[Federal Register Volume 82, Number 92 (Monday, May 15, 2017)]
[Notices]
[Pages 22357-22360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09714]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80631; File No. SR-ICEEU-2017-006]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Proposed Rule Change, Security-Based Swap Submission or Advance
Notice Relating to the CDS End-of-Day Price Discovery Policy
May 9, 2017.
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 April 26, 2017, 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. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change, Security-Based Swap Submission, or Advance Notice
The principal purpose of the changes is to modify certain aspects
of ICE Clear Europe's CDS End-of-Day Price Discovery Policy (the ``EOD
Price Discovery Policy'') and Price Submission Disciplinary Framework.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change, Security-Based Swap Submission or
Advance Notice
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 such statements.
[[Page 22358]]
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change, Security-Based Swap Submission or
Advance Notice
1. Purpose
The purpose of the rule change is to amend the EOD Price Discovery
Policy to change the calculation of firm trade notional limits for
single-name CDS contracts. ICE Clear Europe also proposes to make
certain amendments to its Price Submission Disciplinary Framework (the
``Disciplinary Framework''), which addresses missed price submissions
by CDS Clearing Members for CDS contracts (``Missed Submissions''). The
proposed revisions are described in detail herein. ICE Clear Europe
does not otherwise propose to change its Clearing Rules \3\ or
Procedures in connection with these amendments.
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\3\ Capitalized terms used but not defined herein will have the
meanings specified in the ICE Clear Europe Clearing Rules (the
``Rules'').
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Under the EOD Price Discovery Policy, CDS Clearing Members are
required to submit end-of-day prices for specific instruments relating
to their open CDS interest at the Clearing House. ICE Clear Europe
determines end-of-day settlement price levels from these price
submissions, using its settlement price methodology. (ICE Clear Europe
is not proposing to change the settlement price methodology in
connection with these amendments.) To encourage CDS Clearing Members to
submit high-quality price submissions, ICE Clear Europe, on random
days, selects a subset of instruments to be eligible for required firm
trades in cleared CDS contracts between CDS Clearing Members (``Firm
Trades''). ICE Clear Europe currently utilizes a ``cross and lock''
algorithm for identifying Firm Trades. CDS Clearing Member pairs
identified by the algorithm as crossed or locked markets in these
instruments, based on their price submissions, may be required to enter
into Firm Trades with each other.
ICE Clear Europe currently establishes pre-defined maximum notional
amounts for Firm Trades in single-name CDS contracts. Currently,
single-name Firm Trade notional limits are set at the CDS Clearing
Member level. The notional limits are intended to limit the risk (on an
overnight basis) that a given CDS Clearing Member may face as a result
of a Firm Trade, including in situations where submission errors or
outlying pricing submissions have led to a Firm Trade.
ICE Clear Europe is proposing to modify the EOD Price Discovery
Policy to provide that single-name Firm Trade notional limits will
instead apply on a group level to affiliated CDS Clearing Members,
rather than at an individual CDS Clearing Member level. Under the
current approach, an affiliate group may have multiple clearing
memberships, which in turn leads to a group-wide limit that can be
multiples of the single entity limit. Affiliated groups may use this
approach, for example, where different clearing entities are needed for
house or customer transactions originating from different
jurisdictions. The result can be that an affiliated group with multiple
CDS Clearing Members may be subject to significantly higher risk of
Firm Trades, based on the aggregate notional, than it would if it
cleared all of the same business through a single legal entity. In
addition, over time, ICE Clear Europe has broadened the process for
determining Firm Trades to include all submissions, including those
classified as outlying pricing submission (or ``obvious errors''),
which has made Clearing Members eligible to receive Firm Trades on a
potentially wider range of submissions. As a result, there is
heightened interest in adjusting the Firm Trade allocation process so
that CDS Clearing Members are not overly penalized for Firm Trades in
terms of group-wide risk exposure.
Under the proposed changes, Firm Trade notional limits for single-
name CDS will be implemented at the ``CP affiliate group'' level. A CP
affiliate group consists of all CDS Clearing Members that own, are
owned or are under common ownership with other CDS Clearing Members. In
determining Firm Trades, ICE Clear Europe will track the notional
amounts of potential Firm Trades assigned to each CDS Clearing Member
at the risk sub-factor and sector level. If the cumulative risk sub-
factor notional for the CP affiliate group exceeds the notional limit
for that sub-factor, ICE Clear Europe will not designate further Firm
Trades in that risk sub-factor for any CDS Clearing Member in the CP
affiliate group. Cumulative sector notional limits will be applied
similarly to CP affiliate groups. As under the current approach, the
notional amount of reversing transactions will not count toward CP
affiliate group notional limits.
Certain other changes have been made to the EOD Price Discovery
Policy to update references to the Clearing House's clearing risk
department and head of clearing risk, and certain other risk personnel.
