Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change To Adopt ICC's Enhanced Margin Methodology, 79729-79731 [2011-32781]
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Federal Register / Vol. 76, No. 246 / Thursday, December 22, 2011 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not significantly affect the
protection of investors or the public
interest, does not impose any significant
burden on competition, and, by its
terms, does not become operative for 30
days from the date on which it was
filed, or such shorter time as the
Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 10 and Rule 19b4(f)(6) thereunder.11
The Exchange has requested that the
Commission waive the 30-day operative
delay. The Commission believes that
waiver of the operative delay is
consistent with the protection of
investors and the public interest
because such waiver will allow FINRA
to more effectively carry out its
enforcement activities on behalf of the
Exchange. Therefore, the Commission
designates the proposal operative upon
filing.12
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NYSEAMEX–2011–93 on
the subject line.
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires the Exchange to give the
Commission written notice of the Exchange’s intent
to file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
12 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
Paper Comments
Send paper comments in triplicate to
Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090. All submissions should
refer to File Number SR–NYSEAMEX–
2011–93. 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
(https://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
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the principal office of the
Exchange. 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
publicly available. All submissions
should refer to File Number SR–
NYSEAMEX–2011–93, and should be
submitted on or before January 12, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–32816 Filed 12–21–11; 8:45 am]
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79729
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66001; File No. SR–ICC–
2011–03]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change To Adopt ICC’s
Enhanced Margin Methodology
December 16, 2011.
I. Introduction
On November 4, 2011, ICE Clear
Credit LLC (‘‘ICC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change SR–ICC–2011–03 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 November 10,
2011.3 The Commission received three
comment letters regarding the
proposal.4 For the reasons discussed
below, the Commission is granting
approval of the proposed rule change.
II. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
This rule permits ICC to make certain
modifications to its Risk Management
Framework for clearing credit default
swap (‘‘CDS’’) contracts. These
modifications are collectively referred to
as the ‘‘Portfolio Decomposition
Model.’’ A fundamental aspect of ICC’s
Portfolio Decomposition Model is the
recognition that CDS contracts cleared
by ICC referencing broad-based
securities indices are essentially
compositions of specific single-name
CDS contracts. Under the Portfolio
Decomposition Model, ICC would,
among other things, decompose CDS
contracts referencing broad-based
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 34–65699
(November 7, 2011), 76 FR 70206 (November 10,
2011). In its filing with the Commission, ICC
included statements concerning the purpose of and
basis for the proposed rule change. The text of these
statements is incorporated into the discussion of the
proposed rule change in Section II below.
4 See comment letter from Michael Hisler, Swaps
& Derivatives Market Association, dated December
5, 2011 (‘‘SDMA Letter’’) and comment letters from
John Williams, Allen & Overy LLP, on behalf of
Bank of America Merrill Lynch, Barclays Capital,
BNP Paribas, Citi, Credit Suisse Securities (USA),
Deutsche Bank AG, JPMorgan Chase & Co., Morgan
Stanley and UBS Securities LLC, dated December
1, 2011 and December 5, 2011 (‘‘Allen & Overy
Letters’’). Allen & Overy LLP’s December 5, 2011
letter amended its December 1, 2011 letter, with the
sole change consisting of the addition of The
Goldman Sachs Group, Inc., Nomura Securities
International, and The Royal Bank of Scotland plc
as signatories.
2 17
E:\FR\FM\22DEN1.SGM
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79730
Federal Register / Vol. 76, No. 246 / Thursday, December 22, 2011 / Notices
securities indices into single-name,
index-derived positions with notional
amounts corresponding to their relative
weight in the index.
In connection with the decomposition
of CDS contracts referencing broadbased securities indices, ICC will
incorporate jump-to-default risk as a
component of the risk margin associated
with the clearing of CDS index
products. Because ICC’s prior
methodology did not include jump-todefault margin requirements for CDS
index products, this change will result
in a better measurement of the risk
associated with clearing these contracts.
ICC believes that the Portfolio
Decomposition Model also reflects a
number of other enhancements to the
ICC Risk Management Framework.
Examples of these changes include:
Replacing standard deviation with mean
absolute deviation as a measure of
spread volatility, implementing an autoregressive process to obtain multihorizon risk measures, expanding
spread response scenarios, introducing
liquidity margin requirements for CDS
index products, and base concentration
charges.
In addition, implementation of the
Portfolio Decomposition Model will also
allow ICC to provide portfolio margin
treatment between index CDS contracts
and offsetting single-name CDS
contracts. These portfolio benefits will
generally involve ICC providing margin
offsets across single-name CDS contracts
and index CDS contracts that are held
in a clearing participant’s portfolio
based on correlation measurements.
