Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change Regarding Investment Losses and Non-Default Losses, 32792-32797 [2014-13152]
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to the Fund of Funds Adviser, trustee or
Sponsor of an Investing Trust, or its
affiliated person by the Fund, in
connection with the investment by the
Fund of Funds in the Fund. Any Fund
of Funds Sub-Adviser will waive fees
otherwise payable to the Fund of Funds
Sub-Adviser, directly or indirectly, by
the Investing Management Company in
an amount at least equal to any
compensation received from a Fund by
the Fund of Funds Sub-Adviser, or an
affiliated person of the Fund of Funds
Sub-Adviser, other than any advisory
fees paid to the Fund of Funds SubAdviser or its affiliated person by the
Fund, in connection with the
investment by the Investing
Management Company in the Fund
made at the direction of the Fund of
Funds Sub-Adviser. In the event that the
Fund of Funds Sub-Adviser waives fees,
the benefit of the waiver will be passed
through to the Investing Management
Company.
6. No Fund of Funds or Fund of
Funds Affiliate (except to the extent it
is acting in its capacity as an investment
adviser to a Fund) will cause a Fund to
purchase a security in any Affiliated
Underwriting.
7. The Board of a Fund, including a
majority of the non-interested Board
members, will adopt procedures
reasonably designed to monitor any
purchases of securities by the Fund in
an Affiliated Underwriting, once an
investment by a Fund of Funds in the
securities of the Fund exceeds the limit
of section 12(d)(1)(A)(i) of the Act,
including any purchases made directly
from an Underwriting Affiliate. The
Board will review these purchases
periodically, but no less frequently than
annually, to determine whether the
purchases were influenced by the
investment by the Fund of Funds in the
Fund. The Board will consider, among
other things: (i) whether the purchases
were consistent with the investment
objectives and policies of the Fund; (ii)
how the performance of securities
purchased in an Affiliated Underwriting
compares to the performance of
comparable securities purchased during
a comparable period of time in
underwritings other than Affiliated
Underwritings or to a benchmark such
as a comparable market index; and (iii)
whether the amount of securities
purchased by the Fund in Affiliated
Underwritings and the amount
purchased directly from an
Underwriting Affiliate have changed
significantly from prior years. The
Board will take any appropriate actions
based on its review, including, if
appropriate, the institution of
procedures designed to ensure that
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purchases of securities in Affiliated
Underwritings are in the best interest of
shareholders of the Fund.
8. Each Fund will maintain and
preserve permanently in an easily
accessible place a written copy of the
procedures described in the preceding
condition, and any modifications to
such procedures, and will maintain and
preserve for a period of not less than six
years from the end of the fiscal year in
which any purchase in an Affiliated
Underwriting occurred, the first two
years in an easily accessible place, a
written record of each purchase of
securities in Affiliated Underwritings
once an investment by a Fund of Funds
in the securities of the Fund exceeds the
limit of section 12(d)(1)(A)(i) of the Act,
setting forth from whom the securities
were acquired, the identity of the
underwriting syndicate’s members, the
terms of the purchase, and the
information or materials upon which
the Board’s determinations were made.
9. Before investing in a Fund in
excess of the limit in section
12(d)(1)(A), a Fund of Funds and the
Trust will execute a FOF Participation
Agreement stating without limitation
that their respective boards of directors
or trustees and their investment
advisers, or trustee and Sponsor, as
applicable, understand the terms and
conditions of the order, and agree to
fulfill their responsibilities under the
order. At the time of its investment in
Shares of a Fund in excess of the limit
in section 12(d)(1)(A)(i), a Fund of
Funds will notify the Fund of the
investment. At such time, the Fund of
Funds will also transmit to the Fund a
list of the names of each Fund of Funds
Affiliate and Underwriting Affiliate. The
Fund of Funds will notify the Fund of
any changes to the list of the names as
soon as reasonably practicable after a
change occurs. The Fund and the Fund
of Funds will maintain and preserve a
copy of the order, the FOF Participation
Agreement, and the list with any
updated information for the duration of
the investment and for a period of not
less than six years thereafter, the first
two years in an easily accessible place.
10. Before approving any advisory
contract under section 15 of the Act, the
board of directors or trustees of each
Investing Management Company
including a majority of the disinterested
directors or trustees, will find that the
advisory fees charged under such
contract are based on services provided
that will be in addition to, rather than
duplicative of, the services provided
under the advisory contract(s) of any
Fund in which the Investing
Management Company may invest.
These findings and their basis will be
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fully recorded in the minute books of
the appropriate Investing Management
Company.
11. Any sales charges and/or service
fees charged with respect to shares of a
Fund of Funds will not exceed the
limits applicable to a fund of funds as
set forth in NASD Conduct Rule 2830.
12. No Fund will acquire securities of
an investment company or company
relying on section 3(c)(1) or 3(c)(7) of
the Act in excess of the limits contained
in section 12(d)(1)(A) of the Act, except
to the extent the Fund acquires
securities of another investment
company pursuant to exemptive relief
from the Commission permitting the
Fund to acquire securities of one or
more investment companies for shortterm cash management purposes.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–13153 Filed 6–5–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72297; File No. SR–ICEEU–
2014–06]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Notice of Filing
of Proposed Rule Change Regarding
Investment Losses and Non-Default
Losses
June 2, 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 May 30,
2014, ICE Clear Europe Limited (‘‘ICE
Clear Europe’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
changes 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The principal purpose of the
proposed changes is to amend the ICE
Clear Europe Clearing Rules to address
investment losses and non-default
losses (as described in more detail
below) that may affect the clearing
house.
