[Federal Register Volume 79, Number 132 (Thursday, July 10, 2014)]
[Notices]
[Pages 39421-39424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-16102]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72544; File No. SR-ICEEU-2014-10]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing of Proposed Rule Change to CDS Policies Relating to EMIR
July 3, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
[[Page 39422]]
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 30, 2014, ICE Clear Europe Limited (``ICE Clear Europe'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The principal purpose of the proposed change is to amend certain of
the ICE Clear Europe credit default swaps (CDS) risk policies (``Risk
Policy Amendments'') in order to facilitate compliance with
requirements under the European Market Infrastructure Regulation
(including regulations thereunder, ``EMIR'') \3\ that will apply to ICE
Clear Europe as an authorized central counterparty.
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\3\ Regulation (EU) No 648/2012 of the European Parliament and
of the Council of 4 July 2012 on OTC derivatives, central
counterparties and trade repositories.
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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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
ICE Clear Europe submitted proposed amendments to its risk policies
relating to the CDS business to facilitate compliance with requirements
under EMIR, which will apply to ICE Clear Europe as an authorized
central counterparty. ICE Clear Europe will be required to be in
compliance with EMIR as of the time it receives authorization from the
European Securities and Markets Authority. The relevant policies being
modified are (i) the CDS Risk Policy (``Risk Policy''); (ii) the Risk
Model Description (``Model Description''); (iii) the CDS Clearing Back-
Testing Framework (``Back-Testing Framework''); (iv) the CDS Clearing
Stress-Testing Framework (``Stress-Testing Framework''); and (v) the
CDS Default Management Framework (``Default Management Framework'').
The changes to the Risk Policy amend the calculation of CDS initial
margin requirements to comply with margin requirements under EMIR
Article 41 and Article 24 of the implementing Regulatory Technical
Standards.\4\ As revised, the initial margin methodology is designed to
provide portfolio risk coverage against at least 5-day market
realizations that would occur with probability 99.5% (previously
99.0%). In other words, the estimated requirements provide risk
protection equivalent to, at least, a 5-day 99.5% Value-at-Risk
measure. In addition, in order to address requirements under EMIR
related to procyclicality (Article 28 of the Regulatory Technical
Standards) changes were made to the maximum scale used for the initial
margin approach by adding a volatility scale that assigns a 25% weight
to stressed period observations during the lookback period from April
2007 to the present (consistent with Article 28(b) of the Regulatory
Technical Standards). The revised initial margin requirement, including
certain portfolio benefit assumptions, is expected to result in more
conservative initial margin requirements than under the previous
approach.
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\4\ Commission Delegated Regulation (EU) No. 153/2013 of 19
December 2012 Supplementing Regulation (EU) No. 648/2012 of the
European Parliament and of the Council with regard to Regulatory
Technical Standards on Requirements for Central Counterparties (the
``Regulatory Technical Standards'').
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Similar amendments to those described above were also made to the
Model Description. Under the revised Model Description, the overall
initial margin methodology, post portfolio benefits and other risk
components (e.g. jump-to-default and wrong way risk), are intended to
provide portfolio risk coverage against at least 5-day market
realizations that would occur with probability 99.5% or higher.
Conforming changes with respect to the 99.5% confidence interval were
also made in the Model Description. The revised Model Description also
reflects the use of stressed observations described above to limit
procyclicality. The Model Description has also been revised to include
the clearing house's Monte Carlo Approach for Risk Management (``MC''),
which has previously been applied to Western European sovereign CDS and
is proposed to be extended to all CDS.
The CDS MC approach aims to model the spread risk component of
initial margin by combining individual risk factors (``RFs''), i.e.,
single name or index family of instruments, into a copula. Marginal
distributions for individual RFs are joined together under a Student-t
copula. In this way, the model preserves historical behavior of RFS and
their dependencies. The value-at risk (VaR) for the profit and loss
distribution can be estimated by sampling from this copula.
The MC method offers a number of advantages over the existing
scenario-based spread response method (the ``Decomp SR''). The
dependence structure of RFs is encoded into the copula, as opposed to
the long-short offsets algorithm used to determine portfolio benefits
under the Decomp SR. The copula can also capture tail dependence, such
that various extreme scenarios can be easily simulated.
The scenario-based approach of the spread risk component with its
portfolio benefit assumptions is generally expected to result in a more
conservative requirement when compared to the MC VaR approach for the
same coverage level. In order to ensure compliance with the 99.5
confidence interval requirement for OTC derivatives under EMIR, the
final spread response charge will be determined as the more
conservative of the Decomp SR and the MC VaR calculated at a 99.5%
confidence interval.
The CDS pricing model, used by ICE Clear Europe since the inception
of clearing, has also been attached to the Risk Model Description as an
annex for completeness.
With respect to the Back-Testing Framework, changes were made to
implement the 99.5% confidence interval. The historical volatility
calculation uses data from at the minimum the most recent year (or, if
shorter, the period in which the relevant contract has been cleared).
In addition, per the amendments, on at least a monthly basis, the CDS
Risk Department will report the CDS back testing results and analysis
to the CDS Risk Committee in order to seek their review and, if needed,
their recommendations of the CDS margin model. In addition, CDS back
testing results and analyses are made available to all CDS Clearing
Members and clients (where known to ICE Clear Europe) for their own
portfolios. Disclosed information is aggregated in a form that does not
breach confidentiality. The policy also provides a framework for
monitoring
[[Page 39423]]
and remediating breaches that arise during back-testing, based on the
so-called ``Basel Traffic Light System'', depending on the number and
magnitude of the exceedances. The Back-Testing Framework is reviewed
and approved by the CDS Risk Committee and ICE Clear Europe Board at
least annually.