To date, ICC has not offered such
portfolio margin treatment strictly for
operational reasons. However, ICC has
informed the Commission that it will be
operationally ready to offer portfolio
margining with respect to its clearing
participants’ proprietary positions
sometime in mid-December 2011. In its
filing with the Commission, ICC noted
that the portfolio margining treatment
will only be available to ICC clearing
participants’ proprietary positions
because ICC does not currently clear
single-name CDS contracts for customerrelated transactions. Accordingly, there
are currently no customer-related
positions in single-name CDS contracts
that would qualify for portfolio
margining treatment. Because the
portfolio margining benefits afforded by
the enhancements to the model are
available to all of ICC’s participants
with respect to their proprietary
positions, ICC believes that the
proposed rule change does not unfairly
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discriminate with respect to similarlysituated participants.5
According to ICC, the enhancements
effected by this proposed rule change
have been reviewed and/or
recommended by the ICC Risk Working
Group, ICC Risk Committee, ICC Board
of Managers, the Federal Reserve Bank
of New York and the New York State
Banking Department. In addition, ICC
commissioned a third-party riskmanagement consultant to complete a
model assessment of ICC’s Portfolio
Decomposition Model.
III. Comments
The Commission received three
comment letters on the proposed rule
change from two commenters, both of
which were supportive of the changes.6
Specifically, one commenter noted that
by permitting portfolio margining to
occur with respect to clearing
participants’ proprietary accounts, ICC’s
proposed Portfolio Decomposition
Model would optimize more efficient
risk management through netting,
thereby promoting greater stability for
central clearing.7 This commenter noted
that, because of the high degree of
correlation between single-name CDS
contracts and index CDS contracts,
market participants often maintain
hedged portfolios of these products,
thereby increasingly the impact that
these changes are likely to have
throughout the market. The second
commenter, which represented a group
of eight large financial firms, expressed
a similar view with respect to the ability
of portfolio margining to bring about a
more stable central clearing regime and
concluded that the proposed rule
change represented ‘‘an initial positive
step for the industry.’’ 8
IV. Discussion
Section 19(b)(2)(B) of the Act directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if it finds that such
5 ICC further indicated in its rule filing that it
would expect to offer portfolio margining treatment
to customer-related transactions following: (i) The
commencement of clearing single-name CDS
contracts for customer-related transactions and (ii)
the granting of certain relief by the Commission and
the Commodity Futures Trading Commission
(‘‘CFTC’’) in response to requests by ICC.
Specifically, on November 7, 2011, ICC formally
filed with the Commission a petition to provide
portfolio margining treatment for customer-related
positions in anticipation of ICC offering clearing of
single-name CDS contracts for customer-related
transactions in the future. Available at: https://www.
sec.gov/rules/petitions.shtml. ICC filed a similar
request with the CFTC on October 4, 2011, available
at: https://www.cftc.gov/PressRoom/PressReleases/
pr6145-11.
6 See supra note 4.
7 See SDMA Letter.
8 See Allen & Overy Letters.
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proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to such organization.9 For
example, Section 17A(b)(3)(F) of the
Act 10 requires, among other things, that
the rules of a clearing agency be
designed to remove impediments to and
perfect the mechanism of a national
system for the prompt and accurate
clearance and settlement of securities
transactions and to assure the
safeguarding of securities and funds in
the custody or control of the clearing
agency or for which it is responsible.
If approved, the proposed rule change
would allow ICC to provide portfolio
margining offsets to its participants to
the extent that the participants maintain
proprietary portfolios that hedge index
CDS products against single-name CDS
products. ICC believes that these
changes promote greater capital
efficiency and further contribute to the
development of a national system for
the prompt and accurate clearance and
settlement of CDS contracts. The
Commission carefully reviewed the
proposed changes to ICC’s Risk
Management Framework to ensure that
those changes continue to allow ICC to
adequately manage the risks associated
with the clearing of both index and
single-name CDS contracts. In
particular, the Commission notes that
the Portfolio Decomposition Model will
introduce new requirements to provide
additional margin to address liquidity
and jump-to-default risks in connection
with the clearing of index CDS
products. After considering these
changes, including each of the
representations made by ICC in the
filing, the Commission believes that the
proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act,
including ICC’s obligation to ensure that
its rules be designed to assure the
safeguarding of securities and funds in
the custody or control of the clearing
agency or for which it is responsible.
V. 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 11 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,12 that the
9 15
U.S.C. 78s(b)(2)(B).
U.S.C. 78q–1(b)(3)(F).
11 15 U.S.C. 78q–1.