1 15
2 17
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U.S.C. 78s(b)(1).
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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. 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.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
ICE Clear Europe submitted proposed
amendments to its Rules in order to
adopt new provisions relating to certain
investment losses on margin and
guaranty fund contributions provided
by clearing members (as defined more
fully below, ‘‘investment losses’’) as
well as other losses to the clearing
house arising other than from a clearing
member default (as defined more fully
below, ‘‘non-default losses’’), including
losses from general business risk and
operational risk. The amendments
would (i) require ICE Clear Europe to
apply a specified amount of its own
assets to cover non-default losses and
investment losses (‘‘loss assets’’) and (ii)
require clearing members in all product
categories to make contributions
(referred to as ‘‘collateral offset
obligations’’) to cover investment losses
(but not other non-default losses) that
exceed the available clearing house loss
assets. The proposed rules would also
limit the clearing house’s liability for
losses arising from a failure of a bank or
similar custodian.
The Bank of England has indicated
that ICE Clear Europe will be required
to have rules addressing the allocation
of non-default losses that threaten the
clearing house’s solvency and to have
plans to maintain continuity of services
if such continuity is threatened as a
result of such losses, commencing May
1, 2014. Plans to address losses from
general business risk are also an element
of the CPSS–IOSCO Principles for
Financial Market Infrastructures (the
‘‘PFMIs’’).3 The amendments are
3 We also note in this regard that the Commodity
Futures Trading Commission has adopted a similar
requirement for systemically important derivatives
clearing organizations and ‘‘subpart C’’ derivatives
clearing organizations in CFTC Rule 39.33(b)(2),
and that the Commission has proposed a similar
requirement for certain ‘‘covered clearing agencies’’
in proposed Rule 17Ad–22(e)(15). Standards for
Covered Clearing Agencies, Release No. 34–71699
(Mar. 12, 2014).
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separate from the clearing house’s
existing rules and planned rule changes
that address allocation of losses
resulting from clearing member defaults
and related recovery and wind-down
plans.
The proposed Rule amendments are
described in detail as follows.
Part 1 of the Rules has been revised
to include new definitions for
‘‘Investment Losses’’ and ‘‘Non-Default
Losses,’’ which form the basis of the
new loss allocation provisions in the
proposed rules. Investment Losses
means losses incurred or suffered by the
clearing house arising in connection
with the default of the issuer of any
instrument and/or counterparty to any
repurchase or reverse repurchase
contract or similar transaction in respect
of investment or reinvestment by the
clearing house of margin (other than
variation margin) or guaranty fund
contributions other than a loss resulting
from the clearing house’s failure to
follow its own investment policies. By
way of clarification, investment losses
will be allocated separately from losses
arising from a default, and accordingly,
an investment loss relating to margin or
guaranty fund contributions provided
by a defaulting clearing member will be
included in the calculation of
investment losses. (The amount of
investment losses will thus not be
reduced by any amounts ICE Clear
Europe may use from its default
resources under Parts 9 and 11 of the
Rules (including guaranty fund
contributions or assessments) to address
losses from a default). In addition,
Investment Losses do not include
custodial losses.
‘‘Non-Default Losses’’ means losses
suffered by the clearing house (other
than Investment Losses) arising in
connection with any event other than an
event of default and which threaten the
solvency of the clearing house. In
addition, a new definition for
‘‘Collateral Offset Obligations’’ has been
added, which refers to obligations of a
clearing member arising pursuant to
new Rule 919, as discussed below, to
make payments to the clearing house in
respect of Investment Losses, which
offset obligations of the clearing house
to pay the clearing member or return
assets in respect of margin provided to
the clearing house by the clearing
member. New definitions for
‘‘Custodian’’ (which is used in new Rule
919), and ‘‘Loss Assets’’ (assets of the
clearing house itself that are intended to
be applied to investment losses and
non-default losses under Rule 919 as
described below) have been added.
In Rules 111 and 905, conforming and
clarifying changes to the description of
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various types of losses or liabilities that
may be borne by the clearing house have
been made, through addition of
references to ‘‘claims’’ and ‘‘shortfalls,’’
in order to ensure consistent use of
language throughout Rules where other
references are made to losses.
The proposed changes would adopt
new Rule 919, which includes the
allocation rules for investment losses
and non-default losses and procedures
for applying collateral offset obligations.
Under Rule 919(b), non-default losses
will be satisfied by applying the
available loss assets designated by the
clearing house and then other available
capital or assets of the clearing house.
Investment losses, on the other hand,
will first be satisfied by applying the
available loss assets provided by the
clearing house, and thereafter by
collateral offset obligations as discussed
herein. The amount of loss assets
provided by ICE Clear Europe will
initially be USD 90 million (pursuant to
Rule 919(p)), subject to adjustment by
the clearing house by circular from time
to time. ICE Clear Europe will not have
an obligation to replenish the amount of
loss assets, if applied to non-default
losses or investment losses.