The amendments add certain background standards relating to risk
appetite and related metrics and limits, reflecting the overall
approach of the Clearing House to such matters. The policy is also
being revised to specify additional procedures relating to model
validation and policy review, consistent with overall Clearing House
risk governance policies. Specifically, relevant underlying models
(within the definition thereof established by ICE Clear Europe) used to
support the EOD Price Discovery Policy will be subject to an annual
independent validation. The EOD Price Discovery Policy itself is to be
reviewed by the CDS Risk Committee at least annually. In addition,
material changes must be approved by the Board on the advice of the CDS
Risk Committee and Board Risk Committee prior to implementation. The
policy specifies certain metrics to be tracked by the clearing risk
department and risk oversight department, and sets out escalation and
notification protocols for those metrics, as well as for any deviations
from the policy.
ICE Clear Europe is also proposing to amend the Price Submission
Disciplinary Framework, specifically with regard to the procedures for
imposing fines, known as fixed cash assessments, for Missed
Submissions. The amendments formalize certain procedures around notices
and preliminary determinations with respect to Missed Submissions,
consistent with the procedures for disciplinary proceedings under Part
10 of the Rules. Consistent with the current framework, at the end of
each calendar month, ICE Clear Europe will collect the details of
alleged Missed Submission(s). The Clearing House will issue a Notice of
Investigation under Rule 1002 to the relevant CDS Clearing Member with
alleged Missed Submission(s). Within five days after the Notice of
Investigation, and following an investigation, ICE Clear Europe will
issue a Letter of Mindedness under Rule 1002 setting out its
preliminary factual conclusions and intended course of action (which
would be imposition of a fixed cash assessment). The CDS Clearing
Member will have ten days from the date of the Letter of Mindedness to
note any factual errors or objections. Following such ten day period,
the Clearing House would finalize its findings and course of action.
ICE Clear Europe does not propose to change the levels of cash
assessments for Missed Submissions that are determined to have occurred
under the revised policy.
During an investigation into a Missed Submission, if a CDS Clearing
Member is able to demonstrate that the alleged Missed Submission(s) are
the first instance(s) of a Missed Submission for a particular
instrument, provide an adequate explanation for the Missed
[[Page 22359]]
Submission, and a remedial plan of action to prevent future Missed
Submissions, ICE Clear Europe may take no further action, provided that
another Missed Submission for the same type of instrument does not
occur within ninety days of the first Missed Submission. If a second
Missed Submission were to occur in that period, the CDS Clearing Member
will be subject to a cash assessment for both the initial and
subsequent Missed Submissions.
In addition, consistent with the current framework, if a CDS
Clearing Member is able to demonstrate that an alleged Missed
Submission was due to extraordinary circumstances outside of the CDS
Clearing Member's control (such as a market-wide disruption), the head
of clearing compliance has the ability to determine that a CDS Clearing
Member should not be subject to a cash assessment. Neither of these two
exceptions will preclude ICE Clear Europe from undertaking disciplinary
action against a CDS Clearing Member who persistently fails to submit
end-of-day prices or submits prices treated as obvious errors by the
end of day pricing algorithm.
2. Statutory Basis
ICE Clear Europe believes that the proposed amendments are
consistent with the requirements of Section 17A of the Act \4\ and the
regulations thereunder applicable to it. Section 17A(b)(3)(F) of the
Act \5\ in particular 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
safeguarding of securities and funds in the custody or control of the
clearing agency, and the protection of investors and the public
interest. The proposed amendments are designed to enhance the Clearing
House's EOD Price Discovery Policy, which is a key aspect of the risk
management and daily settlement procedures of the Clearing House. In
ICE Clear Europe's view, the changes will maintain the strong incentive
of Clearing Members to provide accurate end-of-day price submissions,
while appropriately treating affiliated CDS Clearing Members as a group
for purposes of the notional limit. In the Clearing House's experience,
setting notional limits on a CP affiliate group basis is consistent
with CDS Clearing Member price submission practices, where end-of-day
submissions from multiple affiliated entities often are made by the
same personnel or desk and reflect the overall affiliate group's view
on the value of the relevant instrument. The amendments will avoid
unfairly penalizing affiliated Clearing Members with Firm Trades, and
limit the potential overnight risk that a CP affiliate group may face
as a result of the Firm Trade process. The ICE Clear Europe believes
the amendments will not adversely affect the integrity of the
settlement price determination process, as all CDS Clearing Members
will continue to be subject to potential Firm Trades for any given
price submission, on a randomized basis. As a result ICE Clear Europe
does not believe the amendments will change price submission behavior
or materially limit the effectiveness of the Firm Trade process as an
incentive to robust price submissions. Furthermore, ICE Clear Europe
believes that the enhancements to the Disciplinary Framework will
reinforce the price submission process, by clarifying the procedures
for implementing fines and cash assessments for Missed Submissions. As
a result, in ICE Clear Europe's view, the amendments are consistent
with, and will promote, the prompt and accurate clearance and
settlement of securities transactions and derivatives agreements,
contracts and transactions, within the meaning of Section 17A(b)(3)(F)
of the Act.\6\
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\4\ 15 U.S.C. 78q-1.
\5\ 15 U.S.C. 78q-1(b)(3)(F).
\6\ 15 U.S.C. 78q-1(b)(3)(F).
