\ In furtherance of this restriction, ICE Clear
Europe, together with LIFFE A&M, will implement operational controls to
restrict the activities of U.S. Clearing Members. Specifically, the
clearing system to be used for the LIFFE Securities Products will have
market access controls that prevent U.S. Clearing Members from creating
or holding cleared positions in LIFFE Securities Products involving
underlying U.S. securities. This is intended to prevent U.S. Clearing
Members from engaging in any clearing-related activity (including give-
ups or take-ups) in respect of those products. Furthermore, when a new
U.S. clearing member is approved for clearing, LIFFE A&M and ICE Clear
Europe will take the necessary steps in their respective systems to
implement these access controls prior to granting the new member access
to the clearing system.
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\11\ See, e.g., Morgan Guaranty Trust Company of New York,
Brussels Office, as Operator of the Euroclear System, 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) (``Euroclear Order'') at n. 62 (defining ``U.S.
participant'' in the context of granting an exemption from
registration as a clearing agency under Section 17A in connection
with performing the functions of a clearing agency for transactions
involving U.S. government and agency securities for U.S.
participants).
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Part 3 of the Rules contain certain conforming changes.
Changes to Part 4 of the Rules address the submission of LIFFE
Contracts for clearing and related matters. A new Rule 410 has been
added to set out a framework for Link Agreements, which are generally
defined as agreements entered into between ICE Clear Europe and another
exchange for which ICE Clear Europe does not otherwise provide clearing
services that provides for the transfer of contracts to or from that
exchange (or its clearing house) to ICE Clear Europe. LIFFE A&M
currently has link arrangements with Tokyo Financial Exchange Inc. and
Tokyo Stock Exchange Inc., which exchanges would constitute
``Participating Exchanges'' pursuant to the new Rules.
The Proposal revises Part 5 of the Rules, which addresses margin
requirements. Existing Rule 502(d) addresses a number of margin
requirements, including the assets eligible to be provided as Margin or
Permitted Cover, and existing Rule 502(e) addresses haircuts that the
clearing house may apply to such assets. Under the existing Rules,
changes to such requirements may be determined by the clearing house
from time to time and notified by Circular (which will also be posted
on the clearing house's Web site). ICE Clear Europe proposes to add a
new Rule 502(k) to provide that for F&O Contracts, changes to the
matters set forth in Rules 502(d) and (e), including assets eligible as
Margin or Permitted Cover and the haircuts established with respect to
such assets, will be based on an analysis of appropriate factors as
determined by the clearing house. These factors will include, without
limitation, historical and implied price volatility of those assets,
current and anticipated conditions in the market for those assets,
spreads and correlations between assets, liquidity in the trading
market for those assets, composition of the relevant market, default
risk (including sovereign risk) with respect to those assets, relevant
foreign exchange market conditions and other relevant information as
determined by ICE Clear Europe. Consistent with its existing policies
and procedures, ICE Clear Europe regularly reviews its current eligible
Margin and Permitted Cover assets and related haircuts and makes any
necessary adjustments.
Part 6 of the Rules contain no changes.
The Proposal revises Part 7 of the Rules, which deals with
settlement and delivery of futures, to address settlement of LIFFE
Contracts. Specifically, Rule 703 has been amended to address the
treatment of tenders delivered in relation to Futures that are not
settled in cash. Additionally, Rule 704, which deals with the credit
and debit of accounts, has been amended to provide that any payment or
other allowance payable by or to either the Buyer or Seller under the
terms of the Contract shall be paid by or to the Clearing House for
onward payment to the Buyer or Seller, as the case may be.
The Proposal revises Part 8 of the Rules, which deals with Options,
to provide additional terms with respect to the exercise of option
contracts other than options on futures. Specifically, new Rule 806
provides that upon exercise of any Option with a Deliverable which is
not a Future, a Contract for the sale and purchase of the relevant
Deliverable (a ``Contract of Sale'') at the Strike Price (or such other
price as is required pursuant to the Contract Terms) will arise
pursuant to Rule 401 and in accordance with the Contract Terms for the
Option and applicable Market Rules. Additionally, new Rule 806 provides
that upon such Contract of Sale or Contracts of Sale having arisen and
all necessary payments having been made by the Clearing Member and
Clearing House pursuant to the Clearing Procedures, the rights,
obligations and liabilities of the Clearing House and the relevant
Clearing Member in respect of the Option shall be satisfied and the
Option shall be terminated.
