[Federal Register Volume 82, Number 114 (Thursday, June 15, 2017)]
[Notices]
[Pages 27539-27541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-12376]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80895; File No. SR-ICC-2017-006]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Proposed Rule Change Relating to ICC's End-of-Day Price Discovery
Policies and Procedures
June 9, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934,\1\ and Rule 19b-4,\2\ notice is hereby given that on May 25,
2017, ICE Clear Credit LLC (``ICC'') filed with the Securities and
Exchange 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. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The principal purpose of the proposed rule change is to make
revisions to the ICC End-of-Day Price Discovery Policies and Procedures
(``Pricing Policy'') related to the market variability bid-offer width
(``BOW'') scaling methodology, as well as additional clean-up changes.
These revisions do not require any changes to the ICC Clearing Rules
(``Rules'').
II. Clearing Agency'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.
[[Page 27540]]
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
ICC proposes revising its Pricing Policy to make changes related to
the market variability BOW scaling methodology. Specifically, ICC
proposes the introduction of an automated assessment of market
variability and, if appropriate, an automatic widening of BOWs. This
automated assessment feature was initially incorporated in the Pricing
Policy as a considered future enhancement; ICC now wishes to update the
policy to implement the enhancement. ICC believes the enhancement will
facilitate the prompt and accurate clearance and settlement of
securities transactions and derivative agreements, contracts, and
transactions cleared by ICC.
(a) Summary of Proposed Changes
Each business day, ICC determines end-of-day levels through its
established price discovery process, based on end-of-day submissions
from its Clearing Participants. ICC uses these levels for mark-to-
market and risk management purposes. As part of its price discovery
process, ICC determines BOWs for each clearing-eligible instrument. The
price discovery process uses the BOWs as inputs in the determination of
end-of-day levels and Firm Trades. ICC has developed systems that
automatically determine the BOW to use for each clearing-eligible
instrument. These systems rely on BOW information from intraday market
data to make this determination. To ensure ICC's systems, informed by
the available intraday data, are determining appropriate BOWs, the Risk
Department currently monitors the markets and has the ability to over-
ride the system-determined BOWs. During periods of high market
variability, there can be a significant number of adjustments required
to be manually determined and manually input into ICC's systems in a
short period, introducing operational risk. ICC's proposal reduces this
operational risk by replacing the manual determination and manual
adjustments with well-defined algorithmic adjustments executed
automatically by ICC's systems.
ICC proposes to introduce an automated widening of BOWs when there
may be a potential discrepancy between the BOWs determined using the
current process and BOWs that are more indicative of market conditions
based on the dispersion of market mid-levels of intraday quotes.\3\ To
determine when a potential for such discrepancy may exist, and by how
much to widen the BOWs, ICC introduces a new metric, Variability Level,
which it computes based on the intraday movement in mid-levels relative
to the pre-defined BOWs established through its current procedures for
extreme market conditions.
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\3\ Pursuant to discussions via email with ICC's internal
counsel on June 8, 2017, staff in the Division of Trading and
Markets modified the text of this sentence to clarify that the
automated widening of the BOWs will occur where there is a potential
discrepancy between the BOWs determined using the current process
and BOWs that are more indicative of market conditions based on the
dispersion of market mid-levels of intraday quotes.
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ICC also proposes clean-up changes to the Pricing Policy, including
removing details of a planned (never implemented) addition of an
intraday quote filtering algorithm and moving the description of the
current process from a footnote to the main body of the document, and
updating inaccurate table references throughout the policy.
Variability Level Determination
Under the proposed enhancement, ICC computes a Variability Level
for the on-the-run instrument in each of the major index families that
it clears. For each instrument, ICC's systems establish a time series
of intraday mid-levels from that day from available market data.\4\ For
intraday mid-levels falling outside of one pre-defined BOW from the
prior day's end-of-day level, the Variability Level is the maximum
deviation of the time series from the prior end-of-day level divided by
the pre-defined BOW. For intraday mid-levels falling within one pre-
defined BOW from the prior day's end-of-day level, the Variability
Level is set to 1.0 if the range of mid-levels in the time series is
less than or equal to the pre-defined BOW, and set to 1.2 if the range
of mid-levels in the time series is greater than the pre-defined BOW.
ICC establishes Variability Bands that correspond to specific ranges of
Variability Level in order to classify the magnitude of the observed
variability into band 0, 1, 2, etc. Variability Band 0 is the lowest
range of Variability Level, Variability Band 1 is the next higher range
of Variability Level, and so on.