Pursuant to Rule 919(c), if there is an
investment loss in an amount greater
than the then-available loss assets, all
clearing members will be required to
indemnify the clearing house and pay
collateral offset obligations to the
clearing house in accordance with Rule
919(d). The clearing house will publish
a circular including certain required
details of any investment loss and
collateral offset obligations due. The
amount of such payment is determined
pursuant to Rule 919(d), and is based on
the proportion of a clearing member’s
aggregate initial margin and guaranty
fund contributions (for all product
categories) to the aggregate initial
margin and guaranty fund contributions
of all clearing members (for all product
categories) (in any case other than
margin and contributions of defaulting
clearing members that are applied or
included in the net sum calculation
under the Rules as a result of the
default). Under Rule 919(e), the
collateral offset obligation of a clearing
member shall not exceed the total of all
initial margin and guaranty fund
contributions (across all accounts and
product categories) that it has deposited
with the clearing house at the time of
the event giving rise to the investment
loss. To the extent the investment losses
exceed the amount of available loss
assets and the capped collateral offset
obligations of clearing members,
clearing members would not have
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further obligations to make payments to
the clearing house in respect thereof.
Collateral offset obligations are due at
the time specified by the clearing house,
under Rule 919(f), and will be payable
in accordance with the procedures for
collection of margin under Rule 302 and
the Finance Procedures. Collateral offset
obligations may, at the election of the
clearing house, be offset against the
obligation of the clearing house to
return initial margin or guaranty fund
contributions, and will be collected
pursuant to a call for margin from a
proprietary account of the clearing
member. (In the case of a defaulting
clearing member, the clearing house
may include the collateral offset
obligation in any net sum (to reduce any
net sum otherwise payable to the
defaulting clearing member) or offset it
against any other obligation of the
clearing house to return any remaining
margin or guaranty fund contributions
after application in respect of the
default). Collection of the collateral
offset obligation from the proprietary
account of a clearing member is not
intended to preclude a clearing member
from passing the cost of the collateral
offset obligation to its Customer(s), to
the extent the obligation relates to
customer account margin or otherwise
to a customer and to the extent
permitted by applicable law.
If the clearing house subsequently
recovers amounts in respect of an
investment loss, Rule 919(h) provides
for allocating the recovery to clearing
members on a pro rata basis in
proportion to their collateral offset
obligations satisfied (after repaying the
clearing house for any of its own assets
applied in excess of the loss assets or
any other persons for their assets
applied).
Pursuant to Rules 919(i), the
obligation of a clearing member to make
collateral offset obligations is separate
from, and does not reduce, its obligation
to provide margin and to make guaranty
fund contributions or guaranty fund
assessment contributions under the
existing rules. Under Rule 919(j), if the
clearing house calls for collateral offset
obligations in excess of that actually
required, it will credit the excess to the
relevant clearing members’ proprietary
accounts, from which it may be
withdrawn in accordance with the usual
procedure for withdrawal of excess
margin under Part 3 of the Rules.
Rule 919(k) provides that the
obligation to provide collateral offset
obligations under Rule 919 applies
independently from the powers of
assessment following clearing member
defaults in other parts of the Rules, and
notes for clarification that the limits on
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assessment in Rules 917 and 918 for the
F&O and FX product categories do not
affect the liability of clearing members
for collateral offset obligations. Rule
919(l) clarifies that the exercise of rights
under Rule 919 does not constitute a
Clearing House Event (i.e., a payment
default or insolvency of the clearing
house). Rule 919(m) provides for
payments of collateral offset obligations
to be made in accordance with the
general procedures for payments under
Part 3 of the Rules and the Finance
Procedures, subject to the clearing
house’s setoff and netting rights under
the Rules.
Under Rule 919(n), the clearing house
is not required to pursue any litigation
or other action against any person in
respect of unpaid amounts (including
those representing an investment loss or
non-default loss). As discussed above, to
the extent the clearing house recovers
amounts in respect of an investment
loss, Rule 919(h) provides for allocating
such recovery to clearing members that
have paid collateral offset obligations.
Rule 919(o) allows the clearing house to
make currency conversions in making
determinations under Rule 919.
As discussed above, Rule 919(p)
establishes the initial level of loss assets
at USD 90 million. The clearing house
may change the level of loss assets from
time to time by Circular. Pursuant to
Rule 919(q), ICE Clear Europe must
notify clearing members of the amount
of loss assets used from time to time.
The clearing house is not required to
replenish the amount of loss assets if
used, although it may elect to do so.
Separately, Rule 919(q) also provides
that the clearing house may replenish
any regulatory capital as required to
bring it in compliance with applicable
laws at any time, including following an
investment loss or other non-default
loss. However, no such recapitalization
will result in any obligation of any
clearing member to pay collateral offset
obligations, or the size of any
investment loss, being reduced. In
addition, replenishment of required
regulatory capital does not in itself
require, or result in, a replenishment of
loss assets.
Under Rule 919(r), the clearing house
is not liable to any clearing member,
customer or any other person for losses
arising from a failure of a payment or
security services provider, including a
Custodian such as a payment or custody
bank, securities depository or securities
settlement system.
Other related changes are made in
Parts 11, 12 and 16 of the Rules. A
change is made in Rule 1103(e) to allow
the loss assets to be held together with
other clearing house contributions to the
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guaranty fund (without affecting the
limitations in the existing rules and
Rule 919 on the use of such assets). (As
a result of this change, each clearing
house contribution is no longer required
to be held in a separate account,
although the three clearing house
guaranty fund contributions and the loss
assets are required to be held separately
from other clearing house assets.)
