[Federal Register Volume 79, Number 153 (Friday, August 8, 2014)]
[Notices]
[Pages 46479-46481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18752]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72756; File No. SR-ICEEU-2014-10]
Self-Regulatory Organizations; ICE Clear Europe Limited; Order
Granting Accelerated Approval of Proposed Rule Change to CDS Policies
Relating to EMIR
August 4, 2014.
I. Introduction
On June 30, 2014, ICE Clear Europe Limited (``ICE Clear Europe'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-ICEEU-2014-10 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 July 10, 2014.\3\ The Commission received no
comment letters regarding the proposed change. For the reasons
discussed below, the Commission is granting approval of the proposed
rule change on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-72544 (July 3, 2014),
79 FR 39421 (July 10, 2014) (SR-ICEEU-2014-10).
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II. Description of the Proposed Rule Change
ICE Clear Europe is proposing this change 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'') \4\ that will apply to ICE
Clear Europe as an authorized central counterparty.
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\4\ 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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ICE Clear Europe states that the relevant policies being modified
by the proposed change 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'').
ICE Clear Europe states that 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.\5\ ICE Clear Europe
contends that, 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%), that is, the estimated requirements provide risk protection
equivalent to at least a 5-day 99.5% Value-at-Risk measure. In
addition, ICE Clear Europe states that 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). ICE Clear Europe expects the revised
initial margin requirement, including certain portfolio benefit
assumptions, to result in more conservative initial margin requirements
than under the previous approach.
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\5\ 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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ICE Clear Europe states that similar amendments to those described
above are also made to the Model Description. ICE Clear Europe contends
that under the revised Model Description, the
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overall initial margin methodology, post portfolio benefits and other
risk components (e.g. jump-to-default and wrong way risk), will provide
portfolio risk coverage against at least 5-day market realizations that
would occur with probability 99.5% or higher. ICE Clear Europe states
that conforming changes with respect to the 99.5% confidence interval
are also made in the Model Description. ICE Clear Europe also states
that the revised Model Description reflects the use of stressed
observations described above to limit procyclicality. Furthermore, ICE
Clear Europe states that 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.
ICE Clear Europe states that 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. ICE Clear Europe further states that marginal
distributions for individual RFs are joined together under a Student-t
copula. In this way, ICE Clear Europe contends, the model preserves
historical behavior of RFs and their dependencies and that the value-at
risk (VaR) for the profit and loss distribution can be estimated by
sampling from this copula.
ICE Clear Europe contends that the MC method offers a number of
advantages over the existing scenario-based spread response method (the
``Decomp SR''), in that (1) 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; and (2) the copula
can also capture tail dependence, such that various extreme scenarios
can be easily simulated.
ICE Clear Europe states that 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. ICE Clear
Europe further states that 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.
ICE Clear Europe also states that the CDS pricing model, used since
the inception of clearing, has also been attached to the Risk Model
Description as an annex.
ICE Clear Europe states that the changes to the Back-Testing
Framework are also meant to implement the 99.5% confidence interval.
ICE Clear Europe states that the historical volatility calculation has
changed in the Back-Testing Framework to use data from, at minimum, the
most recent year (or, if shorter, the period in which the relevant
contract has been cleared). In addition, ICE Clear Europe contends
that, 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. ICE Clear Europe also states
that 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 and that disclosed information is aggregated in a
form that does not breach confidentiality. ICE Clear Europe also
contends that the policy also provides a framework for monitoring 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. Finally, ICE Clear Europe states that the
Back-Testing Framework will be reviewed and approved by the CDS Risk
Committee and ICE Clear Europe Board at least annually.
ICE Clear Europe states 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.
ICE Clear Europe contends that a detailed analysis of the stress
testing and sensitivity testing results is to be 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. ICE Clear Europe states the
Stress-Testing Framework amendments would also add pure historical
scenarios, as required under EMIR, that are applied at the single name
level, using the same date across all instruments. ICE Clear Europe
also states that 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. ICE Clear Europe also states
that the guaranty fund stress scenario has also been clarified, and is
designed to account for: (1) The occurrence of credit events for two
Clearing Members and three reference entities on which the defaulted
Clearing Members sold protection, (2) adverse contracting or widening
credit spread scenarios, (3) adverse widening of Index-single name
``basis,'' and (4) adverse changes of the default-free discount terms
structure. ICE Clear Europe contends that 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 and
disclosed information is aggregated in a form that does not breach
confidentiality. Finally, ICE Clear Europe states the CDS Stress
Testing framework is to be reviewed and approved by the CDS Risk
Committee and ICE Clear Europe Board at least annually.
