[Federal Register Volume 79, Number 218 (Wednesday, November 12, 2014)]
[Notices]
[Pages 67213-67215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-26692]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73534; File No. SR-ICC-2014-14]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change To Add Rules Related to the Clearing of
Standard Western European Sovereign CDS Contracts
November 5, 2014.
I. Introduction
On August 25, 2014, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change SR-ICC-2014-14 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 September 4, 2014.\3\ The Commission did not receive comments on the
proposed rule change. On October 17, 2014, the Commission extended the
time period in which to either approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule change
to December 3, 2014.\4\ For the reasons discussed below, the Commission
is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-72941 (Aug. 28,
2014), 79 FR 52794 (Sep. 4, 2014) (SR-ICC-2014-14).
\4\ Securities Exchange Act Release No. 34-73384 (Oct. 17,
2014), 79 FR 63453 (Oct. 23, 2014) (SR-ICC-2014-14).
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II. Description of the Proposed Rule Change
ICC proposes to amend Chapter 26 of the ICC Clearing Rules
(``Rules'') to add Subchapter 26I and to amend the ICC Risk Management
Framework to provide for the clearance of Standard Western European
Sovereign (``SWES'') credit default swap (``CDS'') contracts,
specifically the Republic of Ireland, the Italian Republic, the
Portuguese Republic, and the Kingdom of Spain (collectively, the ``SWES
Contracts'').
[[Page 67214]]
ICC states that the proposed rule change is dependent on the
approval and implementation of the proposed rule change contained in
ICC rule filing SR-ICC-2014-11,\5\ amending the ICC Rules,
Restructuring Procedures, and Risk Management Framework to incorporate
references to the revised Credit Derivatives Definitions, as published
by the International Swaps and Derivatives Association, Inc. (``ISDA'')
on February 21, 2014 (the ``2014 ISDA Definitions'') and that SWES
Contracts will only be offered on the 2014 ISDA Definitions.\6\
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\5\ See Securities Exchange Act Release No. 34-72701 (Jul. 29,
2014); 79 FR 45565 (Aug. 5, 2014) (SR-ICC-2014-11).
\6\ ICC rule filing SR-ICC-2014-11 was approved by the
Commission on September 5, 2014. See Securities Exchange Act Release
No. 34-73007 (Sep. 5, 2014), 79 FR 54331 (Sep. 11, 2014) (SR-ICC-
2014-11).
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ICC represents that the 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 Name CDS
contracts (``SDEC Contracts'') currently cleared at ICC and governed by
Subchapter 26G of the ICC Rules. Accordingly, ICC states that 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.\7\ SWES Contracts will be denominated in
United States Dollars.
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\7\ The proposed changes to the ICC Rules are described in
further detail in the notice of filing of the proposed rule change.
See supra note 3.
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ICC represents that 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 the
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 would be revised to incorporate
additional model features designed to generalize the currently
established Specific Wrong Way Risk (``SWWR'') Initial Margin
requirement. ICC states that the proposed changes to the ICC Risk
Management Framework would generalize the SWWR relative to General
Wrong Way Risk (``GWWR''), and that 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. ICC states that, accordingly, the offering
of SWES Contracts introduces potential GWWR in the form of country/
region of domicile WWR. ICC notes that examples of GWWR related to SWES
include but are not limited to a Clearing Participant selling
protection on its country of domicile, or a European domiciled Clearing
Participant selling protection on European sovereign reference
entities. To address such risks, ICC proposes to establish an
additional Jump To Default Risk (``JTDR'') requirement.
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. ICC represents that these proposed revisions would 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 would be required when Clearing Participants sell
protection on SWES reference entities exhibiting a high degree of
association with itself (based on a quantitative approach established
by ICC to determine the degree of correlation) or by virtue of selling
protection on its country of domicile (based on a qualitative approach
established by ICC to determine a Clearing Participant's country of
domicile).
For the qualitative case (i.e., a Clearing Participant selling
protection on its own country of domicile), ICC would require full
collateralization of the additional Jump To Default (``JTD'') loss. In
determining a Clearing Participants' country of domicile, ICC refers to
the International Organization for Standardization (``ISO'') country
code for the issuer's ultimate parent country of risk. ICC states that
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 quantitative threshold amounts, additional GWWR
collateralization would 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) would be 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. ICC states that the new GWWR methodology will apply
to all sovereign contracts cleared by ICC, including SES contracts.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \8\ 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 \9\ 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.
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\8\ 15 U.S.C. 78s(b)(2)(C).
\9\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission finds that the proposed revisions to the ICC Rules
and Risk Management Framework are consistent with the requirements of
[[Page 67215]]
Section 17A of the Act \10\ and the rules and regulations thereunder
applicable to ICC. Specifically, the Commission believes that the
proposed rules in Subchapter 26I to allow for the clearance of SWES
Contracts, in conjunction with existing ICC Rules and procedures
applicable to the clearing of CDS contracts, are designed to promote
the prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.\11\
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\10\ 15 U.S.C. 78q-1.
\11\ 15 U.S.C. 78q-1(b)(3)(F).
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Additionally, the Commission believes that the proposed revisions
to ICC's Risk Management Framework to address the wrong way risk
associated with clearing SWES Contracts are designed to promote the
prompt and accurate clearance and settlement of securities
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, consistent with Section 17A(b)(3)(F) of the Act.\12\
Specifically, the proposed changes to the ICC Risk Management Framework
would require additional collateralization in the form of initial
margin from Clearing Participants that sell protection on SWES
reference entities exhibiting a high degree of association with itself
or that sell protection on its country of domicile. These proposed
margin model enhancements will provide additional resources to ICC to
address the credit risks associated with the correlation between the
risk of default of an underlying sovereign and the risk of default of a
Clearing Participant that has written credit protection through SWES
Contracts on such sovereign. Accordingly, the Commission believes that
the proposed changes to the Risk Management Framework, in combination
with ICC's existing rules and procedures related to margin and guaranty
fund, are reasonably designed to meet the requirements of Rules 17Ad-
22(b)(1)-(3) \13\ related to the measurement and management of credit
exposures, margin requirements, and the maintenance of sufficient
financial resources required for a registered clearing agency acting as
a central counterparty for security-based swaps.
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\12\ Id.
\13\ 17 CFR 240.17Ad-22(b)(1)-(3).
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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 (SR-ICC-2014-14) be, and hereby
is, approved.\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. 2014-26692 Filed 11-10-14; 8:45 am]
BILLING CODE 8011-01-P