Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change Relating to Enhanced Margin Methodology, 1281-1284 [2013-00084]

Download as PDF Federal Register / Vol. 78, No. 5 / Tuesday, January 8, 2013 / Notices reward aggressive liquidity providers. As such, the Exchange believes that the rules governing the SLP Pilot (Rule 107B) should be made permanent. Through this filing the Exchange seeks to extend the current operation of the SLP Pilot until July 31, 2013, in order to allow the Exchange to formally submit a filing to the Commission to convert the Pilot rule to a permanent rule.11 2. Statutory Basis The basis under the Securities Exchange Act of 1934 (the ‘‘Act’’) for this proposed rule change is the requirement under Section 6(b)(5) that an exchange have rules that are designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. The Exchange believes that the instant filing is consistent with these principles because the SLP Pilot provides its market participants with a trading venue that utilizes an enhanced market structure to encourage the addition of liquidity and operates to reward aggressive liquidity providers. Moreover, the instant filing requesting an extension of the SLP Pilot will permit adequate time for: (i) The Exchange to prepare and submit a filing to make the rules governing the SLP Pilot permanent; (ii) public notice and comment; and (iii) completion of the 19b–4 approval process. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. srobinson on DSK4SPTVN1PROD with C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become 11 The NYSE MKT SLP Pilot (NYSE MKT Rule 107B—Equities) is also being extended until July 31, 2013 or until the Commission approves it as permanent (See SR–NYSEMKT–2012–85). VerDate Mar<15>2010 19:11 Jan 07, 2013 Jkt 229001 operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, provided that the self-regulatory organization has given the Commission written notice of its intent to file 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 proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 12 and Rule 19b–4(f)(6) thereunder.13 At any time within 60 days of the filing of such 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. 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: 1281 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 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 available publicly. All submissions should refer to File Number SR–NYSE– 2012–76 and should be submitted on or before January 29, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–00081 Filed 1–7–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION 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–NYSE–2012–76 on the subject line. [Release No. 34–68563; File No. SR–ICEEU– 2012–11] 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–NYSE–2012–76. 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 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 December 28, 2012, ICE Clear Europe Limited (‘‘ICE Clear Europe’’) 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 ICE Clear Europe. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change Relating to Enhanced Margin Methodology January 2, 2013. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change ICE Clear Europe proposes to implement an enhanced margin methodology (‘‘Decomp Model’’) that addresses the risk of both index and 14 17 12 15 U.S.C. 78s(b)(3)(A). 13 17 CFR 240.19b–4(f)(6). PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\08JAN1.SGM 08JAN1 1282 Federal Register / Vol. 78, No. 5 / Tuesday, January 8, 2013 / Notices single-name credit default swaps (‘‘CDS’’) cleared by ICE Clear Europe and permits appropriate portfolio margining between related index and single-name CDS positions. srobinson on DSK4SPTVN1PROD with II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 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 these statements.3 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change A fundamental aspect of the Decomp Model is the recognition that index CDS instruments cleared by ICE Clear Europe are essentially a composition of specific single-name CDS. The Decomp Model includes the following enhancements to the ICE Clear Europe margin methodology for index CDS instruments (which are already in place for singlename CDS): Replacing standard deviation with mean absolute deviation (MAD) as a measure of credit spread variability, use of an auto regressive process to obtain multi-horizon risk measures, an increased number of spread response scenarios, introduction of liquidity requirements and introduction of enhanced concentration charge computations to reflect net notional amounts in addition to the currently used 5-Year (‘‘5Y’’) equivalent notional amount. These enhancements and the enhancements referenced below have been reviewed and/or recommended by the ICE Clear Europe risk management personnel, risk and model review working groups and committees, the ICE Clear Europe Risk Committee and an independent thirdparty risk expert (Finance Concepts). Implementation of these enhancements to the ICE Clear Europe risk methodology will result specifically in a better measurement of the risk associated with clearing index CDS. As a result of the decomposition of the index CDS, ICE Clear Europe will also be able to (1) incorporate jump-todefault