The Proposal revises Part 8 of the Rules to include the addition of
new Rule 809, which clarifies the delivery and settlement procedures
with respect to Contracts of Sale arising from Options. Pursuant to new
Rule 809, the Clearing House has the authority to direct a Clearing
Member, who is a Seller under a Contract of Sale subject to delivery,
to deliver the Deliverable under such Contract to another Clearing
Member that is a Buyer. New Rule 809 further provides that if a Buyer
under a Contract of Sale rejects a Deliverable delivered to it, the
Clearing House as Buyer under the back-to-back Contract with the Seller
shall be entitled, if to do so would be in accordance with the
applicable Contract Terms, to take the same action as against the
Seller under the equivalent Contract and the Clearing House shall not
be deemed to have accepted such delivery until the relevant Buyer has
accepted delivery under the first Contract.
New Rule 810 addresses the cash settlement terms of Options with
Deliverables other than Futures. New Rule 811 provides that the
Clearing House shall make any necessary credits or debits to or from
Clearing Members' Proprietary Margin Account and Customer Margin
Accounts, as appropriate, arising as a result of each cash settlement
and delivery in accordance with Part 3 of the Rules.
Part 9 of the Rules contain certain conforming changes.
Part 10 of the Rules contain no changes.
[[Page 40245]]
The Proposal revises Part 11 of the Rules, which deals with the
Guaranty Funds. The clearing of LIFFE Contracts will be supported by
the existing Energy Guaranty Fund, which will be re-designated the
``F&O Guaranty Fund.'' Contributions to the F&O Guaranty Fund will be
primarily allocated to losses from either Energy Contracts or LIFFE
Contracts, and secondarily allocated to the other such class of
Contracts, as set forth in Rule 1103. The size of each segment will be
determined separately based on ICE Clear Europe's risk assessment of
the Energy Contracts and LIFFE Contracts, respectively, and each
segment will be separately stress-tested in accordance with the
clearing house's risk management policies and procedures. In the event
of a default of a clearing member for which ICE Clear Europe needs to
apply the F&O Guaranty Fund in accordance with the risk waterfall under
the Rules, the energy segment will be applied first to losses resulting
from Energy Contracts, and the LIFFE segment will be applied first to
losses resulting from cleared LIFFE Contracts. Once a segment has been
exhausted by losses in its product category, remaining assets from the
other segment may be applied to those losses.
The Proposal also revises Part 12 of the Rules, which addresses UK
Settlement Finality Regulations and the Companies Act 1989. Conforming
changes have been made to incorporate LIFFE Contracts in the provisions
addressing various categories of transfer orders.
The Proposal includes a new Part 18 of the Rules, which provide for
transitional provisions concerning the novation of open contracts with
LIFFE A&M and LCH.Clearnet Limited, under LIFFE A&M's existing clearing
arrangements, to ICE Clear Europe, under the new clearing relationship,
and the transfer of Clearing Member cash and securities from
LCH.Clearnet Limited to ICE Clear Europe.
C. ICE Clear Europe Procedures
Membership Procedures
The Proposal updates ICE Clear Europe's Membership Procedures to
provide for the clearing of LIFFE Contracts and to reflect a new
membership category, ``F&O Clearing Members'', which identify Clearing
Members seeking to clear LIFFE Contracts as well as existing Energy
Clearing Members. The amendments reflect various other updates and
changes to conform to other provisions of the Rules and procedures. In
Section 4 (``Matters Requiring Notification by Clearing Members''), the
chart governing all notifications, their timing and their form
requirements have been generally updated to address the changes to the
numbering of provisions and otherwise to reflect the latest version of
ICE Clear Europe's Clearing Rules. New subsections G (``Clearing
Procedures''), H (``Finance Procedures''), I (``Complaint Resolution
Procedures'') and J (``Business Continuity Procedures'') have also been
added, reflecting the notifications, timing and form requirements
contained in such procedures.
Finance Procedures
The Proposal also contains revisions to Parts 2, 3, 4, 5, 6, 9 and
13 of ICE Clear Europe's Finance Procedures, which reflect general
updates as well as changes to the clearing of LIFFE Contracts.