12 15 U.S.C. 78s(b)(2).
10 15
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Federal Register / Vol. 76, No. 246 / Thursday, December 22, 2011 / Notices
proposed rule change (File No. SR–ICC–
2011–03) be, and hereby is, approved.13
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–32781 Filed 12–21–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65990; File No. SR–OCC–
2011–17]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change Relating to
Novation of Trades at OCC
December 16, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934,1 notice
is hereby given that on December 12,
2011, The Options Clearing Corporation
(‘‘OCC’’) filed with the Securities and
Exchange Commission (‘‘the
Commission’’) the proposed rule change
as described in Items I and II below,
which items have been prepared
primarily by OCC. OCC filed the
proposed rule change pursuant to
Section 19(b)(3)(A)(iii) of the Act 2 and
Rule 19b–4(f)(4) thereunder 3 so that the
proposal was effective upon filing with
the Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
jlentini on DSK4TPTVN1PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of Terms of Substance of the
Proposed Rule Change
The proposed rule change would
make clarifying amendments to
provisions of OCC’s By-Laws relating to
the timing of OCC’s acceptance or
‘‘novation’’ of exchange transactions in
order to provide clearing members with
certainty as to when their credit
exposure to the original counterparty to
a trade is terminated and OCC becomes
obligated with respect to such trades.4
13 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).
14 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78s(b)(3)(A)(iii).
3 17 CFR 240.19b–4(f)(4).
4 The proposed rule change neither alters the
rights of members nor the timing of OCC’s novation.
Telephone conference between Steve Szarmack,
Vice President and Associate General Counsel,
OCC, and Pamela Kesner, Special Counsel,
Securities and Exchange Commission Division of
Trading and Markets on December 14, 2011.
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II. Self-Regulatory Organization’s
Statement of Purpose of, and Statutory
Basis for, the Proposed Rule Change
In its filing with the Commission,
OCC 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. OCC has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of Purpose of, and Statutory
Basis for, the Proposed Rule Change
Recently, certain OCC clearing
members have expressed uncertainty as
to the time when an exchange
transaction is accepted for clearing and
the ‘‘novation’’ of such transaction
occurs under OCC’s By-Laws and Rules.
The purpose of this proposed rule
change is to make clarifying
amendments to provisions of OCC’s ByLaws relating to the timing of OCC’s
acceptance or ‘‘novation’’ of exchange
transactions in order to provide clearing
members with certainty as to when their
credit exposure to the original
counterparty to a trade is terminated
and OCC becomes obligated with
respect to such trades.
Background
Article VI, Section 5 of OCC’s ByLaws generally establishes that
exchange transactions (i.e., matched
trades in an option, future, or other
cleared contract) are deemed to be
accepted by OCC for clearing at the
‘‘commencement time’’ for such
transactions, or in the case of a future,
when a matched trade has been properly
reported to OCC. The definition of
‘‘commencement time’’ in Article I of
OCC’s By-Laws contains substantive
provisions establishing specific times
when exchange transactions are deemed
accepted for clearing for the majority of
exchange transactions (i.e.,
commencement time is when daily
position reports are made available to
clearing members) as well as exceptions
establishing different commencement
times for cross-rate currency options, FX
Index Options and certain noncompetitively executed transactions in
cleared futures. However, neither
Section 5 of Article VI nor the definition
of ‘‘commencement time’’ expressly
state that OCC’s ‘‘novation’’ of trades
occurs at this time, and the term
‘‘novation’’ is used only once in OCC’s
By-Laws—in an interpretation following
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79731
Section 6 of Article IV (Issuance of
Cleared Contracts).
Confusion may also arise from the fact
that Article VI, Section 5 of the By-Laws
states that futures contracts are accepted
for clearing when they are properly
reported to OCC, rather than at the
commencement time of such
transactions. This provision appears to
give futures contracts more favorable
treatment than options, although there
is no such result as a practical matter.
Section 8 of Article VI provides that,
except with respect to trades in certain
narrow categories of options, OCC
generally has no right to reject any
exchange options transaction due to the
failure of the purchasing clearing
member to pay any amount due to OCC
at or before the settlement time.5
Accordingly, exchange transactions in
most option products will inevitably be
accepted for clearing and novated under
the rules at the commencement time of
such transactions simply due to the
passage of time. Prior to the 1987 crash,
OCC reserved the right to reject trades
in options due to non-payment of
premiums. However, OCC subsequently
gave up that right (with limited
exceptions) in order to create greater
certainty for clearing members.6
Therefore, the right to reject an
exchange transaction for non-payment is
now the exception rather than the rule.