risk as a component of the risk 3 The Commission has modified the text of the summaries prepared by ICE Clear Europe. VerDate Mar<15>2010 19:11 Jan 07, 2013 Jkt 229001 margin associated with index CDS (which is already in place for singlename CDS) and (2) provide appropriate portfolio margin treatment between index CDS and offsetting single-name CDS positions. Incorporating jump-todefault risk as a component of the Decomp Model will result in a better measurement of the risk associated with clearing index CDS (as is already the case for single-name CDS). Recognizing the highly correlated relationship between long-short positions in index CDS and the underlying single-name CDS constituents of an index CDS will provide for fundamental and appropriate portfolio margin treatment. Upon approval of the Decomp Model, ICE Clear Europe would initially make appropriate portfolio margining available with respect to its Clearing Members’ proprietary positions. ICE Clear Europe does not currently clear CDS positions of customers of its Clearing Members, but it plans to introduce customer clearing for CDS upon receipt of applicable regulatory approvals.4 The Commission has granted an exemptive order permitting ICE Clear Europe to commingle customer positions in index CDS and single-name CDS carried through FCM/ BD Clearing Members in a single account; 5 in addition, ICE Clear Europe has petitioned the Commodity Futures Trading Commission to permit such commingling.6 Following the commencement of customer clearing for CDS, and receipt of all necessary regulatory approvals, ICE Clear Europe would make appropriate portfolio margining available to commingled customer positions in index and singlename CDS using the Decomp Model. Accordingly, the Decomp Model is an important component of ICE Clear Europe’s planned customer clearing offering. ICE Clear Europe does not believe that the expected phased implementation of the portfolio margining element of the proposed Decomp Model (commencing with proprietary positions) raises an issue of unfair discrimination. Importantly, the portfolio margining aspect of the Decomp Model does not unfairly discriminate with respect to similarly situated participants because it 4 ICE Clear Europe has filed separately with the Commission proposed rule changes relating to customer clearing for CDS. See Securities Exchange Act Release No. 34–68152 (November 5, 2012), 77 FR 67427 (November 9, 2012). 5 See Securities Exchange Act Release No. 34– 68433 (December 14, 2012), 77 FR 75211 (December 19, 2012). 6 See letter from Paul Swann, President & Chief Operating Officer, ICE Clear Europe to Mr. David Stawick, Secretary, Commodity Futures Trading Commission, dated May 31, 2012. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 is available to any participant for whom ICE Clear Europe is currently able to provide portfolio margin treatment. ICE Clear Europe does not currently offer customer clearing in CDS. Once it does so, and upon receipt of all necessary regulatory approvals, ICE Clear Europe will offer portfolio margining with respect to customer positions. The proposed rule amendments are thus not designed to permit unfair discrimination among participants in the use of ICE Clear Europe’s clearing services. In addition, as part of the implementation of the proposed Decomp Model, ICE Clear Europe proposes to (1) reduce the current level of risk mutualization among ICE Clear Europe’s CDS Clearing Members through the default resources held in the mutualized CDS Guaranty Fund and significantly increase the level of resources held as initial margin for CDS Contracts (‘‘Guaranty Fund/IM Modification’’), (2) modify the initial margin risk model approach in a manner that will make it easier for market participants to measure their risks, by removing the conditional recovery rate stress scenarios and adding a new recovery rate sensitivity component (‘‘IM Recovery Rate Modification’’), (3) introduce the 5Y equivalent notional amount (‘‘5Y ENA’’) per single-name/index with the worst of concentration charge based on 5Y ENA or net notional amount (‘‘NNA’’) being applied (‘‘IM Concentration Charge Modification’’), (4) add a new basis risk component from single-name CDS positions that are offset by indexderived single-name CDS positions (‘‘IM Basis Risk Modification’’) and (5) combine a single guaranty fund calculation for index CDS and singlename CDS positions (‘‘Guaranty Fund Modification’’). Currently, ICE Clear Europe maintains a high percentage of its default resources for CDS Contracts in the CDS Guaranty Fund, as compared to initial margin for CDS Contracts. This reflects the fact that the current CDS Guaranty Fund model is designed to cover the uncollateralized losses that would result from the three single names that would cause the greatest losses when entering a state of default. The Guaranty Fund/ IM Modification incorporates into the initial margin risk model the single name that causes the greatest loss when entering a state of default (i.e., the single name that results in the greatest amount of loss when stress-tested to undergo a credit event). This change effectively collateralizes the loss that would occur from this single name upon default. Consequently, the amount of E:\FR\FM\08JAN1.SGM 08JAN1 srobinson on DSK4SPTVN1PROD with Federal Register / Vol. 78, No. 5 / Tuesday, January 8, 2013 / Notices uncollateralized loss that would result from the three single names causing the greatest losses when entering a state of default is reduced, thereby reducing the amount of required contributions to the CDS Guaranty Fund. It is important to note that the decrease in the CDS Guaranty Fund and the increase in initial margin requirements are not equivalent in terms of magnitudes. Instead, based on current portfolios, it is expected that for every $1 decrease in the CDS Guaranty Fund requirement there will be a corresponding increase of approximately $5 in initial margin requirements. The IM Recovery Rate Modification modifies the initial margin risk model by removing the conditional recovery rate stress scenarios and adding a new recovery rate sensitivity component that is computed by considering changes in the recovery rate assumptions and their impact on the net asset value of the CDS portfolio. This modification will make it easier for market participants to replicate their initial margin requirements. The IM Concentration Charge Modification defines concentration charge thresholds in terms of NNA as well as 5Y ENA and takes the more conservative concentration requirement based on either notional amount. This modification captures the risk of large directional CDS positions that may not be captured by the calculation based on NNA. For example, a set of large NNA positions, whose maturity date is close to the current date, may not be subject to concentration charges based on 5Y ENA if the estimated 5Y ENA is below the established threshold. The alternative NNA-based concentration charge computations may yield significant additional initial margin requirements as the NNA exceeds the established threshold. As index-derived single-name positions and outright single-name positions are offset, an additional basis risk requirement is introduced to account for the fact that the index instruments are more actively traded than single-name instruments and thus are the preferred instruments to express changing views about the credit market as a whole, or even about specific single-name components of the indices. The IM Basis Risk Modification captures the risk associated with differences between outright single-name CDS positions and index-derived singlename CDS positions. In other words, a ‘‘perfectly hedged’’ portfolio consisting of an index CDS position and opposite index replicating single-name CDS positions will still attract an initial VerDate Mar<15>2010 19:11 Jan 07, 2013 Jkt 229001 margin requirement due to the basis risk that exists. Currently, ICE Clear Europe estimates separate guaranty fund sizes for index CDS positions and single-name positions. The Guaranty Fund Modification takes into account the portfolio benefits between index and single-name positions, and incorporates the worst 2-member uncollateralized losses coming from the jump-to-default, spread response, basis and interest rate stress scenario considerations. Section 17A(b)(3)(F) of the Act 7 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 assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible. ICE Clear Europe believes that the changes will facilitate the prompt and accurate settlement and risk management of security-based swaps and contribute to the safeguarding of securities and funds associated with security-based swap transactions. As discussed above, ICE Clear Europe does not believe that the portfolio margining-related proposed changes raise an issue of unfair discrimination in the use of ICE Clear Europe’s clearing services by similarly situated participants. B. Self-Regulatory Organization’s Statement on Burden on Competition ICE Clear Europe does not believe the proposed changes to its margin methodology would have any impact, or impose any burden, on competition. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others ICE Clear Europe will notify the Commission of any written comments received by ICE Clear Europe. As noted above, ICE Clear Europe has consulted extensively with CDS Clearing Members and others in developing the Decomp Model. 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 7 15 PO 00000 U.S.C. 78q–1(b)(3)(F). Frm 00088 Fmt 4703 Sfmt 4703 1283 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 (https://www.sec.gov/ rules/sro.shtml) or • Send an email to rulecomments@sec.gov. Please include File Number SR–ICEEU–2012–11 on the subject line. 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–ICEEU–2012–11. 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 10:00 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/publicdocs/ regulatory_filings/ ICEU_SEC_122812.pdf. All comments received will be posted without change; the Commission does E:\FR\FM\08JAN1.SGM 08JAN1 1284 Federal Register / Vol. 78, No. 5 / Tuesday, January 8, 2013 / Notices 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–2012–11 and should be submitted on or before January 29, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.8 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–00084 Filed 1–7–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68458; File No. SR– NYSEArca–2012–139] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To List and Trade First Trust Preferred Securities and Income ETF Under NYSE Arca Equities Rule 8.600 December 18, 2012. Correction In