Conforming changes to definitions
relating to custodians are made in Rule
1201.
New Rule 1606(b) is added to address
certain matters relating to the
investment of customer collateral in the
form of cash provided by FCM/BD
Clearing Members under applicable
CFTC regulations. The revised rule
confirms that such cash can only be
invested in U.S. treasury securities in
accordance with applicable law. The
rule further provides that FCM/BD
Clearing Members must direct the
clearing house whether to so invest such
cash or to leave it uninvested (and
deems the clearing member to have
instructed the clearing house to invest
such collateral if it does not provide
direction).
ICE Clear Europe believes that the
proposed rule changes are consistent
with the requirements of Section 17A of
the Act 4 and the regulations thereunder
applicable to it, including the standards
under Rule 17Ad–22.5 Section
17A(b)(3)(F) of the Act 6 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.
Neither Section 17A of the Act 7 nor
Rule 17Ad–22 8 specifically addresses
non-default losses of the type
contemplated by the proposed rules.
Nonetheless, ICE Clear Europe believes
that the proposed rule changes are
consistent with the Act and the
regulations thereunder applicable to ICE
Clear Europe, in particular, Section
17(A)(b)(3)(F),9 because ICE Clear
Europe believes that the new rules will
enhance the clearing house’s ability to
bear such losses. This will in turn
further the clearing house’s ability to
continue operations if faced by
investment or non-default losses, which
will facilitate prompt and accurate
settlement of securities transactions
and, to the extent applicable, derivative
4 15
U.S.C. 78q–1.
CFR 240.17Ad–22.
6 15 U.S.C. 78q–1(b)(3)(F).
7 15 U.S.C. 78q–1.
8 17 CFR 240.17Ad–22.
9 15 U.S.C. 78q–1(b)(3)(F).
5 17
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agreements, contracts and transactions
and contribute to the safeguarding of
securities and funds which are in the
custody or control of ICE Clear Europe
or for which it is responsible, as set
forth herein.
ICE Clear Europe has developed the
proposed rules to satisfy paragraphs
29A and 29B under the UK’s Financial
Services and Markets Act 2000
(Recognition Requirements for
Investment Exchanges and Clearing
Houses) Regulations 2001, Schedule, as
inserted by the Financial Services and
Markets Act 2000 (Over the Counter
Derivatives, Central Counterparties and
Trade Repositories) (No. 2) Regulations
2013. Rules addressing allocation of
investment and non-default losses are
also contemplated under the PFMIs.
Consistent with these requirements, the
proposed rules are designed to allocate
investment losses (i.e., losses from a
default under an investment) to the
clearing house and clearing members,
while other non-default losses (i.e.,
other losses not resulting from clearing
member default) are allocated only to
the clearing house. The rules further
limit the liability of the clearing house
for losses resulting from a failure of a
Custodian—losses that are outside of the
control of the clearing house but which
could threaten the solvency of the
clearing house. ICE Clear Europe does
not expect that these rules will affect the
ordinary course operation of the
clearing house or its existing protections
for the securities and funds in its
custody or control or for which it is
responsible. ICE Clear Europe believes
that the proposed rule changes will
enhance the stability of ICE Clear
Europe if it experiences significant
investment losses or non-default losses,
by providing new resources to cover
such losses. The proposed rules will
also provide greater certainty for
clearing members and the clearing
house itself as to the scope of resources
that will be available to cover such
losses and the liability of the clearing
house and clearing members for such
losses. Taken together, the amendments
will thus promote the prompt and
accurate clearance and settlement of
contracts cleared by ICE Clear Europe,
consistent with the requirements of
Section 17A(b)(3)(F).10
The amendments also are consistent
with the relevant requirements of Rule
17Ad–22, and in particular the financial
resources requirements of Rule 17Ad–
22(b)(2–3).11 ICE Clear Europe does not
propose to change the amount of
financial resources (both pre-funded
10 15
11 17
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(b)(2)–(3).
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resources and potential assessment
resources) currently available to support
its clearing operations in any product
category. The amendments would
provide an additional financial resource
to address investment losses and nondefault losses. In addition, ICE Clear
Europe believes that the changes will
enhance its ability to continue clearing
operations following an investment loss
or non-default loss and provide it and
market participants with greater
certainty as to the financial resources
that will be available to the clearing
house following such losses.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
ICE Clear Europe does not believe the
proposed rule changes would have any
material impact, or impose any material
burden, on competition not necessary or
appropriate in furtherance of the
purposes of the Act.
The rule amendments will by
definition impose additional potential
costs on clearing members in
investment loss scenarios, as they may
be required to make collateral offset
obligations, up to the defined maximum
amount. The limitation on liability for
custodial losses may also impose costs
on clearing members. As discussed
above, ICE believes this approach is
warranted in light of the need to allocate
such losses and implement recovery and
wind-down plans as a result of such
losses, as required under applicable UK
legislation. Moreover, ICE Clear Europe
does not believe these costs are likely to
have a material impact on the ordinary
course operation of the clearing house,
as they are relevant only under extreme
non-default loss scenarios where the
alternative could be clearinghouse
failure or insolvency.
In terms of access to the clearing
house, ICE Clear Europe is not
proposing to change its standards for
clearing membership or financial
requirements for clearing membership.
