Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change To Clear New Sovereign Contracts, 10578-10581 [2014-03973]

Download as PDF 10578 Federal Register / Vol. 79, No. 37 / Tuesday, February 25, 2014 / Notices Notice. The Commission establishes Docket No. CP2014–27 to consider the Postal Service’s Notice. Interested persons may express views and offer comments on whether the planned changes are consistent with 39 U.S.C. 3632, 3633, and 3642, 39 CFR part 3015, and 39 CFR part 3020 subparts B and E. Comments are due no later than March 5, 2014. Pursuant to 39 U.S.C. 505, Pamela A. Thompson is appointed to serve as Public Representative to represent the interests of the general public in this docket. Additional information. The Postal Service indicates that it has determined that the Standard Post product as a whole will continue to cover its costs and make an appropriate contribution to institutional costs. Id. at 2. The Postal Service is directed to provide revenue and attributable cost data for the 12month period from the effective date of the proposed rates (March 20, 2014) to demonstrate that the Standard Post product complies with 39 U.S.C. 3633(a)(2). The Postal Service is also directed to confirm that following the price change, competitive products in total will be in compliance with 39 U.S.C. 3633(a)(1) and (3). The Postal Service is directed to provide this additional information by February 26, 2014. It is ordered: 1. The Commission establishes Docket No. CP2014–27 to consider the matters raised in this docket. 2. The Commission appoints Pamela A. Thompson to serve as Public Representative to represent the interests of the general public in this proceeding. 3. The additional information requested in this Order is due no later than February 26, 2014. 4. Comments on the Notice are due no later than March 5, 2014. 5. The Secretary shall arrange for publication of this order in the Federal Register. By the Commission. Shoshana M. Grove, Secretary. emcdonald on DSK67QTVN1PROD with NOTICES BILLING CODE 7710–FW–P SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meeting Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Public Law 94–409, that the Securities and Exchange Commission will hold a Closed Meeting 17:58 Feb 24, 2014 Dated: February 20, 2014. Kevin M. O’Neill, Deputy Secretary. BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71574; File No. SR–ICEEU– 2014–04] Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change To Clear New Sovereign Contracts Jkt 232001 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 February 11, 2014, 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. 1 15 2 17 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00113 Fmt 4703 Sfmt 4703 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 principal purpose of the change is to provide for the clearance of new CDS contracts that are Western European Sovereign CDS contracts referencing the Republic of Ireland, Italian Republic, Portuguese Republic, and Kingdom of Spain (the ‘‘New Sovereign Contracts’’). 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. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose [FR Doc. 2014–04132 Filed 2–21–14; 11:15 am] February 19, 2014. [FR Doc. 2014–03977 Filed 2–24–14; 8:45 am] VerDate Mar<15>2010 on Thursday, February 27, 2014 at 2:00 p.m. Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the Closed Meeting. Certain staff members who have an interest in the matters also may be present. The General Counsel of the Commission, or her designee, has certified that, in her opinion, one or more of the exemptions set forth in 5 U.S.C. 552b(c)(3), (5), (7), 9(B) and (10) and 17 CFR 200.402(a)(3), (5), (7), 9(ii) and (10), permit consideration of the scheduled matter at the Closed Meeting. Commissioner Piwowar, as duty officer, voted to consider the items listed for the Closed Meeting in a closed session. The subject matter of the Closed Meeting will be: Institution and settlement of injunctive actions; institution and settlement of administrative proceedings; adjudicatory matters; and other matters relating to enforcement proceedings. At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact the Office of the Secretary at (202) 551–5400. The purpose of the additional CDS products is to allow ICE Clear Europe Clearing Members the ability to clear additional European CDS products through ICE Clear Europe’s platform. ICE Clear Europe has identified Western European Sovereign CDS Contracts as a product that has become increasingly important for market participants to manage risk and express views with respect to the European sovereign credit markets. ICE Clear Europe believes clearance of the New Sovereign Contracts will benefit the markets for credit default swaps on Western European sovereigns by offering to market participants the benefits of clearing, including reduction in counterparty risk and safeguarding of margin assets pursuant to clearing house rules. The terms of the New Sovereign Contracts will be governed by Paragraph 12 of the CDS Procedures. Clearing of the New Sovereign Contracts will not require any changes to ICE Clear Europe’s existing Clearing Rules and CDS Procedures (although ICE Clear Europe has updated its risk management E:\FR\FM\25FEN1.SGM 25FEN1 emcdonald on DSK67QTVN1PROD with NOTICES Federal Register / Vol. 79, No. 37 / Tuesday, February 25, 2014 / Notices framework (including relevant policies) and margin model as discussed herein). ICE Clear Europe’s CDS risk management framework, including the margin methodology (the ‘‘CDS Model’’),3 has been enhanced to include several features designed to address particular risks of the New Sovereign Contracts. To address so-called general wrong way risk (‘‘General Wrong Way Risk’’) involving correlation between the risk of default of an underlying sovereign and the risk of default of a clearing member that has written credit protection through a New Sovereign Contract on such sovereign, additional jump-to-default requirements for initial margin are established for portfolios that present such risk. ICE Clear Europe proposes to adopt a combination of qualitative and quantitative approaches to