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\4\ Pursuant to discussions via email with ICC's internal
counsel on June 8, 2017, staff in the Division of Trading and
Markets modified the text of this sentence to clarify that the time
series of intraday mid-levels is established from mid-levels for
that particular day.
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Market-Proxy Variability Bands
Under the proposed enhancement, to create a measure of the level of
variability for North American (CDX), European (iTraxx), Emerging
Market and Asia Pacific markets, ICC assigns each of the index
instruments for which it determines a Variability Band to one of those
markets. For example, ICC assigns CDX.NA.IG and CDX.NA.HY instruments
to the North American market. ICC determines the Market-Proxy
Variability Band for each market as the largest Variability Band
computed for any of the index instruments assigned to that market.
Determination of EOD BOWs for Index Instruments
ICC's current price discovery process for index instruments selects
between one of three pre-defined BOWs, based on which is most
representative of the BOWs observed in intraday market data. The pre-
defined Regime 1 (normal), Regime 2 (volatile) and Regime 3 (extreme)
BOWs are progressively wider. The proposed enhancement adjusts the
regime selected by the current process depending on the computed
Market-Proxy Variability Band for the market to which ICC has assigned
the given instrument. The adjustment is none, one regime (moving from
Regime 1 to Regime 2 or from Regime 2 to Regime 3), and two regimes
(moving from Regime 1 to Regime 3 or from Regime 2 to Regime 3). Higher
Market-Proxy Variability Bands result in a larger adjustment. ICC
assigns index instruments to specific markets based on the region
related to the reference entities of their constituent.
Determination of EOD BOWs for Single Name (``SN'') Instruments
ICC's current price discovery process derives BOWs for SN
instruments based on the BOWs quoted in intraday market data, and
applies certain scaling factors to arrive at the EOD BOW for SN
instruments. The proposed enhancement applies an additional scaling
factor to the BOWs derived by the current process, depending on the
computed Market-Proxy Variability Band for the market to which ICC
assigns the given instrument. The scaling factors start at 1 (no
adjustment) and are larger for higher Market-Proxy Variability Bands.
ICC assigns SN instruments to markets based on the region related to
the reference entity of the instrument.
Determination of Consensus BOWs and Correction of Inaccurate Table
References
The current version of the Pricing Policy includes details of an
intraday quote filtering algorithm, which was, at the time of
inclusion, a planned enhancement and which has never been implemented
to determine consensus
[[Page 27541]]
BOWs. ICC proposes deleting the text describing such algorithm. The
text describing ICC's current practices for determining consensus BOWs
is currently set forth in a footnote within the policy. ICC proposes
moving this description into the main text of the policy. ICC has also
corrected inaccurate table references throughout the policy.
(b) Statutory Basis
Section 17A(b)(3)(F) of the Act \5\ requires, among other things,
that the rules of a clearing agency be designed to protect investors
and the public interest and to comply with the provisions of the Act
and the rules and regulations thereunder. ICC believes that the
proposed rule changes are consistent with the requirements of the Act
and the rules and regulations thereunder applicable to ICC, in
particular, to Section 17(A)(b)(3)(F),\6\ [sic]because ICC believes
that the proposed rule changes will assure the prompt and accurate
clearance and settlement of securities transactions, derivatives
agreements, contracts, and transactions, as the proposed revisions
allow for the automatic adjustment of BOWs to appropriate levels during
periods of high market variability, thus assisting ICC in ensuring it
maintains market appropriate BOWs in all market conditions. Appropriate
BOWs ensure ICC maintains an accurate and effective EOD price discovery
process, which includes the determination of EOD pricing levels and
Firm Trade determinations. As such, the proposed changes are designed
to promote the prompt and accurate clearance and settlement of
securities transactions, derivatives agreements, contracts, and
transactions within the meaning of Section 17A(b)(3)(F) \7\ of the Act.
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\5\ 15 U.S.C. 78q-1(b)(3)(F).
\6\ Id.
\7\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
ICC does not believe the proposed rule changes would have any
impact, or impose any burden, on competition. The proposed changes to
ICC's market variability BOW scaling methodology will apply uniformly
across all market participants. Therefore, ICC does not believe the
proposed rule changes 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
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 such 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-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-ICC-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 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 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-2017-006
and should be submitted on or before July 6, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-12376 Filed 6-14-17; 8:45 am]
BILLING CODE 8011-01-P