notice document 2012–30888 appearing on pages 76148–76155 in the issue of December 26, 2012, make the following correction: On page 76155, in the first column, in the 14th line, ‘‘January 14, 2013’’ should read ‘‘January 16, 2013’’. [FR Doc. C1–2012–30888 Filed 1–7–13; 8:45 am] BILLING CODE 1505–01–D SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68557; File No. SR– NYSEMKT–2012–85] Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Extending the Operation of Its Supplemental Liquidity Providers Pilot (Rule 107B—Equities) Until the Earlier of the Securities and Exchange Commission’s Approval To Make Such Pilot Permanent or July 31, 2013 the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange filed the proposal as a ‘‘noncontroversial’’ proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to extend the operation of its Supplemental Liquidity Providers Pilot (‘‘SLP Pilot’’ or ‘‘Pilot’’) (See Rule 107B—Equities), currently scheduled to expire on January 31, 2013, until the earlier of the Securities and Exchange Commission’s (‘‘Commission’’) approval to make such Pilot permanent or July 31, 2013. The text of the proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization 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 those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to extend the operation of its SLP Pilot,5 currently 3 15 srobinson on DSK4SPTVN1PROD with January 2, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 18, 2012, NYSE MKT LLC (the ‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with 8 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Mar<15>2010 19:11 Jan 07, 2013 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). 5 See Securities Exchange Act Release No. 61308 (January 7, 2010), 75 FR 2573 (January 15, 2010) (SR–NYSEAmex–2009–98) (establishing the NYSE Amex Equities SLP Pilot). See also Securities Exchange Act Release Nos. 61841 (April 5, 2010), 75 FR 18560 (April 12, 2010) (SR–NYSEAmex– 2010–33) (extending the operation of the SLP Pilot to September 30, 2010); 62814 (September 1, 2010), 75 FR 54671 (September 8, 2010) (SR–NYSEAmex– 2010–88) (extending the operation of the SLP Pilot to January 31, 2011); 63615 (December 29, 2010), 76 FR 611 (January 5, 2011) (SR–NYSEAmex–2010– 4 17 Jkt 229001 PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 scheduled to expire on January 31, 2013, until the earlier of Commission approval to make such Pilot permanent or July 31, 2013. Background 6 In October 2008, the New York Stock Exchange LLC (‘‘NYSE’’) implemented significant changes to its market rules, execution technology and the rights and obligations of its market participants all of which were designed to improve execution quality on the NYSE. These changes were all elements of the NYSE’s and the Exchange’s enhanced market model referred to as the ‘‘New Market Model’’ (‘‘NMM Pilot’’).7 The NYSE SLP Pilot was launched in coordination with the NMM Pilot (see NYSE Rule 107B). As part of the NMM Pilot, NYSE eliminated the function of specialists on the Exchange creating a new category of market participant, the Designated Market Maker or ‘‘DMM.’’ 8 Separately, the NYSE established the SLP Pilot, which established SLPs as a new class of market participants to supplement the liquidity provided by DMMs.9 The NYSE adopted NYSE Rule 107B governing SLPs as a six-month pilot program commencing in November 2008. This NYSE pilot has been extended several times, most recently to January 31, 2013.10 The NYSE is in the 123) (extending the operation of the SLP Pilot to August 1, 2011); 64772 (June 29, 2011), 76 FR 39455 (July 6, 2011) (SR–NYSEAmex–2011–44) (extending the operation of the SLP Pilot to January 31, 2012); 66041 (December 23, 2011), 76 FR 82328 (December 30, 2011) (SR–NYSEAmex–2011–103) (extending the operation of the SLP Pilot to July 31, 2012); and 67496 (July 25, 2012), 77 FR 45390 (July 31, 2012) (SR–NYSEMKT–2012–22) (extending the operation of the SLP Pilot to January 31, 2013). 6 The information contained herein is a summary of the NMM Pilot and the SLP Pilot. See supra note 5 and Infra note 7 for a fuller description of those pilots. 7 See Securities Exchange Act Release No. 58845 (October 24, 2008), 73 FR 64379 (October 29, 2008) (SR–NYSE–2008–46). 8 See NYSE Rule 103. 9 See NYSE Rule 107B and NYSE MKT Rule 107B—Equities. NYSE amended the monthly volume requirements to an ADV that is a specified percentage of NYSE CADV. See Securities Exchange Act Release No. 67759 (August 20, 2012), 77 FR 54939 (September 6, 2012) (SR–NYSEMKT–2012– 38). 10 See Securities Exchange Act Release Nos. 58877 (October 29, 2008), 73 FR 65904 (November 5, 2008) (SR–NYSE–2008–108) (adopting SLP Pilot program); 59869 (May 6, 2009), 74 FR 22796 (May 14, 2009) (SR–NYSE–2009–46) (extending SLP Pilot program until October 1, 2009); 60756 (October 1, 2009), 74 FR 51628 (October 7, 2009) (SR–NYSE– 2009–100) (extending SLP Pilot program until November 30, 2009); 61075 (November 30, 2009), 74 FR 64112 (December 7, 2009) (SR–NYSE–2009– 119) (extending SLP Pilot program until March 30, 2010); 61840 (April 5, 2010), 75 FR 18563 (April 12, 2010) (SR–NYSE–2010–28) (extending the SLP Pilot until September 30, 2010); 62813 (September 1, 2010), 75 FR 54686 (September 8, 2010) (SR–NYSE– 2010–62) (extending the SLP Pilot until January 31, E:\FR\FM\08JAN1.SGM 08JAN1