capture General Wrong Way Risk. Under the enhanced CDS Model, an additional contribution to initial margin will be required when the seller of protection exhibits a high degree of association with an underlying Western European Sovereign reference entity by virtue of domicile (qualitative approach) or high spread return correlation (quantitative approach). To address General Wrong Way Risk arising from clearing member domicile, ICE Clear Europe will require full collateralization of the jump-todefault loss for a protection seller under a contract referencing the sovereign where the protection seller is domiciled. Under the quantitative approach, which applies where the protection seller is not domiciled in the jurisdiction of the underlying sovereign, two types of thresholds are introduced: A loss threshold and a correlation threshold. Additional General Wrong Way Risk collateralization will be collected if both thresholds are exceeded. If the spread return correlation between the member and the sovereign is above the correlation threshold and the sovereign CDS jumpto-default loss is above the loss threshold, General Wrong Way Risk collateralization is assessed as a function of the spread return correlation and amount by which the loss threshold is exceeded. The charge becomes more conservative as the spread return correlation increases. The application of additional initial margin requirements under the quantitative approach is not subject to discretion, although the thresholds are subject to review by the CDS Risk Committee as part of its 3 ICE Clear Europe has performed a variety of empirical analyses related to clearing of the New Sovereign Contracts under its margin methodology, including back tests and stress tests. VerDate Mar<15>2010 17:58 Feb 24, 2014 Jkt 232001 periodic review of ICE Clear Europe’s margin methodology. Other forms of wrong way risk arising from currency risk are also addressed. To mitigate the currency risk between a sovereign reference entity and a New Sovereign Contract involving that entity, and to facilitate greater market liquidity, the New Sovereign Contracts (and related margin and guaranty fund requirements) are denominated in U.S. dollars, rather than Euro. In addition, the rules contain prohibitions on selfreferencing trades (i.e., trades where the clearing member is an affiliate of the underlying sovereign reference entity). Such trades may not be submitted for clearing, and if a clearing member subsequently becomes affiliated with the underlying reference entity, the rules applicable to New Sovereign Contracts provide for the termination of relevant positions. The ICE Clear Europe CDS Risk Policy, the CDS Risk Model Description methodology document and CDS Wrong Way Risk Policy have been updated to account for these additional features of the risk model for the New Sovereign Contracts. 2. Statutory Basis ICE Clear Europe believes that clearing of the proposed New Sovereign Contracts is consistent with the requirements of Section 17A of the Act 4 and regulations thereunder applicable to it, including the standards under Rule 17Ad–22.5 The amendments will provide for clearing of New Sovereign Contracts by ICE Clear Europe, consistent with ICE Clear Europe’s existing clearing arrangements and related financial safeguards, protections and risk management procedures. ICE Clear Europe has adopted enhancements to the existing CDS Model to address the clearing of the New Sovereign Contracts, including the additional initial margin requirements under the qualitative and quantitative approaches to General Wrong Way Risk discussed above. The New Sovereign Contracts that will be cleared are Western European Sovereign CDS contracts substantially similar to other CDS contracts currently cleared by ICE Clear Europe. Acceptance of New Sovereign Contracts for clearing, on the terms and conditions set out in the ICE Clear Europe Rules and the enhanced CDS Model, is consistent with the prompt and accurate clearance of and settlement of securities transactions and derivative agreements, contracts and transactions cleared by ICE Clear Europe, the safeguarding of securities 4 15 5 17 PO 00000 U.S.C. 78q–1. CFR 240.17Ad–22. Frm 00114 Fmt 4703 Sfmt 4703 10579 and funds in the custody or control of ICE Clear Europe and the protection of investors and the public interest, within the meaning of Section 17A(b)(3)(F) of the Act.6 Clearing of the New Sovereign Contracts will also satisfy the relevant requirements of Rule 17Ad–22,7 as discussed below. Financial Resources. ICE Clear Europe will apply its existing margin methodology to the New Sovereign Contracts, with the enhancements to address General Wrong Way Risk discussed above. ICE Clear Europe believes that this model, including the additional initial margin that may be required to address General Wrong Way Risk, will provide sufficient margin to cover its credit exposure to its clearing members from clearing such contracts, consistent with the requirements of Rule 17Ad–22(b)(2) and Rule 17Ad– 22(d)(14).8 In addition, ICE Clear Europe believes the CDS Guaranty Fund, under its existing methodology, will, together with the required margin, provide sufficient financial resources to support the clearing of New Sovereign Contracts consistent with the requirements of Rule 17Ad–22(b)(3).9 Operational Resources. ICE Clear Europe will have the operational and managerial capacity to clear the New Sovereign Contracts as of the commencement of clearing, consistent with the requirements of Rule 17Ad– 22(d)(4).10 ICE Clear Europe believes that its existing systems are appropriately scalable to handle the additional New Sovereign Contracts, which are generally similar from an operational perspective to the CDS contracts currently cleared by ICE Clear Europe. Settlement. ICE Clear Europe believes that the rule changes will be consistent with the requirements of Rule 17Ad– 22(d)(5), (12) and (15) 11 as to the finality and accuracy of its daily settlement process and avoidance of the risk to ICE Clear Europe of settlement failures. ICE Clear Europe will use its existing settlement procedures, account structures and approved financial institutions as used in other CDS clearing for the New Sovereign Contracts. ICE Clear Europe believes that its Rules and procedures related to settlements (including physical settlements), appropriately identify and manage the risks associated with 6 15 U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22. 