[Federal Register Volume 79, Number 171 (Thursday, September 4, 2014)]
[Notices]
[Pages 52794-52797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-20997]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72941; File No. SR-ICC-2014-14]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change to Add Rules Related to the Clearing of
Standard Western European Sovereign CDS Contracts
August 28, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 25, 2014, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared primarily by ICC. 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 purpose of the proposed rule change is to adopt new rules that
will provide the basis for ICC to clear additional credit default swap
contracts. Specifically, ICC is proposing to amend Chapter 26 of its
rules to add Subchapter 26I and to amend the ICC Risk Management
Framework to provide for the clearance of Standard Western European
Sovereign CDS contracts, specifically the Republic of Ireland, the
Italian Republic, the Portuguese Republic, and the Kingdom of Spain
(collectively, the ``SWES Contracts''). The proposed change is
dependent on the approval and implementation of the proposed rule
change contained in ICC-2014-11 and therefore, the text of the proposed
rule change in Exhibit 5 should be read in conjunction with the text of
the proposed rule change in Exhibit 5 to ICC-2014-11.\3\
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\3\ See Securities Exchange Act Release No. 34-72701 (Jul. 29,
2014), 79 FR 45565 (Aug. 5, 2014) (SR-ICC-2014-11). The text of the
proposed rule change for rule filing SR-ICC-2014-11 can also be
found on ICC's Web site at https://www.theice.com/clear-credit/regulation.
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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, ICC 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. ICC 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
1. Purpose
ICC has identified SWES Contracts as products that have become
increasingly important for market participants to utilize for risk
management. ICC believes that clearance of SWES Contracts will
facilitate the prompt and accurate clearance and settlement of
securities transactions and derivative agreements, contracts, and
transactions for which it is responsible.
SWES Contracts have similar terms to the Standard North American
Corporate Single Name CDS contracts (``SNAC Contracts'') currently
cleared by ICC and governed by Subchapter 26B of the ICC Rules, the
Standard Emerging Sovereign CDS contracts (``SES Contracts'') currently
cleared by ICC and governed by Subchapter 26D of the ICC Rules, and the
Standard European Corporate Single
[[Page 52795]]
Name CDS contracts (``SDEC Contracts'') currently cleared at ICC and
governed by Subchapter 26G of the ICC Rules. Accordingly, the proposed
rules found in Subchapter 26I largely mirror the ICC Rules for SNAC
Contracts in Subchapter 26B, SES Contracts in Subchapter 26D, and SDEC
Contracts in Subchapter 26G, with certain modifications that reflect
differences in terms and market conventions between those contracts and
SWES Contracts. SWES Contracts will be denominated in United States
Dollars.
The proposed rules set forth in Subchapter 26I incorporate
references to revised Credit Derivatives Definitions, as published by
the International Swaps and Derivatives Association, Inc. (``ISDA'') on
February 21, 2014 (the ``2014 ISDA Definitions''). ICC has a rule
filing currently pending with the Commission consisting of proposed
amendments to the ICC Rules to incorporate references to the 2014 ISDA
Definitions (ICC-2014-11).\4\ This filing has a planned effective date,
consistent with the industry implementation date of the 2014 ISDA
Definitions, on September 22, 2014. The 2014 ISDA Definitions will be
applicable to SWES Contracts cleared by ICC, and, as such, references
to the 2014 ISDA Definitions are utilized throughout the SWES
Contracts-related rules found in Subchapter 26I. Thus, approval and
implementation of clearing SWES Contracts is dependent on the approval
and implementation of the proposed rule change contained in ICC-2014-11
and therefore, the text of the proposed rule change in Exhibit 5 should
be read in conjunction with the text of the proposed rule change in
Exhibit 5 to ICC-2014-11.\5\ ICC will not implement the 2014 ISDA
Definitions-related rule changes until regulatory approval is received
and until the industry implementation date of September 22, 2014.
Similarly, ICC will not begin clearing SWES Contracts until the later
of receipt of regulatory approval or the industry implementation date
of September 22, 2014. SWES Contracts will only be offered on the 2014
ISDA Definitions.
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\4\ Id.
\5\ Id.
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Rule 26I-102 (Definitions) sets forth the definitions used for the
SWES Contracts. An ``Eligible SWES Reference Entity'' is defined as
``each particular Reference Entity included in the List of Eligible
SWES Reference Entities,'' which is a list maintained, updated and
published from time to time by ICC containing certain specified
information with respect to each reference entity. If ICC determines to
add or remove additional SWES Contracts from the List of Eligible SWES
Reference Entities, it will seek approval from the Commission for such
contracts (or for a class of product including such contracts) by a
subsequent filing. The remaining definitions are substantially the same
as the definitions found in Subchapters 26B, 26D, and 26G of the ICC
Rules, other than certain conforming changes.