Section 2.1 has been revised to clarify the currencies supported by
ICE Clear Europe in various contexts. Initial and Original Margin
obligations may be met only in USD, GBP and EUR currency. CAD, CHF and
SEK currency may be used by Clearing Members only for the receipt of
income on non-cash Permitted Cover with coupons payable in those
currencies. CAD may also be used for Variation Margin and settlement
payments only for Energy Contracts which settle in CAD. Certain
additional currencies may be used for Variation Margin and settlement
payments for LIFFE Contracts which settle in such currencies.
Similarly, Section 3.7 has been amended to clarify that currencies
eligible for Triparty Collateral for Original or Initial Margin are
limited to USD, GBP and EUR.
Section 4.1 governing currency requirements for the accounts of the
Clearing Members has been slightly modified: all F&O Clearing Members
must have an account, denominated in USD; all CDS Clearing Members must
have an account denominated in EUR; all F&O Clearing Members must
additionally have at least one further account denominated in either
GBP or EUR; all CDS Clearing Members must additionally have at least
one further account denominated in either GBP or USD; a Clearing Member
which has an Open Contract Position in a contract for which EUR, GBP,
USD or CAD is the settlement currency must have an account denominated
in such currency; a Clearing Member which transfers non-cash Permitted
Cover to the Clearing House which pays a coupon, interest or
redemptions in USD, EUR, GBP, CAD, CHF or SEK must have an account in
that currency; and an F&O Clearing Member that is a LIFFE Clearing
Member and is party to LIFFE Contracts which settle in CAD, CHF, CZK,
DKK, HUF, JPY, NOK, PLN, SEK or TRY must have an account in each such
currency.
The procedures of the assured payment system have been updated
under Section 5.5 of the Finance Procedures to conform to changes
recently made to Rule 301(f) regarding the liability of Clearing
Members for the remittance of funds through Approved Financial
Institutions.
Section 6.1(h), which addresses the various payments that may be
included in a cash transfer, has been modified to address intra-day
call of additional Initial or Original Margin Call, the proceeds of
which may be applied against future Variation Margin or Mark-to-Market
Margin calls. Intra-day Calls will now only be processed in USD, GBP or
EUR. Section 6.1(h)(vi) has been revised to address general procedures
for rebates, fee discounts and incentive programs that the Clearing
House may adopt from time to time. In addition, the provisions on
Currency Holidays and payments on other currencies, Section
6.1(h)(viii), have also been updated and now include language on Force
Majeure Events and Financial Emergencies.
In Section 9, the definitions relating to the use of Emission
Allowances and Permitted Cover have been updated to reflect changes in
EU Law with respect to Registry Regulations. Certain conforming changes
are made in Part 10 of the Finance Procedures. Finally, Section 12.1
has been revised to reflect the sub-categories of Letters of Credit
that might be used to satisfy Original Margin, being a ``Standard
Letter of Credit'' and a ``Pass-Through Letter of Credit''. The
relevant forms of the Letters of Credit have also been updated in
Section 12.4.
Section 13.6 of the Finance Procedures addresses the determination
and change of original margin rates from time to time. Margin
requirements for LIFFE Contracts will be calculated using the
SPAN[supreg]1 v4 algorithm,\12\ with modifications for concentration
charges and a trinomial model used with respect to certain LIFFE A&M
option transactions. ICE Clear Europe will determine the margin
parameters used in the SPAN algorithm for LIFFE Contracts cleared by
ICE Clear Europe, and make appropriate modifications to those
parameters from time to time, within the framework of the margin
requirement policy approved by the
[[Page 40246]]
ICEEU F&O Risk Committee. As set forth in existing Section 13.6, ICE
Clear Europe regularly reviews its margin rates in light of market
conditions and makes appropriate modifications. ICE Clear Europe
proposes to amend Section 13.6 to provide that changes to original
margin rates for F&O Contracts will be based on an analysis of
appropriate factors as determined by the clearing house. These include
market prices, historical and implied volatilities of relevant
contracts, spreads and correlations between related commodities, other
current and anticipated conditions (including liquidity) in the market
for the contracts and other relevant information as determined by ICE
Clear Europe. ICE Clear Europe believes that Section 13.6 provides it
the flexibility to adjust the calculation of margin rates in order to
react to changes in market conditions, particularly changes in
volatility. These changes may occur suddenly, and failure to update
margin rates to take into account such changes may lead to insufficient
margin being collected by the clearing house. The proposed revisions to
Section 13.7 of the Finance Procedures are substantially the same as
the amendments to Rule 502(k), and are being made for the reasons
discussed above in connection with that rule change.