8 17 CFR 240.17Ad–22(b)(2), (d)(14). 9 17 CFR 240.17Ad–22(b)(3). 10 17 CFR 240.17Ad–22(d)(4). 11 17 CFR 240.17Ad–22(d)(5), (12) and (15). 7 17 E:\FR\FM\25FEN1.SGM 25FEN1 emcdonald on DSK67QTVN1PROD with NOTICES 10580 Federal Register / Vol. 79, No. 37 / Tuesday, February 25, 2014 / Notices settlements under New Sovereign Contracts. Default Procedures. ICE Clear Europe’s existing Rules and default management policies and procedures for CDS will apply to the New Sovereign Contracts as well. ICE Clear Europe believes that the Rules and procedures allow for it to take timely action to contain losses and liquidity pressures and to continue meeting its obligations in the event of clearing member insolvencies or defaults, including in respect of New Sovereign Contracts, in accordance with Rule 17Ad–22(d)(11).12 Governance. ICE Clear Europe has determined to accept the New Sovereign Contracts for clearing in accordance with its governance process, including review of the contracts and related risk management considerations (and the enhancements to the margin methodology for General Wrong Way Risk discussed herein) by the CDS Risk Committee and approval by its Board. These arrangements are consistent with the requirements of Rule 17Ad– 22(d)(8).13 Although the General Wrong Way Risk approaches, when applied to all clearing members who clear the New Sovereign Contracts, may result in clearing members being subject to different margin charges based on their domicile and correlation with the underlying sovereign for a contract, ICE Clear Europe believes that the policy properly aligns the margin requirements to the risks presented by clearing members in this regard. The policy on General Wrong Way Risk has been established with well-defined, objective parameters and is applicable to all clearing members that choose to clear the New Sovereign Contracts. Further, ICE Clear Europe does not believe the revised margin methodology creates a conflict of interest between ICE Clear Europe and its clearing members or among clearing members. The revised margin methodology operates without the need for the CDS Risk Committee, ICE Clear Europe Board or management to exercise discretion concerning particular clearing members or the margin levels applicable to them. The qualitative and quantitative components to the methodology do not contain discretionary elements, and once the relevant threshold is exceeded, the clearing house is required under the policy to assess an additional initial margin charge based on the margin methodology. This approach should minimize any potential conflicts of interest. As noted above, the CDS Risk Committee and ICE Clear Europe CFR 240.17Ad–22(d)(11). 13 17 CFR 240.17Ad–22(d)(8). 17:58 Feb 24, 2014 B. Self-Regulatory Organization’s Statement on Burden on Competition ICE Clear Europe does not believe the proposed New Sovereign Contracts would have any impact, or impose any burden, on competition not necessary or appropriate in furtherance of the purpose of the Act. ICE Clear Europe does not anticipate that its commencement of clearing for the New Sovereign Contracts will adversely affect the trading market for those contracts or for CDS more generally. Specifically, allowing clearing of the New Sovereign Contracts will provide market participants with the additional choice to have their transactions in these types of contracts cleared, and should generally promote the further development of the market for these contracts. Moreover, ICE Clear Europe has established fair and objective criteria for eligibility to clear the New Sovereign Contracts, consistent with its criteria for other cleared CDS. Although clearance of New Sovereign Contracts may result in an increase in margin requirements for some clearing members as a result of the General Wrong Way Risk requirements, ICE Clear Europe believes that these changes will properly align margin requirements to the risks presented by such clearing members with respect to the New Sovereign Contracts. As a result, ICE Clear Europe is of the view that these changes are necessary and appropriate in furtherance of the purpose of the Act and the Commission’s regulations thereunder, including the financial resources and risk management requirements of Rule 17Ad–22.15 Furthermore, ICE Clear Europe does not believe that any such increase in margin requirements would significantly affect the ability of clearing members or other market participants to continue to clear CDS, consistent with the risk management requirements of the clearing house, or otherwise limit market participants’ choices for selecting clearing services. Accordingly 14 15 U.S.C. 78q–1(b)(3)(F); 17 CFR 240.17Ad– 22(d)(8). 15 17 CFR 240.17Ad–22. 12 17 VerDate Mar<15>2010 management will regularly review the appropriateness of the quantitative threshold. Accordingly, the policy does not, in ICE Clear Europe’s view, result in unfair discrimination among clearing members within the meaning of Section 17A(b)(3)(F) of the Act and Rule 17Ad– 22(d)(8).14 ICE Clear Europe further notes that it has extensively consulted with its CDS Risk Committee as to this aspect of the clearing of the New Sovereign Contracts. Jkt 232001 PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 ICE Clear Europe does not believe that clearance of the New Sovereign Contracts will impose any burden on competition among clearing members not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments relating to the current proposal for acceptance of the New Sovereign Contracts for clearing have not been solicited or received. One comment letter was received in connection with ICE Clear Europe’s prior filing with respect thereto (File No. 2012–08), which suggested, in relevant part, consideration of additional wrong way risk raised by credit exposures of protection sellers to underlying sovereign reference entities. (The letter raised other issues concerning the disclosure of risk management processes generally and the effectiveness of market-standard sovereign CDS contracts as a hedge, which ICE Clear Europe believes are outside the scope of this rule change). ICE Clear Europe believes that the combination of the qualitative and quantitative approaches discussed herein provides appropriate initial margin protection for General Wrong Way Risk, and notes that ICE Clear Europe management and the CDS Risk Committee regularly review the appropriateness of the margin methodology. ICE Clear Europe will notify the Commission of any written comments received by ICE Clear Europe. The CDS Risk Committee raised no objection to the clearing of the New Sovereign Contracts on the terms described herein on December 10, 2013. The clearing of the New Sovereign Contracts was approved by the ICE Clear Europe board on August 1, 2012. 