ICC Rules 26I-203 (Restriction on Activity), 26I-206 (Notices
Required of Participants with respect to SWES Contracts), 26I-303 (SWES
Contract Adjustments), 26I-309 (Acceptance of SWES Contracts by ICE
Clear Credit), 26I-315 (Terms of the Cleared SWES Contract), 26I-316
(Relevant Physical Settlement Matrix Updates), 26I-502 (Specified
Actions), and 26I-616 (Contract Modification) reflect or incorporate
the basic contract specifications for SWES Contracts and are
substantially the same as under Subchapters 26B, 26D, and 26G of the
ICC Rulebook.
Clearing SWES Contracts will not require any changes to ICC's
operational procedures, as the SWES Contracts operate similarly to the
Standard Emerging European and Middle Eastern Sovereign Single Names,
currently cleared by ICC. The addition of SWES Contracts to ICC's
product offering requires risk specific changes to the ICC Risk
Management Framework, which are described below.
ICC's Risk Management Framework has been revised to incorporate
additional model features designed to generalize the currently
established Specific Wrong Way Risk (``SWWR'') Initial Margin (``IM'')
requirement. The proposed changes to the ICC Risk Management Framework
generalize the SWWR relative to General Wrong Way Risk (``GWWR''). This
generalization of Wrong Way Risk (``WWR'') is introduced to account for
additional risk present in CDS instruments whose reference entities
exhibit a high level of correlation with those Clearing Participants
clearing the relevant name, or with an entity that is guaranteed by, or
affiliated with, those Clearing Participants. To this effect, the
offering of SWES Contracts introduces potential GWWR in the form of
country/region of domicile WWR. Examples of GWWR related to SWES
include but are not limited to a CP selling protection on its country
of domicile, or a European domiciled Clearing Participant selling
protection on European sovereign reference entities. To address such
risks, an additional Jump To Default Risk (``JTDR'') requirement is
established.
Accordingly, the Risk Management Framework contains revisions to
the calculation of the portfolio JTDR requirement. Specifically, the
calculations have been updated to incorporate the concept of WWR as
described below in reference to the quantitative and qualitative
approaches. These revisions will have no material impact on the size of
the Guaranty Fund.
ICC's proposed changes adopt a combination of qualitative and
quantitative approaches to capture GWWR. Under the revised ICC Risk
Management Framework, an additional contribution to the JTDR
requirement will be required when Clearing Participants sell protection
on SWES reference entities exhibiting a high degree of association with
itself (quantitative approach) or by virtue of selling protection on
its country of domicile (qualitative approach). For the qualitative
case, ICC will require full collateralization of the additional Jump To
Default (``JTD'') loss. In determining a Clearing Participants' country
of domicile for purposes of the qualitative determination, ICC refers
to the International Organization for Standardization (``ISO'') country
code for the issuer's ultimate parent country of risk. The ISO
methodology considers management location, country of primary listing,
country of revenue and reporting currency of the issuer.
The quantitative approach applies to the additional risk arising
from Clearing Participants selling protection on SWES reference
entities, other than the Clearing Participant's country of domicile, on
which the Clearing Participant's domicile has a high degree of
correlation. If the additional SWES JTD losses and the dependence
levels breach specific threshold amounts, additional GWWR
collateralization will be required. The additional collateralization is
a function of the level of correlation between the Clearing
Participants and the SWES reference entities and will become more
conservative as the level of correlation increases.
As a result of these enhancements to the ICC Risk Management
Framework, Rule 26D-309 (Acceptance of SES Contracts by ICE Clear
Credit), part (c) has been revised to remove language which prohibits
the acceptance of Trades for clearance and settlement if at the time of
submission or acceptance of the Trade or at the time of novation the
Participant submitting the Trade is domiciled in the country of the
Eligible Standard Emerging Sovereign (``SES'') Reference Entity for
such SES contract. The new GWWR methodology will
[[Page 52796]]
apply to all sovereign contracts cleared by ICC, including SES
contracts.