As such, ICE Clear Europe does not
believe the changes will reduce access
by clearing members to the clearing
house. While there will be additional
potential costs for clearing members, the
limit on collateral offset obligations is
intended to provide clearing members
with greater certainty as to the extent of
their financial obligations to the
clearinghouse, and to limit their
maximum potential liability. As a result,
the amendments may make it easier for
some market participants to become
members, and a failure to adopt the
amendments could, in ICE Clear
Europe’s view, dissuade some market
participants from being members. As a
result, ICE Clear Europe does not
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32795
believe the amendments will reduce
clearing member access to the clearing
house. In addition, ICE Clear Europe
does not believe the proposed
amendments are likely to adversely
affect competition among clearing
members. The proposed rules will apply
to all clearing members in the same
way. Enhanced certainty, and greater
stability of the clearing house in the
event of non-default losses, may also
benefit the market for cleared
derivatives generally, which in turn may
enhance competition.
In terms of the impact on customers
of clearing members, it is possible that
the added costs to clearing members of
potential collateral offset obligations,
and the limitation on liability for
custodial losses, will result in higher
costs for customers in some
circumstances. As with the costs on
clearing members themselves, ICE Clear
Europe believes that the proposed rule
changes are warranted in light of the UK
requirements to allocate investment and
non-default losses, and benefits of
enhanced financial resources and
stability for the clearing house. In
addition, ICE Clear Europe does not
believe that the potential additional
costs will have a significant burden on
competition, as they apply to all
clearing members equally.
ICE Clear Europe also does not believe
the rule amendments will adversely
affect the ability of market participants
to continue to clear transactions or
otherwise limit market participants’
choices for clearing transactions. ICE
Clear Europe expects that, in light of the
PFMIs and applicable regulatory
requirements in the US and EU, other
clearing organizations will similarly
need to develop procedures for
addressing non-default losses. The rule
amendments are intended to provide a
stronger framework for the clearing
house to deal with non-default loss
events and keep clearing services in
operation despite such losses. This
should generally enhance the ability of
market participants to continue to clear
derivative products, reduce systemic
effects on the cleared markets generally
and reduce the risk of failure of a
clearinghouse (which would generally
be expected to have an adverse impact
on competition). To the extent market
participants have greater certainty as to
how investment and non-default losses
would be handled by the clearing house,
they may have greater confidence in
clearing generally, which will also tend
to enhance the stability and strength of
the market for cleared products,
consistent with the goals of the Act.
For the foregoing reasons, the
proposed rules are, in ICE Clear
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Federal Register / Vol. 79, No. 109 / Friday, June 6, 2014 / Notices
wreier-aviles on DSK5TPTVN1PROD with NOTICES
Europe’s view, appropriate in
furtherance of the purposes of the Act
and other legal requirements applicable
to ICE Clear Europe. The clearing house
does not believe that the proposed
amendments will impose any burden on
competition not necessary or
appropriate in furtherance of the
purpose of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Comments relating to the rule changes
were solicited from clearing members by
Circular No. C14/056 (May 2, 2014). ICE
Clear Europe has received comments
from the Futures Industry Association
and comments provided on behalf of
various clearing members. These
comments raised certain objections to
the proposed rules, including that (i)
allocation of investment losses in
respect of an FCM customer account is
inconsistent with CFTC Rule 1.29(b), (ii)
allocation of investment losses would
create undue and potentially unlimited
and unquantifiable risk to clearing
members, (iii) the proposed rules lack a
formula for determining the amount of
loss assets provided by ICE Clear
Europe, and should require that ICE
Clear Europe replenish the loss assets,
(iv) collateral offset obligations should
not be netted against unrelated payment
obligations of ICE Clear Europe, (v) loss
assets should not be used for both
investment losses and non-default
losses, (vi) the loss assets and ICE
contributions to the guaranty funds
should each be held in a separate
account, (vii) the manner of allocation
of investment losses attempts should be
revised, including to allocate
investment losses between customer
accounts and proprietary accounts,
based on product categories, and/or
based on cash margin rather than total
margin.
ICE Clear Europe has considered and
disagrees with these comments.
Specifically, ICE Clear Europe believes
that in light of the provisions of
proposed Rule 1606(b), the allocation of
investment losses in respect of the FCM
customer account is consistent with the
requirements of CFTC Rule 1.29(b), and
further that because of the cap on
collateral offset obligations in Rule
919(e), the liability for collateral offset
obligations is neither unlimited nor
unquantifiable. ICE Clear Europe does
not believe a defined formula for loss
assets is necessary. In ICE Clear
Europe’s view, the proposed rule
provides a significant additional
resource to cover investment losses and
non-default losses as compared to the
VerDate Mar<15>2010
13:59 Jun 05, 2014
Jkt 232001
current rules. For this reason, ICE Clear
Europe does not believe it is necessary
to provide separate resources for nondefault losses and investment losses, or
to have an obligation to replenish such
assets or otherwise provide even more
resources. Netting under Rule 919(f)
would apply to obligations to return
margin or guaranty fund contributions,
which are not unrelated to investment
losses, and in ICE Clear Europe’s view
is appropriate with a view to reducing
unnecessary payment flows. ICE Clear
Europe further does not believe it is
necessary for loss assets and ICE Clear
Europe guaranty fund contributions to
be held in separate accounts, given that
such amounts are kept separate from
amounts provided by clearing members
and the limitations on the use of such
amounts are unchanged. In light of the
limited scenarios in which the loss
allocation rules of Rule 919 are expected
to be used, and the fact that a loss may
not be readily allocable to any particular
clearing member, customer or product
category, ICE Clear Europe does not
believe it is desirable to attempt to
allocate losses between customer and
proprietary accounts, or to particular
product categories. ICE Clear Europe
further believes that allocating based on
overall initial margin and guaranty fund
contributions is an efficient and
equitable means of allocating the losses.