ICE Clear Europe contends that minor improvements have been made to
the Default Management Framework, namely, (1) ICE Clear Europe will
conduct a quarterly (rather than annual) review of its Default
Management Framework, and (2) ICE Clear Europe will perform a mock
Clearing Member default test at least annually.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \6\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if the
Commission finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such self-regulatory organization. Section 17A(b)(3)(F)
of the Act \7\ requires, among other things, that the rules of a
clearing agency are 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 and, in general, to protect investors and the public
interest. In addition, Rule 17Ad-22(b)(1)-(3) requires a registered
clearing agency that performs central counterparty services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, among other things, measure its
credit exposures to its participants at least once a day and
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limit its exposures to potential losses from defaults by its
participants, use margin requirements to limit its credit exposures to
participants under normal market conditions, and if it performs central
counterparty services for security-based swaps, maintain sufficient
financial resources to withstand, at a minimum, a default by the two
participant families to which it has the largest exposures in extreme
but plausible market conditions.\8\
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\6\ 15 U.S.C. 78s(b)(2)(C).
\7\ 15 U.S.C. 78q-1(b)(3)(F).
\8\ 17 CFR 240.17Ad-22(b)(1)-(3).
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The Commission finds that the proposed rule change is consistent
with Section 17A of the Act \9\ and the rules thereunder applicable to
ICE Clear Europe. ICE Clear Europe represents that the proposed rule
change will enhance the financial resources available to the Clearing
House by imposing more conservative initial margin requirements, while
also reducing the risk of loss to market participants resulting from a
default by a Clearing Member or other customer. ICE Clear Europe
further states that the proposed rule change will impose more frequent
reviews and tests of its risk management procedures. The Commission
therefore believes that the proposed enhancements to ICE Clear Europe's
risk policies are designed 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 consistent with Section 17A(b)(3)(F).\10\ In
addition, the Commission believes the proposed Risk Policy Amendments
are reasonably designed to ensure that ICE Clear Europe continues to
meet the risk management requirements of Rule 17Ad-22(b)(1)-(3).\11\
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\9\ 15 U.S.C. 78q-1.
\10\ 15 U.S.C. 78q-1(b)(3)(F).
\11\ 17 CFR 240.17Ad-22(b)(1)-(3).
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Section 19(b)(2)(C)(iii) of the Act \12\ allows the Commission to
approve a proposed rule change earlier than 30 days after the date of
publication of the notice of the proposed rule change in the Federal
Register where the Commission finds good cause for so doing and
publishes the reason for the finding. In its filing, ICE Clear Europe
requested that the Commission approve the proposed rule change on an
accelerated basis for good cause shown. ICE Clear Europe has
represented that the proposed Risk Policy Amendments are necessary in
order to comply with requirements under EMIR in connection with its
authorization as a central counterparty under EMIR. ICE Clear Europe
further notes that failure to have the amendments in effect, and to be
in compliance with the EMIR requirements, may adversely affect the
approval of its authorization application and therefore its ability to
do business as a recognized central counterparty. Accordingly, the
Commission finds that good cause exists to approve the proposed rule
change on an accelerated basis pursuant to Section 19(b)(2)(C)(iii) of
the Act.\13\
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\12\ 15 U.S.C. 78s(b)(2)(C)(iii).
\13\ 15 U.S.C. 78s(b)(2)(C)(iii).
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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 \14\ and the
rules and regulations thereunder.
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\14\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (File No. SR-ICEEU-2014-10) be,
and hereby is, approved on an accelerated basis.\16\
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\15\ 15 U.S.C. 78s(b)(2).
\16\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18752 Filed 8-7-14; 8:45 am]
BILLING CODE 8011-01-P