The Stress-Testing Framework is amended to provide further detail
as to its use of daily stress testing, which allows ICE Clear Europe to
discover any potential weaknesses in the risk methodologies as well as
to exercise short-term measures if the tests reveal that any
counterparties are inadequately collateralized. A detailed analysis of
the stress testing and sensitivity testing results is performed by the
CDS Risk Department at least on a monthly basis, or more frequently in
stressed market conditions, to ensure the adequacy of the existing
stress test scenarios and framework. The Stress-Testing Framework
amendments would also add pure historical scenarios, as required under
EMIR. Pure historical scenarios are applied at the single name level,
using the same date across all instruments. Single-name specific stress
scenarios are based on the same 5-day period when the on-the-run
indices had the greatest observed related spread increases or
decreases. The guaranty fund stress scenario has also been clarified,
and is designed to account for: (i) The occurrence of credit events for
two clearing members and three reference entities on which the
defaulted clearing members sold protection, (ii) adverse contracting or
widening credit spread scenarios, (iii) adverse widening of Index-
single name ``basis'', and (iv) adverse changes of the default-free
discount terms structure. CDS stress testing results and analyses are
made available to all CDS Clearing Members and clients (where known to
ICE Clear Europe) for their own portfolios. Disclosed information is
aggregated in a form that does not breach confidentiality. The CDS
Stress Testing framework is reviewed and approved by the CDS Risk
Committee and ICE Clear Europe Board at least annually.
Minor improvements have been made to the Default Management
Framework. First, ICE Clear Europe will conduct a quarterly (rather
than annual) review of its Default Management Framework. Also, ICE
Clear Europe will perform a mock clearing member default test at least
annually.
ICE Clear Europe believes that the proposed rule change is
consistent with the requirements of Section 17A of the Act \5\ and the
regulations thereunder applicable to it, including the standards under
Rule 17Ad-22.\6\ 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. The proposed rule change, which is
intended to ensure compliance by the clearing house with the margin and
risk management requirements of EMIR, principally enhance relevant risk
policies and impose more conservative initial margin requirements. As a
result, ICE Clear Europe believes that the proposed rule change will
contribute to the safeguarding of funds and securities associated with
derivative transactions that are in the custody or control of the
clearing house, as well as more generally facilitate the prompt and
accurate settlement of such transactions, within the meaning of Section
17(A)(b)(3)(F).\8\ ICE Clear Europe further believes that the proposed
rule change will enhance the stability of the clearing system, by
reducing the risk to market participants of a default by a clearing
member or other customer. In addition, the proposed change to the Risk
Policy Amendments is consistent with the relevant requirements of Rule
17Ad-22.\9\ In particular, the amendments to the Risk Policy and Model
Description will enhance the financial resources available to the
clearing house by imposing more conservative initial margin
requirements for CDS, as required by EMIR and consistent with the
requirements of Rule 17Ad-22(b)(2-3).\10\ The changes in the Default
Management Policy are intended to improve on default management
procedures and therefore are consistent with Rule 17Ad-22(d)(11).\11\
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\5\ 15 U.S.C. 78q-1.
\6\ 17 CFR 240.17Ad-22.
\7\ 15 U.S.C. 78q-1(b)(3)(F).
\8\ 15 U.S.C. 78q-1(b)(3)(F).
\9\ 17 CFR 240.17Ad-22.
\10\ 17 CFR 240.17Ad-22(b)(2-3).
\11\ 17 CFR 240.17Ad-22(d)(11).
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For the reasons noted above, ICE Clear Europe believes that the
proposed Risk Policy Amendments are consistent with the requirements of
Section 17A of the Act and regulations thereunder applicable to it.
B. Self-Regulatory Organization's Statement on Burden on Competition
ICE Clear Europe does not believe the Risk Policy Amendments would
have any impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purposes of the Act. Although the
Risk Policy Amendments may increase the costs of clearing CDS for
clearing members and their customers, as a result of more conservative
initial margin requirements, this change is required in order to comply
with Article 41 of EMIR and implementing regulations. In addition, ICE
Clear Europe believes that the revisions to the model strengthen its
risk management capability and financial resources, and are therefore
appropriate in furtherance of the purposes of the Act. Because these
changes will apply to all clearing members that clear CDS, ICE Clear
Europe does not believe the amendments will adversely affect
competition among clearing members. Furthermore, since the EMIR
requirements will apply to European clearing houses generally, ICE
Clear Europe does not anticipate that the changes will adversely affect
the ability of market participants to clear CDS transactions generally,
reduce access to clearing generally, or limit market participants'
choices for clearing derivatives. As a result, ICE Clear Europe
believes that any impact on competition is appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments relating to the proposed change to the rules have
not been solicited or received. ICE Clear Europe will notify the
Commission of any written comments received by ICE Clear Europe.
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.
[[Page 39424]]
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-2014-10 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1060.
All submissions should refer to File Number SR-ICEEU-2014-10. 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/notices/Notices.shtml?regulatoryFilings.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-ICEEU-2014-10
and should be submitted on or before July 31, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-16102 Filed 7-9-14; 8:45 am]
BILLING CODE 8011-01-P