Agencies

[Federal Register Volume 78, Number 5 (Tuesday, January 8, 2013)]
[Notices]
[Pages 1281-1284]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00084]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68563; File No. SR-ICEEU-2012-11]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change Relating to Enhanced Margin 
Methodology

January 2, 2013.
    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 December 28, 2012, ICE Clear Europe Limited (``ICE Clear Europe'') 
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 ICE Clear Europe. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    ICE Clear Europe proposes to implement an enhanced margin 
methodology (``Decomp Model'') that addresses the risk of both index 
and

[[Page 1282]]

single-name credit default swaps (``CDS'') cleared by ICE Clear Europe 
and permits appropriate portfolio margining between related index and 
single-name CDS positions.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    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 these statements.\3\
---------------------------------------------------------------------------

    \3\ The Commission has modified the text of the summaries 
prepared by ICE Clear Europe.
---------------------------------------------------------------------------

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    A fundamental aspect of the Decomp Model is the recognition that 
index CDS instruments cleared by ICE Clear Europe are essentially a 
composition of specific single-name CDS. The Decomp Model includes the 
following enhancements to the ICE Clear Europe margin methodology for 
index CDS instruments (which are already in place for single-name CDS): 
Replacing standard deviation with mean absolute deviation (MAD) as a 
measure of credit spread variability, use of an auto regressive process 
to obtain multi-horizon risk measures, an increased number of spread 
response scenarios, introduction of liquidity requirements and 
introduction of enhanced concentration charge computations to reflect 
net notional amounts in addition to the currently used 5-Year (``5Y'') 
equivalent notional amount. These enhancements and the enhancements 
referenced below have been reviewed and/or recommended by the ICE Clear 
Europe risk management personnel, risk and model review working groups 
and committees, the ICE Clear Europe Risk Committee and an independent 
third-party risk expert (Finance Concepts). Implementation of these 
enhancements to the ICE Clear Europe risk methodology will result 
specifically in a better measurement of the risk associated with 
clearing index CDS.
    As a result of the decomposition of the index CDS, ICE Clear Europe 
will also be able to (1) incorporate jump-to-default risk as a 
component of the risk margin associated with index CDS (which is 
already in place for single-name CDS) and (2) provide appropriate 
portfolio margin treatment between index CDS and offsetting single-name 
CDS positions. Incorporating jump-to-default risk as a component of the 
Decomp Model will result in a better measurement of the risk associated 
with clearing index CDS (as is already the case for single-name CDS). 
Recognizing the highly correlated relationship between long-short 
positions in index CDS and the underlying single-name CDS constituents 
of an index CDS will provide for fundamental and appropriate portfolio 
margin treatment.
    Upon approval of the Decomp Model, ICE Clear Europe would initially 
make appropriate portfolio margining available with respect to its 
Clearing Members' proprietary positions. ICE Clear Europe does not 
currently clear CDS positions of customers of its Clearing Members, but 
it plans to introduce customer clearing for CDS upon receipt of 
applicable regulatory approvals.\4\ The Commission has granted an 
exemptive order permitting ICE Clear Europe to commingle customer 
positions in index CDS and single-name CDS carried through FCM/BD 
Clearing Members in a single account; \5\ in addition, ICE Clear Europe 
has petitioned the Commodity Futures Trading Commission to permit such 
commingling.\6\ Following the commencement of customer clearing for 
CDS, and receipt of all necessary regulatory approvals, ICE Clear 
Europe would make appropriate portfolio margining available to 
commingled customer positions in index and single-name CDS using the 
Decomp Model. Accordingly, the Decomp Model is an important component 
of ICE Clear Europe's planned customer clearing offering.
---------------------------------------------------------------------------