When OCC began clearing futures, it
was deemed appropriate to state in the
By-Laws that futures contracts would be
accepted when properly reported
because futures do not require premium
payments.7
Proposed By-Law Changes
OCC proposes to amend the definition
of ‘‘commencement time’’ in Article I of
the By-Laws to (i) remove the
substantive provisions establishing the
specific times when exchange
transactions in various products are
deemed accepted for clearing (as such
provisions should be placed in the
5 The exceptions are contained in the Articles
governing specific products. For example, Section
5 of Article XX (addressing cross-rate foreign
currency options and Section 7 of Article XXIII
(addressing FX Index Options) condition OCC’s
acceptance of trades in those products for clearing
on the completion of settlement payments in
respect of such trades. These exceptions apply
because settlements involving foreign currencies in
different time zones create heightened exposure to
OCC if a Clearing Member were to default.
6 The staff notes that this change was adopted in
filing SR–OCC–90–05. See Securities Exchange Act
Release No. 29853 (October 25, 1991), 56 FR 55968
(October 30, 1991).
7 Article XII, Section 7 of the By-Laws makes an
exception for non-competitively executed futures
trades. Because such trades may be executed away
from the market price, OCC does not accept them
until the initial variation payment is made.
E:\FR\FM\22DEN1.SGM
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Agencies
[Federal Register Volume 76, Number 246 (Thursday, December 22, 2011)]
[Notices]
[Pages 79729-79731]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32781]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66001; File No. SR-ICC-2011-03]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change To Adopt ICC's Enhanced Margin
Methodology
December 16, 2011.
I. Introduction
On November 4, 2011, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change SR-ICC-2011-03 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 November 10, 2011.\3\ The Commission received three comment letters
regarding the proposal.\4\ For the reasons discussed below, the
Commission is granting approval of the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-65699 (November 7,
2011), 76 FR 70206 (November 10, 2011). In its filing with the
Commission, ICC included statements concerning the purpose of and
basis for the proposed rule change. The text of these statements is
incorporated into the discussion of the proposed rule change in
Section II below.
\4\ See comment letter from Michael Hisler, Swaps & Derivatives
Market Association, dated December 5, 2011 (``SDMA Letter'') and
comment letters from John Williams, Allen & Overy LLP, on behalf of
Bank of America Merrill Lynch, Barclays Capital, BNP Paribas, Citi,
Credit Suisse Securities (USA), Deutsche Bank AG, JPMorgan Chase &
Co., Morgan Stanley and UBS Securities LLC, dated December 1, 2011
and December 5, 2011 (``Allen & Overy Letters''). Allen & Overy
LLP's December 5, 2011 letter amended its December 1, 2011 letter,
with the sole change consisting of the addition of The Goldman Sachs
Group, Inc., Nomura Securities International, and The Royal Bank of
Scotland plc as signatories.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
This rule permits ICC to make certain modifications to its Risk
Management Framework for clearing credit default swap (``CDS'')
contracts. These modifications are collectively referred to as the
``Portfolio Decomposition Model.'' A fundamental aspect of ICC's
Portfolio Decomposition Model is the recognition that CDS contracts
cleared by ICC referencing broad-based securities indices are
essentially compositions of specific single-name CDS contracts. Under
the Portfolio Decomposition Model, ICC would, among other things,
decompose CDS contracts referencing broad-based
[[Page 79730]]
securities indices into single-name, index-derived positions with
notional amounts corresponding to their relative weight in the index.
In connection with the decomposition of CDS contracts referencing
broad-based securities indices, ICC will incorporate jump-to-default
risk as a component of the risk margin associated with the clearing of
CDS index products. Because ICC's prior methodology did not include
jump-to-default margin requirements for CDS index products, this change
will result in a better measurement of the risk associated with
clearing these contracts. ICC believes that the Portfolio Decomposition
Model also reflects a number of other enhancements to the ICC Risk
Management Framework. Examples of these changes include: Replacing
standard deviation with mean absolute deviation as a measure of spread
volatility, implementing an auto-regressive process to obtain multi-
horizon risk measures, expanding spread response scenarios, introducing
liquidity margin requirements for CDS index products, and base
concentration charges.
In addition, implementation of the Portfolio Decomposition Model
will also allow ICC to provide portfolio margin treatment between index
CDS contracts and offsetting single-name CDS contracts. These portfolio
benefits will generally involve ICC providing margin offsets across
single-name CDS contracts and index CDS contracts that are held in a
clearing participant's portfolio based on correlation measurements.