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\12\ SPAN is a registered trademark of Chicago Mercantile
Exchange Inc. and used by ICE Clear Europe under license. SPAN is a
risk evaluation and margin framework algorithm.
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Clearing Procedures
The Proposal also updates ICE Clear Europe's Clearing Procedures to
provide for the clearing of LIFFE Contracts as well as certain other
updates and confirmations. Accordingly, amendments have been made to
the provisions relating to ICE Clear Europe's post-trade
administration, clearing and settlement systems, position management
and position accounts in Sections 1, 2 and 3, respectively.
Delivery Procedures
The Proposal revises ICE Clear Europe's Delivery Procedures to
provide for the delivery of LIFFE Contracts. The following provisions
have been added to the Delivery Procedures, which set out the new
delivery arrangements:
Section 8 (``Alternative Delivery Procedure: LIFFE White
Sugar and Raw Sugar'');
Section 17 (``LIFFE Guardian''), which describes the LIFFE
Guardian electronic grading and delivery system which will be used in
certain LIFFE deliveries; and
Parts I-Q, which set out the delivery arrangements for the
additional LIFFE Contracts as follows:
Part I: ``LIFFE Cocoa Contracts''
Part J: ``LIFFE Coffee Contracts''
Part K: ``LIFFE White Sugar Contracts''
Part L ``LIFFE Wheat Contracts''
Part M: ``LIFFE Deliveries''
Part N: ``LIFFE Common Delivery Procedures''
Part O: ``LIFFE Gilt Contracts''
Part P: ``LIFFE Japanese Government Bond Contracts''
Part Q: ``LIFFE Equity Futures/Options''.
Further, the Schedule of Forms and Reports has been updated and
lists additional delivery forms used for the LIFFE Contracts.
Part A of the Delivery Procedures relating to emissions contracts
has also been amended, reflecting changes to EU legislation, certain
new emission contracts previously launched by ICE Futures Europe and
the use of a single EU registry together with additional conforming and
updating changes to the Delivery Procedures generally.
ICE Clear Europe believes that the proposed rule and procedure
changes are consistent with the requirements of Section 17A of the Act
\13\ and the regulations thereunder applicable to it, including the
standards under Rule 17Ad-22.\14\ The amendments will provide for
clearing of LIFFE Contracts by ICE Clear Europe, consistent with ICE
Clear Europe's existing clearing arrangements and related financial
safeguards, protections and risk management procedures, as discussed
herein. ICE Clear Europe believes acceptance of LIFFE Contracts for
clearing, and conditions set out in these rule and procedure
amendments, will promote the prompt and accurate clearance of and
settlement of securities transactions, the safeguarding of securities
and funds in the custody or control of ICE Clear Europe and the
protection of investors and the public interest, within the meaning of
Section 17A(b)(3)(F) of the Act.\15\ The proposed amendments do not
impact ICE Clear Europe's financial resources devoted to its security-
based swap related (i.e., credit default swap) clearing business. ICE
Clear Europe believes the clearing of LIFFE Contracts will satisfy
relevant requirements of Rule 17Ad-22,\16\ as discussed below.
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\13\ 15 U.S.C. 78q-1.
\14\ 17 CFR 240.17Ad-22.
\15\ 15 U.S.C. 78q-1(b)(3)(F).
\16\ 17 CFR 240.17Ad-22.
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Financial Resources. As discussed above, ICE Clear Europe believes
it has structured the F&O Guaranty Fund to provide sufficient
additional financial resources to support the clearing of LIFFE
Contracts consistent with the requirements of Rule 17Ad-22.\17\ The
proposed amendments do not impact ICE Clear Europe's financial
resources devoted to its security-based swap related (i.e., credit
default swap) clearing business. Moreover, new policies were approved
covering margin requirements, mark-to-market margin, capital to margin,
membership, internal rating, backtesting, wrong-way risk, concentration
charges, intraday margin and stress testing in respect of the LIFFE A&M
clearing relationship. Relevant models applicable to the clearing of
LIFFE Contracts were subjected to independent validation as required by
ICE Clear Europe's model governance framework.