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ICE Clear Europe also believes that the amendments will not permit
unfair discrimination among participants in the use of the Clearing
House, within the meaning of Section 17A(b)(3)(F). In particular, the
amendments are designed to treat affiliated groups of CDS Clearing
Members fairly, such that they are not subject to excessive overnight
risk as a result of the Firm Trade submission process, as potentially
applied to multiple CDS Clearing Member entities within the group. The
approach thus is designed to prevent the Firm Trade process from
disadvantaging those CP affiliate groups that have chosen to conduct
their clearing business through multiple CDS Clearing Members, as
opposed to a single clearing entity. This is particularly appropriate
where a single or consolidated trading desk is submitting end-of-day
prices for the entire CP affiliate group.
For similar reasons, ICE Clear Europe believes that the amendments
are consistent with the requirements of Section 17A(b)(3)(D) \7\ of the
Act, which requires that the rules of a clearing agency provide for the
equitable allocation of reasonable fees, dues and other charges among
its participants. As discussed above, the amendments are intended to
equitably allocate the risk and potential cost of Firm Trades across
the members of a CP affiliate group, to avoid unfairly disadvantaging
each CDS Clearing Member in that group. The amendments mitigate the
potential overnight risk exposure of an entire affiliate group from
Firm Trades, to the same level that would apply if the group cleared
all of its trades through a single CDS Clearing Member entity. At the
same time, all such CDS Clearing Members remain potentially subject to
Firm Trades for any given submission, on a randomized basis. Thus, if
only one CDS Clearing Member within a CP affiliate group submits an
off-market submission resulting in a Firm Trade for that entity only,
the full notional limit would potentially be applicable to it. In ICE
Clear Europe's view, this revised approach provides for the equitable
allocation of reasonable dues, fees and charges among participants,
within the meaning of Section 17A(b)(3)(D) of the Act.\8\
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\7\ 15 U.S.C. 78q-1(b)(3)(D).
\8\ 15 U.S.C. 78q-1(b)(3)(D).
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In addition, in ICE Clear Europe's view, the amended Disciplinary
Framework, like the current framework, provides an appropriately
tailored set of cash assessments for Missed Submissions by Clearing
Members, in light of the importance of end-of-day price submissions to
the Clearing House risk management and settlement procedures. The
framework is thus consistent with the requirements of Section
17A(b)(3)(G) of the Act.\9\ The amendments also enhance the procedures
for investigating and notifying Clearing Members of potential Missed
Submissions and related assessments, and for Clearing Members to
dispute and/or seek a waiver of such assessments in particular
circumstances. In ICE Clear Europe's view, this aspect of the amended
framework is consistent with the requirements of Section 17A(b)(3)(H)
of the Act.\10\
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\9\ 15 U.S.C. 78q-1(b)(3)(G).
\10\ 15 U.S.C. 78q-1(b)(3)(H).
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(B) Clearing Agency's Statement on Burden on Competition
ICE Clear Europe does not believe the proposed rule changes would
have any impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purposes of the Act. The enhancements
to ICE Clear Europe's price discovery process apply uniformly to all
CDS Clearing Members. As discussed above,
[[Page 22360]]
the amendments are designed to avoid unfairly burdening affiliate
groups that have elected to clear through more than one affiliated CDS
Clearing Member, by setting the relevant Firm Trade notional limit at
the CP affiliate group level. In ICE Clear Europe's view, the revised
approach appropriately incentivizes CDS Clearing Member participation
in the end-of-day price submission process, while balancing the risks
of the Firm Trade process fairly across different CDS Clearing Members.
The amendments to the Disciplinary Framework will also apply to all CDS
Clearing Members, and establish new procedures for determinations that
a Clearing Member is subject to a cash assessment as a result of a
Missed Submission. ICE Clear Europe does not believe that the adoption
of the amendments will adversely affect competition among Clearing
Members, or the ability of market participants to clear contracts
generally. The Clearing House also does not believe that the amendments
will reduce access to clearing CDS contracts or limit market
participants' choices for clearing CDS.
The amended policies, like the current policies, may result in
certain costs for Clearing Members that are required to enter into Firm
Trades as a result of obvious errors in their submissions or otherwise,
or are subject to cash assessments as a result of Missed Submissions.
ICE Clear Europe believes that these costs are warranted to enhance the
integrity of the price submission process, and are in any event
generally within the control of the Clearing Member. As a result, ICE
Clear Europe does not believe the proposed amendments impose any burden
on competition that is inappropriate in furtherance of the purposes of
the Act.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments relating to the proposed changes 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, Security-Based
Swap Submission and Advance Notice 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.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, security-based swap submission or advance notice 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-ICEEU-2017-006 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-ICEEU-2017-006. 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, security-
based swap submission or advance notice that are filed with the
Commission, and all written communications relating to the proposed
rule change, security-based swap submission or advance notice 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/clear-europe/regulation#rule-filings.
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-2017-006
and should be submitted on or before June 5, 2017.
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\11\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-09714 Filed 5-12-17; 8:45 am]
BILLING CODE 8011-01-P