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. E:\FR\FM\25FEN1.SGM 25FEN1 Federal Register / Vol. 79, No. 37 / Tuesday, February 25, 2014 / Notices 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–2014–04 on the subject line. emcdonald on DSK67QTVN1PROD with NOTICES 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–2014–04. 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/notices/ Notices.shtml?regulatoryFilings. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–ICEEU–2014–04 and should be submitted on or before March 18, 2014. 16 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 17:58 Feb 24, 2014 Jkt 232001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–03973 Filed 2–24–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71571; File No. SR–OCC– 2013–23] Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change, As Modified by Amendment No. 1, To Provide OCC With Authority in Emergency Circumstances To Waive, Suspend, or Extend the Time for Compliance With Its By-Laws, Rules, Policies and Procedures, or any Other Rules Issued by OCC February 19, 2014. I. Introduction On December 27, 2013, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–OCC–2013–23 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder.2 On January 8, 2014, OCC filed Amendment No. 1 to the proposed rule change.3 The proposed rule change was published for comment in the Federal Register on January 15, 2014.4 The Commission received no comments concerning the proposed rule change. For the reasons set forth below, the Commission is approving the proposed rule change. II. Description The rule change, as approved, amends OCC’s by-laws to provide OCC with authority in emergency circumstances, subject to certain conditions, to waive or suspend the operation of its by-laws, rules, policies and procedures, or any other rules issued by OCC (collectively, ‘‘Rules’’) or to extend any time fixed thereby for the doing of any act or acts. OCC previously sought action by the Division of Trading and Markets on an ad hoc basis whenever OCC needed to temporarily waive or suspend certain of 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 In Amendment No. 1, OCC clarified its ability to extend the time fixed in certain Rules for the doing of any act or acts in emergency situations, and made other technical changes. 4 Securities Exchange Act Release No. 71268 (January 9, 2014), 79 FR 2739 (January 15, 2014) (SR–OCC–2013–23). 2 17 PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 10581 its Rules, or extend the time for doing any act or acts specified by its Rules, in order to help facilitate the national system for the prompt and accurate clearance and settlement of securities transactions.5 The rule change generally aligns OCC’s Rules with those of other registered clearing agencies, which allow those clearing agencies to waive or suspend their rules, or extend the time fixed thereby for performing any act or acts, in similar circumstances. Under the rule change, as approved, OCC’s Board of Directors, Chairman,6 Management Vice Chairman, or President is authorized either to waive or suspend the Rules or extend any time fixed by the Rules for the doing of any act or acts if it is believed that an emergency exists and such extension, waiver, or suspension is necessary or advisable to protect OCC or allow it to continue to facilitate the prompt and accurate clearance and settlement of confirmed transactions and to provide its services in a safe and sound manner. If a determination to invoke these emergency powers is made by anyone other than by the Board of Directors, the Board of Directors must be notified as soon as practicable. The rule change, as approved, requires OCC to notify the Commission and the CFTC within two hours after exercising its emergency powers.7 OCC is further required to provide the Commission and the CFTC as soon as practicable, but not later than three calendar days after exercising its emergency powers, with a report setting out the nature of the emergency, the identity of the person or persons who invoked OCC’s emergency powers, and the rationale for doing so. OCC is permitted to continue the emergency action for up to thirty calendar days unless the Commission or the CFTC, as applicable, objects in writing. If OCC wishes to continue the emergency action beyond the thirty-day period, then OCC is required to file a 5 For instance, in one case, OCC needed to waive certain of its rules temporarily to facilitate the transfer and assignment of the correspondent securities-clearing business of one of its clearing members to another. The Division of Trading and Markets issued a No-Action Letter advising OCC that the Division would not recommend an enforcement action if OCC waived its rules under those circumstances. The Options Clearing Corporation, SEC No-Action Letter, (June 4, 2012), available at https://www.sec.gov/divisions/ marketreg/mr-noaction/2012/occ060412.pdf. 6 Pursuant to Article IV, Section 6 of OCC’s ByLaws, the Chairman of the Board is also the Executive Chairman. 7 The Commission’s approval of this rule change does not relieve OCC of its obligation to submit a filing to the Commission pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act when appropriate. See 12 U.S.C. 5465(e)(1). E:\FR\FM\25FEN1.SGM 25FEN1