ICE Clear Europe notes that certain
comments also suggested that ICE Clear
Europe provide additional information
and transparency concerning its
investment policies. ICE Clear Europe is
continuing to consider such changes, in
consultation with clearing members,
although it does not believe such
changes would affect the proposed
rules.
ICE Clear Europe will notify the
Commission of any additional written
comments received by ICE Clear Europe.
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.
PO 00000
Frm 00106
Fmt 4703
Sfmt 4703
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–2014–06 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ICEEU–2014–06. 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–2014–06 and
should be submitted on or before June
27, 2014.
E:\FR\FM\06JNN1.SGM
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Federal Register / Vol. 79, No. 109 / Friday, June 6, 2014 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–13152 Filed 6–5–14; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–72291; File No. SR–MIAX–
2014–20]
Self-Regulatory Organizations; Miami
International Securities Exchange LLC;
Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend Exchange Rule 519,
MIAX Order Monitor
June 2, 2014.
Pursuant to the provisions of 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 May 22, 2014, Miami International
Securities Exchange LLC (‘‘MIAX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. 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 is filing a proposal to
amend Exchange Rule 519. The text of
the proposed rule change is available on
the Exchange’s Web site at https://
www.miaxoptions.com/filter/wotitle/
rule_filing, at MIAX’s principal office,
and at the Commission’s Public
Reference Room.
wreier-aviles on DSK5TPTVN1PROD with NOTICES
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
Exchange 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. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b-4.
13:59 Jun 05, 2014
including changing a citation in Rule
530.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
2. Statutory Basis
The Exchange proposes to amend
Rule 519, MIAX Order Monitor, to
provide details regarding order size
protections. The proposal codifies
existing functionality applicable to
orders on the Exchange.
Currently, Rule 519 only provides
details regarding the System’s order
price protections. However, in addition
to order protections based on price, the
System also employs order protections
based on size. The Exchange now
proposes to codify these existing order
size protections into Rule 519.
Specifically, the Exchange proposes to
provide that the System prevents certain
orders from executing or being placed
on the Book if the size of the order
exceeds the order size protection
designated by the Member. Members
may designate or disable the order size
protection on a firm wide basis. The
default maximum size of orders are
determined by the Exchange and
announced to Members through a
Regulatory Circular.3 The order size
protections provide market participants
the flexibility to designate the level of
protection they need to help prevent the
potential submission of erroneously
sized orders on the Exchange. The
proposed change is designed to protect
investors and the public interest by
codifying the order size protections that
apply to orders that help market
participants avoid the potential
submission of erroneously sized orders
on the Exchange. In addition, the
Exchange believes that the proposed
amendment removes impediments to
and perfects the mechanisms of a free
and open market and a national market
system and, in general, protects
investors and the public interest by
helping to eliminate potential confusion
on behalf of market participants by
clearly stating the System’s
functionality with regard to orders that
trigger order size protections.
The Exchange also proposes several
technical changes to enable the
incorporation of the order size
protections into the Rules alongside the
existing order price protections,
3 The Exchange notes that the current default
maximum size of orders is 10,000. However,
Members may designate a maximum order size on
a firm wide basis from 0 to 999,999.
12 17
VerDate Mar<15>2010
the most significant aspects of such
statements.
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
Jkt 232001
32797
PO 00000
Frm 00107
Fmt 4703
Sfmt 4703
The Exchange believes that its
proposed rule change is consistent with
Section 6(b) 4 of the Act in general, and
furthers the objectives of Section
6(b)(5) 5 of the Act in particular, in that
it is designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanisms of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
The proposed change is designed to
protect investors and the public interest
by codifying the order size protections
that apply to orders that help market
participants avoid the potential
submission of erroneously sized orders
on the Exchange. In addition, the
Exchange believes that the proposed
amendment removes impediments to
and perfects the mechanisms of a free
and open market and a national market
system and, in general, protects
investors and the public interest by
helping to eliminate potential confusion
on behalf of market participants by
clearly stating the System’s
functionality with regard to orders that
trigger order size protections.
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 not
necessary or appropriate in furtherance
of the purposes of the Act. Specifically,
the Exchange believes the proposed
changes will not impose any burden on
intra-market competition because it
applies to all MIAX participants
equally. In addition, the Exchange does
not believe the proposal will impose
any burden on inter-market competition
as the proposal is intended to protect
investors by providing further
transparency regarding the Exchange’s
order size protections.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
4 15
5 15
E:\FR\FM\06JNN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
06JNN1
]]>Agencies
[Federal Register Volume 79, Number 109 (Friday, June 6, 2014)]
[Notices]
[Pages 32792-32797]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-13152]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72297; File No. SR-ICEEU-2014-06]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing of Proposed Rule Change Regarding Investment Losses and Non-
Default Losses
June 2, 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 May 30, 2014, ICE Clear Europe Limited (``ICE Clear Europe'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule changes 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 proposed changes is to amend the ICE
Clear Europe Clearing Rules to address investment losses and non-
default losses (as described in more detail below) that may affect the
clearing house.