2. Statutory Basis
Section 17A(b)(3)(F) of the Act \6\ 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 and to comply with the provisions of the Act and the rules
and regulations thereunder. These contracts are similar to the SNAC,
SES, and SDEC Contracts currently cleared by ICC, and the SWES
Contracts will be cleared pursuant to ICC's existing clearing
arrangements and related financial safeguards, protections and risk
management procedures, except as described herein. The addition of SWES
Contracts will allow market participants an increased ability to manage
risk. ICC believes that acceptance of the new contracts, on the terms
and conditions set out in the ICC Rules, is consistent with the prompt
and accurate clearance of and settlement of securities transactions and
derivative agreements, contracts and transactions cleared by ICC, the
safeguarding of securities and funds in the custody or control of ICC,
and the protection of investors and the public interest, within the
meaning of Section 17A(b)(3)(F) of the Act.\7\ ICC performed a
comprehensive risk analysis related to the clearing of SWES Contracts
and identified the introduction of GWWR as a new risk and accommodated
for this risk in the ICC Risk Management Framework, as discussed
herein. ICC identified no additional risk or systemic risk concerns
introduced by clearing SWES Contracts, not accounted for by ICC's
existing risk management procedures. As such, clearing the new SWES
Contracts is consistent with the requirement of promoting and
protecting the public interest in Section 17A(b)(3)(F).\8\
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\6\ 15 U.S.C. 78q-1(b)(3)(F).
\7\ Id.
\8\ Id.
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Clearing of the additional SWES Contracts will also satisfy the
requirements of Rule 17Ad-22.\9\ In particular, in terms of financial
resources, ICC will apply its existing margin methodology to the
additional contracts, with enhancements to address General Wrong Way
Risk discussed above. ICC believes that this model will provide
sufficient margin to cover its credit exposure to its clearing members
from clearing such contracts, consistent with the requirements of Rule
17Ad-22(b)(2).\10\ In addition, ICC believes its Guaranty Fund, under
its existing methodology, will, together with the required margin,
provide sufficient financial resources to support the clearing of the
additional contracts consistent with the requirements of Rule 17Ad-
22(b)(3).\11\ ICC also believes that its existing operational and
managerial resources will be sufficient for clearing of the additional
contracts, consistent with the requirements of Rule 17Ad-22(d)(4),\12\
as the new contracts are substantially the same from an operational
perspective as existing contracts. Similarly, ICC will use its existing
settlement procedures and account structures for the new contracts,
consistent with the requirements of Rule 17Ad-22(d)(5), (12) and (15)
\13\ as to the finality and accuracy of its daily settlement process
and avoidance of the risk to ICC of settlement failures. ICC determined
to accept the SWES contracts for clearing in accordance with its
governance process, which included review of the contracts and related
risk management considerations (and the enhancements to the margin
methodology for General Wrong Way Risk discussed herein) by the ICC
Risk Committee and approval by its Board. These governance arrangements
are consistent with the requirements of Rule 17Ad-22(d)(8).\14\
Finally, ICC will apply its existing default management policies and
procedures for the SWES contracts. ICC believes that these 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 in respect of the additional
single names, in accordance with Rule 17Ad-22(d)(11).\15\
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\9\ 17 CFR 240.17Ad-22.
\10\ 17 CFR 240.17Ad-22(b)(2).
\11\ 17 CFR 240.17Ad-22(b)(3).
\12\ 17 CFR 240.17Ad-22(d)(4).
\13\ 17 CFR 240.17Ad-22(d)(5), (12) and (15).
\14\ 17 CFR 240.17Ad-22(d)(8).
\15\ 17 CFR 240.17Ad-22(d)(11).
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B. Self-Regulatory Organization's Statement on Burden on Competition
ICC does not believe the proposed rule change would have any
impact, or impose any burden, on competition. The proposed GWWR
methodology and the additional JTDR will apply uniformly to all ICC
Clearing Participants, as applicable. The SWES Contracts will be
available for clearing to all ICC Clearing Participants. The clearing
of SWES Contracts by ICC does not preclude the offering of this product
for clearing by other market participants. Therefore, ICC does not
believe the proposed rule change imposes any burden on competition that
is inappropriate 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 rule change have not been
solicited or received. ICC will notify the Commission of any written
comments received by ICC.
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. 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-ICC-2014-14 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-ICC-2014-14. 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
[[Page 52797]]
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 also will be available for inspection
and copying at the principal office of ICE Clear Credit and on ICE
Clear Credit's Web site at https://www.theice.com/clear-credit/regulation.
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-ICC-2014-14
and should be submitted on or before September 25, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-20997 Filed 9-3-14; 8:45 am]
BILLING CODE 8011-01-P