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\17\ Id.
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Operational Resources. ICE Clear Europe believes it will have the
operational and managerial capacity to clear the LIFFE Contracts as of
the commencement of clearing, consistent with the requirements of Rule
17Ad-22(d)(4).\18\ Staffing levels and resources at ICE Clear Europe
related to operational and technology needs for the clearing of LIFFE
Contracts will be subject to ongoing review. ICE Clear Europe believes
that its existing systems are appropriately scalable to handle the
expected increase in volume. ICE Clear Europe may also enter into
services arrangements with LIFFE A&M from time to time in connection
with the clearing of LIFFE Contracts, under which LIFFE A&M or its
personnel may assist with certain clearing functions, particularly with
respect to contracts that go to delivery.
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\18\ 17 CFR 240.17Ad-22(d)(4).
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Participant Requirements. ICE Clear Europe believes that the
Proposal and the clearing of LIFFE Contracts are consistent with the
requirements of Rule 17Ad-22(d)(2) \19\ to provide fair and open access
through participation requirements that are objective and publicly
disclosed. ICE Clear Europe believes that the Proposal establishes fair
and objective criteria for the eligibility to clear LIFFE Contracts.
ICE Clear Europe clearing membership is available to participants that
meet such criteria. ICE Clear Europe Clearing Members that wish to
clear LIFFE Contracts will have to satisfy the financial resources
requirements to clear these products and continue to do so in order to
preserve their eligibility to clear LIFFE Contracts. Clearing Member
compliance with the requirements to clear LIFFE Contracts will be
monitored by ICE Clear Europe.
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\19\ 17 CFR 240.17Ad-22(d)(2).
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Settlement. ICE Clear Europe believes that the Proposal will
improve the
[[Page 40247]]
finality and accuracy of its daily settlement process and reduce the
risk to ICE Clear Europe of settlement failures, consistent with the
requirements of Rule 17Ad-22(d)(5), (12) and (15).\20\ The Proposal
would require ICE Clear Europe Clearing Members that clear LIFFE
Contracts to maintain accounts at approved financial institutions and
that are denominated in the settlement currency of the LIFFE Contracts
such Clearing Member clears. Also, the proposed amendments to the
Finance Procedures clarify the steps a Clearing Member (and its
approved financial institutions) must take in order for the Clearing
Member's obligations to pay ICE Clear Europe to be deemed satisfied and
complete.
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\20\ 17 CFR 240.17Ad-22(d)(5), (12) and (15).
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Likewise, the proposed amendments to the Delivery Procedures
clarify the obligations of ICE Clear Europe and its Clearing Members in
respect of physically-settled LIFFE Contracts. The Proposal
contemplates that ICE Clear Europe may, from time to time, enter into
clearing services arrangements with LIFFE A&M, in respect of LIFFE
Contracts, pursuant to which certain functions may be performed by
LIFFE A&M for ICE Clear Europe. In general, the terms to be added to
the ICE Clear Europe Delivery Procedures in large part reflect the
terms currently applicable to the LIFFE Contracts under their existing
clearing arrangements.
ICE Clear Europe believes these changes are thus in furtherance of,
and are consistent with, the requirements of Rule 17Ad-22 \21\ and will
facilitate the continued operation of the clearing house's settlement
process. ICE Clear Europe believes that its Rules and procedures
related to settlements (including physical settlements), as amended,
appropriately identify and manage the risks associated with settlements
under LIFFE Contracts.
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\21\ 17 CFR 240.17Ad-22.
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Default Procedures. ICE Clear Europe believes that the Rules and
its relevant procedures allow for it to take timely action to contain
losses and liquidity pressures and to continue meeting its obligations
in the event of Clearing Member insolvencies or defaults, including in
respect of LIFFE Contracts, in accordance with Rule 17Ad-22(d)(11).\22\
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\22\ 17 CFR 240.17Ad-22(d)(11).
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \23\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such organization. Section 17A(b)(1) of the Act \24\
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)(3)(F) of the Act \25\ 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.
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\23\ 15 U.S.C. 78s(b)(2)(C).
\24\ 15 U.S.C. 78q-1(b)(1).