[[Page 32793]]
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. 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
ICE Clear Europe submitted proposed amendments to its Rules in
order to adopt new provisions relating to certain investment losses on
margin and guaranty fund contributions provided by clearing members (as
defined more fully below, ``investment losses'') as well as other
losses to the clearing house arising other than from a clearing member
default (as defined more fully below, ``non-default losses''),
including losses from general business risk and operational risk. The
amendments would (i) require ICE Clear Europe to apply a specified
amount of its own assets to cover non-default losses and investment
losses (``loss assets'') and (ii) require clearing members in all
product categories to make contributions (referred to as ``collateral
offset obligations'') to cover investment losses (but not other non-
default losses) that exceed the available clearing house loss assets.
The proposed rules would also limit the clearing house's liability for
losses arising from a failure of a bank or similar custodian.
The Bank of England has indicated that ICE Clear Europe will be
required to have rules addressing the allocation of non-default losses
that threaten the clearing house's solvency and to have plans to
maintain continuity of services if such continuity is threatened as a
result of such losses, commencing May 1, 2014. Plans to address losses
from general business risk are also an element of the CPSS-IOSCO
Principles for Financial Market Infrastructures (the ``PFMIs'').\3\ The
amendments are separate from the clearing house's existing rules and
planned rule changes that address allocation of losses resulting from
clearing member defaults and related recovery and wind-down plans.
---------------------------------------------------------------------------
\3\ We also note in this regard that the Commodity Futures
Trading Commission has adopted a similar requirement for
systemically important derivatives clearing organizations and
``subpart C'' derivatives clearing organizations in CFTC Rule
39.33(b)(2), and that the Commission has proposed a similar
requirement for certain ``covered clearing agencies'' in proposed
Rule 17Ad-22(e)(15). Standards for Covered Clearing Agencies,
Release No. 34-71699 (Mar. 12, 2014).
---------------------------------------------------------------------------
The proposed Rule amendments are described in detail as follows.
Part 1 of the Rules has been revised to include new definitions for
``Investment Losses'' and ``Non-Default Losses,'' which form the basis
of the new loss allocation provisions in the proposed rules. Investment
Losses means losses incurred or suffered by the clearing house arising
in connection with the default of the issuer of any instrument and/or
counterparty to any repurchase or reverse repurchase contract or
similar transaction in respect of investment or reinvestment by the
clearing house of margin (other than variation margin) or guaranty fund
contributions other than a loss resulting from the clearing house's
failure to follow its own investment policies. By way of clarification,
investment losses will be allocated separately from losses arising from
a default, and accordingly, an investment loss relating to margin or
guaranty fund contributions provided by a defaulting clearing member
will be included in the calculation of investment losses. (The amount
of investment losses will thus not be reduced by any amounts ICE Clear
Europe may use from its default resources under Parts 9 and 11 of the
Rules (including guaranty fund contributions or assessments) to address
losses from a default). In addition, Investment Losses do not include
custodial losses.
``Non-Default Losses'' means losses suffered by the clearing house
(other than Investment Losses) arising in connection with any event
other than an event of default and which threaten the solvency of the
clearing house. In addition, a new definition for ``Collateral Offset
Obligations'' has been added, which refers to obligations of a clearing
member arising pursuant to new Rule 919, as discussed below, to make
payments to the clearing house in respect of Investment Losses, which
offset obligations of the clearing house to pay the clearing member or
return assets in respect of margin provided to the clearing house by
the clearing member. New definitions for ``Custodian'' (which is used
in new Rule 919), and ``Loss Assets'' (assets of the clearing house
itself that are intended to be applied to investment losses and non-
default losses under Rule 919 as described below) have been added.
In Rules 111 and 905, conforming and clarifying changes to the
description of various types of losses or liabilities that may be borne
by the clearing house have been made, through addition of references to
``claims'' and ``shortfalls,'' in order to ensure consistent use of
language throughout Rules where other references are made to losses.
The proposed changes would adopt new Rule 919, which includes the
allocation rules for investment losses and non-default losses and
procedures for applying collateral offset obligations. Under Rule
919(b), non-default losses will be satisfied by applying the available
loss assets designated by the clearing house and then other available
capital or assets of the clearing house. Investment losses, on the
other hand, will first be satisfied by applying the available loss
assets provided by the clearing house, and thereafter by collateral
offset obligations as discussed herein. The amount of loss assets
provided by ICE Clear Europe will initially be USD 90 million (pursuant
to Rule 919(p)), subject to adjustment by the clearing house by
circular from time to time. ICE Clear Europe will not have an
obligation to replenish the amount of loss assets, if applied to non-
default losses or investment losses.