Agencies

[Federal Register Volume 79, Number 37 (Tuesday, February 25, 2014)]
[Notices]
[Pages 10578-10581]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-03973]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71574; File No. SR-ICEEU-2014-04]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change To Clear New Sovereign Contracts

February 19, 2014.
    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 February 11, 2014, 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

    The principal purpose of the change is to provide for the clearance 
of new CDS contracts that are Western European Sovereign CDS contracts 
referencing the Republic of Ireland, Italian Republic, Portuguese 
Republic, and Kingdom of Spain (the ``New Sovereign Contracts'').

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.

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

1. Purpose
    The purpose of the additional CDS products is to allow ICE Clear 
Europe Clearing Members the ability to clear additional European CDS 
products through ICE Clear Europe's platform.
    ICE Clear Europe has identified Western European Sovereign CDS 
Contracts as a product that has become increasingly important for 
market participants to manage risk and express views with respect to 
the European sovereign credit markets. ICE Clear Europe believes 
clearance of the New Sovereign Contracts will benefit the markets for 
credit default swaps on Western European sovereigns by offering to 
market participants the benefits of clearing, including reduction in 
counterparty risk and safeguarding of margin assets pursuant to 
clearing house rules. The terms of the New Sovereign Contracts will be 
governed by Paragraph 12 of the CDS Procedures. Clearing of the New 
Sovereign Contracts will not require any changes to ICE Clear Europe's 
existing Clearing Rules and CDS Procedures (although ICE Clear Europe 
has updated its risk management