To date, ICC has not offered such portfolio margin treatment
strictly for operational reasons. However, ICC has informed the
Commission that it will be operationally ready to offer portfolio
margining with respect to its clearing participants' proprietary
positions sometime in mid-December 2011. In its filing with the
Commission, ICC noted that the portfolio margining treatment will only
be available to ICC clearing participants' proprietary positions
because ICC does not currently clear single-name CDS contracts for
customer-related transactions. Accordingly, there are currently no
customer-related positions in single-name CDS contracts that would
qualify for portfolio margining treatment. Because the portfolio
margining benefits afforded by the enhancements to the model are
available to all of ICC's participants with respect to their
proprietary positions, ICC believes that the proposed rule change does
not unfairly discriminate with respect to similarly-situated
participants.\5\
---------------------------------------------------------------------------
\5\ ICC further indicated in its rule filing that it would
expect to offer portfolio margining treatment to customer-related
transactions following: (i) The commencement of clearing single-name
CDS contracts for customer-related transactions and (ii) the
granting of certain relief by the Commission and the Commodity
Futures Trading Commission (``CFTC'') in response to requests by
ICC. Specifically, on November 7, 2011, ICC formally filed with the
Commission a petition to provide portfolio margining treatment for
customer-related positions in anticipation of ICC offering clearing
of single-name CDS contracts for customer-related transactions in
the future. Available at: https://www.sec.gov/rules/petitions.shtml.
ICC filed a similar request with the CFTC on October 4, 2011,
available at: https://www.cftc.gov/PressRoom/PressReleases/pr6145-11.
---------------------------------------------------------------------------
According to ICC, the enhancements effected by this proposed rule
change have been reviewed and/or recommended by the ICC Risk Working
Group, ICC Risk Committee, ICC Board of Managers, the Federal Reserve
Bank of New York and the New York State Banking Department. In
addition, ICC commissioned a third-party risk-management consultant to
complete a model assessment of ICC's Portfolio Decomposition Model.
III. Comments
The Commission received three comment letters on the proposed rule
change from two commenters, both of which were supportive of the
changes.\6\ Specifically, one commenter noted that by permitting
portfolio margining to occur with respect to clearing participants'
proprietary accounts, ICC's proposed Portfolio Decomposition Model
would optimize more efficient risk management through netting, thereby
promoting greater stability for central clearing.\7\ This commenter
noted that, because of the high degree of correlation between single-
name CDS contracts and index CDS contracts, market participants often
maintain hedged portfolios of these products, thereby increasingly the
impact that these changes are likely to have throughout the market. The
second commenter, which represented a group of eight large financial
firms, expressed a similar view with respect to the ability of
portfolio margining to bring about a more stable central clearing
regime and concluded that the proposed rule change represented ``an
initial positive step for the industry.'' \8\
---------------------------------------------------------------------------
\6\ See supra note 4.
\7\ See SDMA Letter.
\8\ See Allen & Overy Letters.
---------------------------------------------------------------------------
IV. Discussion
Section 19(b)(2)(B) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\9\ For example, Section 17A(b)(3)(F) of the Act \10\
requires, among other things, that the rules of a clearing agency be
designed to remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions and to assure the safeguarding of securities
and funds in the custody or control of the clearing agency or for which
it is responsible.
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\9\ 15 U.S.C. 78s(b)(2)(B).
\10\ 15 U.S.C. 78q-1(b)(3)(F).
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If approved, the proposed rule change would allow ICC to provide
portfolio margining offsets to its participants to the extent that the
participants maintain proprietary portfolios that hedge index CDS
products against single-name CDS products. ICC believes that these
changes promote greater capital efficiency and further contribute to
the development of a national system for the prompt and accurate
clearance and settlement of CDS contracts. The Commission carefully
reviewed the proposed changes to ICC's Risk Management Framework to
ensure that those changes continue to allow ICC to adequately manage
the risks associated with the clearing of both index and single-name
CDS contracts. In particular, the Commission notes that the Portfolio
Decomposition Model will introduce new requirements to provide
additional margin to address liquidity and jump-to-default risks in
connection with the clearing of index CDS products. After considering
these changes, including each of the representations made by ICC in the
filing, the Commission believes that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act, including ICC's
obligation to ensure that its rules be designed to assure the
safeguarding of securities and funds in the custody or control of the
clearing agency or for which it is responsible.
V. 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 \11\ and the
rules and regulations thereunder.
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\11\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the
[[Page 79731]]
proposed rule change (File No. SR-ICC-2011-03) be, and hereby is,
approved.\13\
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\12\ 15 U.S.C. 78s(b)(2).
\13\ 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.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32781 Filed 12-21-11; 8:45 am]
BILLING CODE 8011-01-P