\25\ 15 U.S.C. 78q-1(b)(3)(F).
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After careful review, the Commission finds that the Proposal, in
conjunction with exemptive relief granted by the Commission to ICE
Clear Europe (the ``Exemptive Order''),\26\ is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. Specifically, the
Commission finds that the Proposal, in conjunction with the Exemptive
Order, is consistent with the requirement of Section 17A(b)(1) of the
Act \27\ regarding clearing agency registration. Section 17A(b)(1) of
the Exchange Act requires 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) to register with the Commission, unless an
exemption is granted by 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.\28\
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\26\ 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, Exchange
Act Release No. 34-69872 (Jun. 27, 2013), 78 FR ------ (July ------,
2013).
\27\ 15 U.S.C. 78q-1(b)(1).
\28\ See, 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); Euroclear Order, supra n. 11; 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) (replacing MGT-Brussels with
Euroclear Bank as operator of the Euroclear System).
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ICE Clear Europe is a foreign clearing agency registered in the
U.S. solely for the purpose of clearing SBS. In light of the
Commission's precedents pertaining to registration requirements for
foreign clearing agencies, ICE Clear Europe has proposed to amend its
Rules to include new ICE Clear Europe Rule 207(f), which would prohibit
Clearing Members that are U.S. participants \29\ 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). 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.
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\29\ 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 Euroclear Order, supra n. 11, at 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.
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Notwithstanding new ICE Clear Europe Rule 207(f) and its attendant
policies and procedures and operational controls, the Commission
believes that the proposed clearing of the LIFFE Securities Products
would exceed the scope of activities permitted by ICE Clear Europe's
registration solely to clear SBS under Section 17A(l) of the Exchange
Act. Thus, ICE Clear Europe must register or seek an exemption from
registration as a clearing agency under Section 17A(b) of the Exchange
Act in
[[Page 40248]]
order to provide clearing services for the LIFFE Securities Products.
Accordingly, ICE Clear Europe has submitted, and the Commission has
granted, ICE Clear Europe's application for exemptive relief from
clearing agency registration under Section 17A(b) of the Exchange Act
and Rule 17Ab2-1 thereunder solely with respect to ICE Clear Europe's
provision of clearance and settlement services for LIFFE Securities
Products.\30\ Given the Exemptive Order,\31\ the Commission finds that
the Proposal is consistent with the requirement of Section 17A(b)(1) of
the Act \32\ regarding clearing agency registration.
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\30\ 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.
\31\ Supra n. 26.
\32\ 15 U.S.C. 78q-1(b)(1).
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In addition, the Commission finds that the Proposal is consistent
with the requirement of the Exchange Act with respect to promoting the
prompt and accurate clearance and settlement of securities transactions
and, to the extent applicable, derivative agreements, contracts, and
transactions. The Proposal contains provisions designed to permit and
facilitate LIFFE Contracts to be transitioned to and cleared on an
ongoing basis by ICE Clear Europe, including changes to ICE Clear
Europe's Rules, as well as its Finance Procedures, Clearing Procedures,
Delivery Procedures, and Membership Procedures.
In addition, the Commission finds that the Proposal is consistent
with the requirements of Section 17A(b)(3)(F) of the Act \33\ regarding
the safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible. Among
other things, the Proposal revises margin requirements, establishes the
F&O Guaranty Fund to accommodate the clearing of both LIFFE contracts
and ICE Clear Europe's existing Energy Contracts, and revises ICE Clear
Europe's risk management framework with respect to LIFFE contracts. The
Proposal includes new policies covering margin requirements, mark-to-
market margin, capital to margin, membership, internal rating,
backtesting, wrong-way risk, concentration charges, intraday margin and
stress testing in respect of the LIFFE A&M clearing relationship.
Relevant models applicable to the clearing of LIFFE Contracts were
subjected to independent validation as required by ICE Clear Europe's
model governance framework.
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\33\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. 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 \34\ and the
rules and regulations thereunder.
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\34\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\35\ that the proposed rule change (File No. SR-ICEEU-2013-09) be,
and hereby is, approved.\36\
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\35\ 15 U.S.C. 78s(b)(2).
\36\ 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.\37\
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\37\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15999 Filed 7-2-13; 8:45 am]
BILLING CODE 8011-01-P