[[Page 10579]]

framework (including relevant policies) and margin model as discussed 
herein).
    ICE Clear Europe's CDS risk management framework, including the 
margin methodology (the ``CDS Model''),\3\ has been enhanced to include 
several features designed to address particular risks of the New 
Sovereign Contracts. To address so-called general wrong way risk 
(``General Wrong Way Risk'') involving correlation between the risk of 
default of an underlying sovereign and the risk of default of a 
clearing member that has written credit protection through a New 
Sovereign Contract on such sovereign, additional jump-to-default 
requirements for initial margin are established for portfolios that 
present such risk.
---------------------------------------------------------------------------

    \3\ ICE Clear Europe has performed a variety of empirical 
analyses related to clearing of the New Sovereign Contracts under 
its margin methodology, including back tests and stress tests.
---------------------------------------------------------------------------

    ICE Clear Europe proposes to adopt a combination of qualitative and 
quantitative approaches to capture General Wrong Way Risk. Under the 
enhanced CDS Model, an additional contribution to initial margin will 
be required when the seller of protection exhibits a high degree of 
association with an underlying Western European Sovereign reference 
entity by virtue of domicile (qualitative approach) or high spread 
return correlation (quantitative approach). To address General Wrong 
Way Risk arising from clearing member domicile, ICE Clear Europe will 
require full collateralization of the jump-to-default loss for a 
protection seller under a contract referencing the sovereign where the 
protection seller is domiciled.
    Under the quantitative approach, which applies where the protection 
seller is not domiciled in the jurisdiction of the underlying 
sovereign, two types of thresholds are introduced: A loss threshold and 
a correlation threshold. Additional General Wrong Way Risk 
collateralization will be collected if both thresholds are exceeded. If 
the spread return correlation between the member and the sovereign is 
above the correlation threshold and the sovereign CDS jump-to-default 
loss is above the loss threshold, General Wrong Way Risk 
collateralization is assessed as a function of the spread return 
correlation and amount by which the loss threshold is exceeded. The 
charge becomes more conservative as the spread return correlation 
increases. The application of additional initial margin requirements 
under the quantitative approach is not subject to discretion, although 
the thresholds are subject to review by the CDS Risk Committee as part 
of its periodic review of ICE Clear Europe's margin methodology.
    Other forms of wrong way risk arising from currency risk are also 
addressed. To mitigate the currency risk between a sovereign reference 
entity and a New Sovereign Contract involving that entity, and to 
facilitate greater market liquidity, the New Sovereign Contracts (and 
related margin and guaranty fund requirements) are denominated in U.S. 
dollars, rather than Euro. In addition, the rules contain prohibitions 
on self-referencing trades (i.e., trades where the clearing member is 
an affiliate of the underlying sovereign reference entity). Such trades 
may not be submitted for clearing, and if a clearing member 
subsequently becomes affiliated with the underlying reference entity, 
the rules applicable to New Sovereign Contracts provide for the 
termination of relevant positions.
    The ICE Clear Europe CDS Risk Policy, the CDS Risk Model 
Description methodology document and CDS Wrong Way Risk Policy have 
been updated to account for these additional features of the risk model 
for the New Sovereign Contracts.
2. Statutory Basis
    ICE Clear Europe believes that clearing of the proposed New 
Sovereign Contracts is consistent with the requirements of Section 17A 
of the Act \4\ and regulations thereunder applicable to it, including 
the standards under Rule 17Ad-22.\5\ The amendments will provide for 
clearing of New Sovereign Contracts by ICE Clear Europe, consistent 
with ICE Clear Europe's existing clearing arrangements and related 
financial safeguards, protections and risk management procedures. ICE 
Clear Europe has adopted enhancements to the existing CDS Model to 
address the clearing of the New Sovereign Contracts, including the 
additional initial margin requirements under the qualitative and 
quantitative approaches to General Wrong Way Risk discussed above. The 
New Sovereign Contracts that will be cleared are Western European 
Sovereign CDS contracts substantially similar to other CDS contracts 
currently cleared by ICE Clear Europe. Acceptance of New Sovereign 
Contracts for clearing, on the terms and conditions set out in the ICE 
Clear Europe Rules and the enhanced CDS Model, is consistent with the 
prompt and accurate clearance of and settlement of securities 
transactions and derivative agreements, contracts and transactions 
cleared by ICE Clear Europe, the safeguarding of securities and funds 
in the custody or control of ICE Clear Europe and the protection of 
investors and the public interest, within the meaning of Section 
17A(b)(3)(F) of the Act.\6\ Clearing of the New Sovereign Contracts 
will also satisfy the relevant requirements of Rule 17Ad-22,\7\ as 
discussed below.
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    \4\ 15 U.S.C. 78q-1.
    \5\ 17 CFR 240.17Ad-22.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ 17 CFR 240.17Ad-22.
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    Financial Resources. ICE Clear Europe will apply its existing 
margin methodology to the New Sovereign Contracts, with the 
enhancements to address General Wrong Way Risk discussed above. ICE 
Clear Europe believes that this model, including the additional initial 
margin that may be required to address General Wrong Way Risk, will 
provide sufficient margin to cover its credit exposure to its clearing 
members from clearing such contracts, consistent with the requirements 
of Rule 17Ad-22(b)(2) and Rule 17Ad-22(d)(14).\8\ In addition, ICE 
Clear Europe believes the CDS Guaranty Fund, under its existing 
methodology, will, together with the required margin, provide 
sufficient financial resources to support the clearing of New Sovereign 
Contracts consistent with the requirements of Rule 17Ad-22(b)(3).\9\
---------------------------------------------------------------------------