    \4\ ICE Clear Europe has filed separately with the Commission 
proposed rule changes relating to customer clearing for CDS. See 
Securities Exchange Act Release No. 34-68152 (November 5, 2012), 77 
FR 67427 (November 9, 2012).
    \5\ See Securities Exchange Act Release No. 34-68433 (December 
14, 2012), 77 FR 75211 (December 19, 2012).
    \6\ See letter from Paul Swann, President & Chief Operating 
Officer, ICE Clear Europe to Mr. David Stawick, Secretary, Commodity 
Futures Trading Commission, dated May 31, 2012.
---------------------------------------------------------------------------

    ICE Clear Europe does not believe that the expected phased 
implementation of the portfolio margining element of the proposed 
Decomp Model (commencing with proprietary positions) raises an issue of 
unfair discrimination. Importantly, the portfolio margining aspect of 
the Decomp Model does not unfairly discriminate with respect to 
similarly situated participants because it is available to any 
participant for whom ICE Clear Europe is currently able to provide 
portfolio margin treatment. ICE Clear Europe does not currently offer 
customer clearing in CDS. Once it does so, and upon receipt of all 
necessary regulatory approvals, ICE Clear Europe will offer portfolio 
margining with respect to customer positions. The proposed rule 
amendments are thus not designed to permit unfair discrimination among 
participants in the use of ICE Clear Europe's clearing services.
    In addition, as part of the implementation of the proposed Decomp 
Model, ICE Clear Europe proposes to (1) reduce the current level of 
risk mutualization among ICE Clear Europe's CDS Clearing Members 
through the default resources held in the mutualized CDS Guaranty Fund 
and significantly increase the level of resources held as initial 
margin for CDS Contracts (``Guaranty Fund/IM Modification''), (2) 
modify the initial margin risk model approach in a manner that will 
make it easier for market participants to measure their risks, by 
removing the conditional recovery rate stress scenarios and adding a 
new recovery rate sensitivity component (``IM Recovery Rate 
Modification''), (3) introduce the 5Y equivalent notional amount (``5Y 
ENA'') per single-name/index with the worst of concentration charge 
based on 5Y ENA or net notional amount (``NNA'') being applied (``IM 
Concentration Charge Modification''), (4) add a new basis risk 
component from single-name CDS positions that are offset by index-
derived single-name CDS positions (``IM Basis Risk Modification'') and 
(5) combine a single guaranty fund calculation for index CDS and 
single-name CDS positions (``Guaranty Fund Modification'').
    Currently, ICE Clear Europe maintains a high percentage of its 
default resources for CDS Contracts in the CDS Guaranty Fund, as 
compared to initial margin for CDS Contracts. This reflects the fact 
that the current CDS Guaranty Fund model is designed to cover the 
uncollateralized losses that would result from the three single names 
that would cause the greatest losses when entering a state of default. 
The Guaranty Fund/IM Modification incorporates into the initial margin 
risk model the single name that causes the greatest loss when entering 
a state of default (i.e., the single name that results in the greatest 
amount of loss when stress-tested to undergo a credit event). This 
change effectively collateralizes the loss that would occur from this 
single name upon default. Consequently, the amount of