    \8\ 17 CFR 240.17Ad-22(b)(2), (d)(14).
    \9\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------

    Operational Resources. ICE Clear Europe will have the operational 
and managerial capacity to clear the New Sovereign Contracts as of the 
commencement of clearing, consistent with the requirements of Rule 
17Ad-22(d)(4).\10\ ICE Clear Europe believes that its existing systems 
are appropriately scalable to handle the additional New Sovereign 
Contracts, which are generally similar from an operational perspective 
to the CDS contracts currently cleared by ICE Clear Europe.
---------------------------------------------------------------------------

    \10\ 17 CFR 240.17Ad-22(d)(4).
---------------------------------------------------------------------------

    Settlement. ICE Clear Europe believes that the rule changes will be 
consistent with the requirements of Rule 17Ad-22(d)(5), (12) and (15) 
\11\ as to the finality and accuracy of its daily settlement process 
and avoidance of the risk to ICE Clear Europe of settlement failures. 
ICE Clear Europe will use its existing settlement procedures, account 
structures and approved financial institutions as used in other CDS 
clearing for the New Sovereign Contracts. ICE Clear Europe believes 
that its Rules and procedures related to settlements (including 
physical settlements), appropriately identify and manage the risks 
associated with

[[Page 10580]]

settlements under New Sovereign Contracts.
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    \11\ 17 CFR 240.17Ad-22(d)(5), (12) and (15).
---------------------------------------------------------------------------

    Default Procedures. ICE Clear Europe's existing Rules and default 
management policies and procedures for CDS will apply to the New 
Sovereign Contracts as well. ICE Clear Europe believes that the Rules 
and procedures allow for it to take timely action to contain losses and 
liquidity pressures and to continue meeting its obligations in the 
event of clearing member insolvencies or defaults, including in respect 
of New Sovereign Contracts, in accordance with Rule 17Ad-22(d)(11).\12\
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    \12\ 17 CFR 240.17Ad-22(d)(11).
---------------------------------------------------------------------------

    Governance. ICE Clear Europe has determined to accept the New 
Sovereign Contracts for clearing in accordance with its governance 
process, including review of the contracts and related risk management 
considerations (and the enhancements to the margin methodology for 
General Wrong Way Risk discussed herein) by the CDS Risk Committee and 
approval by its Board. These arrangements are consistent with the 
requirements of Rule 17Ad-22(d)(8).\13\ Although the General Wrong Way 
Risk approaches, when applied to all clearing members who clear the New 
Sovereign Contracts, may result in clearing members being subject to 
different margin charges based on their domicile and correlation with 
the underlying sovereign for a contract, ICE Clear Europe believes that 
the policy properly aligns the margin requirements to the risks 
presented by clearing members in this regard. The policy on General 
Wrong Way Risk has been established with well-defined, objective 
parameters and is applicable to all clearing members that choose to 
clear the New Sovereign Contracts. Further, ICE Clear Europe does not 
believe the revised margin methodology creates a conflict of interest 
between ICE Clear Europe and its clearing members or among clearing 
members. The revised margin methodology operates without the need for 
the CDS Risk Committee, ICE Clear Europe Board or management to 
exercise discretion concerning particular clearing members or the 
margin levels applicable to them. The qualitative and quantitative 
components to the methodology do not contain discretionary elements, 
and once the relevant threshold is exceeded, the clearing house is 
required under the policy to assess an additional initial margin charge 
based on the margin methodology. This approach should minimize any 
potential conflicts of interest. As noted above, the CDS Risk Committee 
and ICE Clear Europe management will regularly review the 
appropriateness of the quantitative threshold. Accordingly, the policy 
does not, in ICE Clear Europe's view, result in unfair discrimination 
among clearing members within the meaning of Section 17A(b)(3)(F) of 
the Act and Rule 17Ad-22(d)(8).\14\ ICE Clear Europe further notes that 
it has extensively consulted with its CDS Risk Committee as to this 
aspect of the clearing of the New Sovereign Contracts.
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    \13\ 17 CFR 240.17Ad-22(d)(8).
    \14\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(d)(8).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed New Sovereign 
Contracts would have any impact, or impose any burden, on competition 
not necessary or appropriate in furtherance of the purpose of the Act. 
ICE Clear Europe does not anticipate that its commencement of clearing 
for the New Sovereign Contracts will adversely affect the trading 
market for those contracts or for CDS more generally. Specifically, 
allowing clearing of the New Sovereign Contracts will provide market 
participants with the additional choice to have their transactions in 
these types of contracts cleared, and should generally promote the 
further development of the market for these contracts. Moreover, ICE 
Clear Europe has established fair and objective criteria for 
eligibility to clear the New Sovereign Contracts, consistent with its 
criteria for other cleared CDS. Although clearance of New Sovereign 
Contracts may result in an increase in margin requirements for some 
clearing members as a result of the General Wrong Way Risk 
requirements, ICE Clear Europe believes that these changes will 
properly align margin requirements to the risks presented by such 
clearing members with respect to the New Sovereign Contracts. As a 
result, ICE Clear Europe is of the view that these changes are 
necessary and appropriate in furtherance of the purpose of the Act and 
the Commission's regulations thereunder, including the financial 
resources and risk management requirements of Rule 17Ad-22.\15\ 
Furthermore, ICE Clear Europe does not believe that any such increase 
in margin requirements would significantly affect the ability of 
clearing members or other market participants to continue to clear CDS, 
consistent with the risk management requirements of the clearing house, 
or otherwise limit market participants' choices for selecting clearing 
services. Accordingly ICE Clear Europe does not believe that clearance 
of the New Sovereign Contracts will impose any burden on competition 
among clearing members not necessary or appropriate in furtherance of 
the purposes of the Act.
---------------------------------------------------------------------------

    \15\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

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

    Written comments relating to the current proposal for acceptance of 
the New Sovereign Contracts for clearing have not been solicited or 
received. One comment letter was received in connection with ICE Clear 
Europe's prior filing with respect thereto (File No. 2012-08), which 
suggested, in relevant part, consideration of additional wrong way risk 
raised by credit exposures of protection sellers to underlying 
sovereign reference entities. (The letter raised other issues 
concerning the disclosure of risk management processes generally and 
the effectiveness of market-standard sovereign CDS contracts as a 
hedge, which ICE Clear Europe believes are outside the scope of this 
rule change). ICE Clear Europe believes that the combination of the 
qualitative and quantitative approaches discussed herein provides 
appropriate initial margin protection for General Wrong Way Risk, and 
notes that ICE Clear Europe management and the CDS Risk Committee 
regularly review the appropriateness of the margin methodology. ICE 
Clear Europe will notify the Commission of any written comments 
received by ICE Clear Europe.
    The CDS Risk Committee raised no objection to the clearing of the 
New Sovereign Contracts on the terms described herein on December 10, 
2013. The clearing of the New Sovereign Contracts was approved by the 
ICE Clear Europe board on August 1, 2012.

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.

[[Page 10581]]

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-2014-04 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-2014-04. 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/notices/Notices.shtml?regulatoryFilings.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-ICEEU-2014-04 
and should be submitted on or before March 18, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-03973 Filed 2-24-14; 8:45 am]
BILLING CODE 8011-01-P
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