[[Page 1283]]

uncollateralized loss that would result from the three single names 
causing the greatest losses when entering a state of default is 
reduced, thereby reducing the amount of required contributions to the 
CDS Guaranty Fund.
    It is important to note that the decrease in the CDS Guaranty Fund 
and the increase in initial margin requirements are not equivalent in 
terms of magnitudes. Instead, based on current portfolios, it is 
expected that for every $1 decrease in the CDS Guaranty Fund 
requirement there will be a corresponding increase of approximately $5 
in initial margin requirements.
    The IM Recovery Rate Modification modifies the initial margin risk 
model by removing the conditional recovery rate stress scenarios and 
adding a new recovery rate sensitivity component that is computed by 
considering changes in the recovery rate assumptions and their impact 
on the net asset value of the CDS portfolio. This modification will 
make it easier for market participants to replicate their initial 
margin requirements.
    The IM Concentration Charge Modification defines concentration 
charge thresholds in terms of NNA as well as 5Y ENA and takes the more 
conservative concentration requirement based on either notional amount. 
This modification captures the risk of large directional CDS positions 
that may not be captured by the calculation based on NNA. For example, 
a set of large NNA positions, whose maturity date is close to the 
current date, may not be subject to concentration charges based on 5Y 
ENA if the estimated 5Y ENA is below the established threshold. The 
alternative NNA-based concentration charge computations may yield 
significant additional initial margin requirements as the NNA exceeds 
the established threshold.
    As index-derived single-name positions and outright single-name 
positions are offset, an additional basis risk requirement is 
introduced to account for the fact that the index instruments are more 
actively traded than single-name instruments and thus are the preferred 
instruments to express changing views about the credit market as a 
whole, or even about specific single-name components of the indices. 
The IM Basis Risk Modification captures the risk associated with 
differences between outright single-name CDS positions and index-
derived single-name CDS positions. In other words, a ``perfectly 
hedged'' portfolio consisting of an index CDS position and opposite 
index replicating single-name CDS positions will still attract an 
initial margin requirement due to the basis risk that exists.
    Currently, ICE Clear Europe estimates separate guaranty fund sizes 
for index CDS positions and single-name positions. The Guaranty Fund 
Modification takes into account the portfolio benefits between index 
and single-name positions, and incorporates the worst 2-member 
uncollateralized losses coming from the jump-to-default, spread 
response, basis and interest rate stress scenario considerations.
    Section 17A(b)(3)(F) of the Act \7\ 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 assure the safeguarding of securities and funds 
which are in the custody or control of the clearing agency or for which 
it is responsible. ICE Clear Europe believes that the changes will 
facilitate the prompt and accurate settlement and risk management of 
security-based swaps and contribute to the safeguarding of securities 
and funds associated with security-based swap transactions. As 
discussed above, ICE Clear Europe does not believe that the portfolio 
margining-related proposed changes raise an issue of unfair 
discrimination in the use of ICE Clear Europe's clearing services by 
similarly situated participants.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed changes to its 
margin methodology would have any impact, or impose any burden, on 
competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    ICE Clear Europe will notify the Commission of any written comments 
received by ICE Clear Europe. As noted above, ICE Clear Europe has 
consulted extensively with CDS Clearing Members and others in 
developing the Decomp Model.

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 (https://www.sec.gov/rules/sro.shtml) or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ICEEU-2012-11 on the subject line.

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-ICEEU-2012-11. 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 
10:00 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/publicdocs/regulatory_filings/ICEU_SEC_122812.pdf.
    All comments received will be posted without change; the Commission 
does

[[Page 1284]]

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-2012-11 and should be 
submitted on or before January 29, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00084 Filed 1-7-13; 8:45 am]
BILLING CODE 8011-01-P
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.