Pursuant to Rule 919(c), if there is an investment loss in an
amount greater than the then-available loss assets, all clearing
members will be required to indemnify the clearing house and pay
collateral offset obligations to the clearing house in accordance with
Rule 919(d). The clearing house will publish a circular including
certain required details of any investment loss and collateral offset
obligations due. The amount of such payment is determined pursuant to
Rule 919(d), and is based on the proportion of a clearing member's
aggregate initial margin and guaranty fund contributions (for all
product categories) to the aggregate initial margin and guaranty fund
contributions of all clearing members (for all product categories) (in
any case other than margin and contributions of defaulting clearing
members that are applied or included in the net sum calculation under
the Rules as a result of the default). Under Rule 919(e), the
collateral offset obligation of a clearing member shall not exceed the
total of all initial margin and guaranty fund contributions (across all
accounts and product categories) that it has deposited with the
clearing house at the time of the event giving rise to the investment
loss. To the extent the investment losses exceed the amount of
available loss assets and the capped collateral offset obligations of
clearing members, clearing members would not have
[[Page 32794]]
further obligations to make payments to the clearing house in respect
thereof.
Collateral offset obligations are due at the time specified by the
clearing house, under Rule 919(f), and will be payable in accordance
with the procedures for collection of margin under Rule 302 and the
Finance Procedures. Collateral offset obligations may, at the election
of the clearing house, be offset against the obligation of the clearing
house to return initial margin or guaranty fund contributions, and will
be collected pursuant to a call for margin from a proprietary account
of the clearing member. (In the case of a defaulting clearing member,
the clearing house may include the collateral offset obligation in any
net sum (to reduce any net sum otherwise payable to the defaulting
clearing member) or offset it against any other obligation of the
clearing house to return any remaining margin or guaranty fund
contributions after application in respect of the default). Collection
of the collateral offset obligation from the proprietary account of a
clearing member is not intended to preclude a clearing member from
passing the cost of the collateral offset obligation to its
Customer(s), to the extent the obligation relates to customer account
margin or otherwise to a customer and to the extent permitted by
applicable law.
If the clearing house subsequently recovers amounts in respect of
an investment loss, Rule 919(h) provides for allocating the recovery to
clearing members on a pro rata basis in proportion to their collateral
offset obligations satisfied (after repaying the clearing house for any
of its own assets applied in excess of the loss assets or any other
persons for their assets applied).
Pursuant to Rules 919(i), the obligation of a clearing member to
make collateral offset obligations is separate from, and does not
reduce, its obligation to provide margin and to make guaranty fund
contributions or guaranty fund assessment contributions under the
existing rules. Under Rule 919(j), if the clearing house calls for
collateral offset obligations in excess of that actually required, it
will credit the excess to the relevant clearing members' proprietary
accounts, from which it may be withdrawn in accordance with the usual
procedure for withdrawal of excess margin under Part 3 of the Rules.
Rule 919(k) provides that the obligation to provide collateral
offset obligations under Rule 919 applies independently from the powers
of assessment following clearing member defaults in other parts of the
Rules, and notes for clarification that the limits on assessment in
Rules 917 and 918 for the F&O and FX product categories do not affect
the liability of clearing members for collateral offset obligations.
Rule 919(l) clarifies that the exercise of rights under Rule 919 does
not constitute a Clearing House Event (i.e., a payment default or
insolvency of the clearing house). Rule 919(m) provides for payments of
collateral offset obligations to be made in accordance with the general
procedures for payments under Part 3 of the Rules and the Finance
Procedures, subject to the clearing house's setoff and netting rights
under the Rules.
Under Rule 919(n), the clearing house is not required to pursue any
litigation or other action against any person in respect of unpaid
amounts (including those representing an investment loss or non-default
loss). As discussed above, to the extent the clearing house recovers
amounts in respect of an investment loss, Rule 919(h) provides for
allocating such recovery to clearing members that have paid collateral
offset obligations. Rule 919(o) allows the clearing house to make
currency conversions in making determinations under Rule 919.
As discussed above, Rule 919(p) establishes the initial level of
loss assets at USD 90 million. The clearing house may change the level
of loss assets from time to time by Circular. Pursuant to Rule 919(q),
ICE Clear Europe must notify clearing members of the amount of loss
assets used from time to time. The clearing house is not required to
replenish the amount of loss assets if used, although it may elect to
do so. Separately, Rule 919(q) also provides that the clearing house
may replenish any regulatory capital as required to bring it in
compliance with applicable laws at any time, including following an
investment loss or other non-default loss. However, no such
recapitalization will result in any obligation of any clearing member
to pay collateral offset obligations, or the size of any investment
loss, being reduced. In addition, replenishment of required regulatory
capital does not in itself require, or result in, a replenishment of
loss assets.
Under Rule 919(r), the clearing house is not liable to any clearing
member, customer or any other person for losses arising from a failure
of a payment or security services provider, including a Custodian such
as a payment or custody bank, securities depository or securities
settlement system.
Other related changes are made in Parts 11, 12 and 16 of the Rules.
A change is made in Rule 1103(e) to allow the loss assets to be held
together with other clearing house contributions to the guaranty fund
(without affecting the limitations in the existing rules and Rule 919
on the use of such assets). (As a result of this change, each clearing
house contribution is no longer required to be held in a separate
account, although the three clearing house guaranty fund contributions
and the loss assets are required to be held separately from other
clearing house assets.) Conforming changes to definitions relating to
custodians are made in Rule 1201.
New Rule 1606(b) is added to address certain matters relating to
the investment of customer collateral in the form of cash provided by
FCM/BD Clearing Members under applicable CFTC regulations. The revised
rule confirms that such cash can only be invested in U.S. treasury
securities in accordance with applicable law. The rule further provides
that FCM/BD Clearing Members must direct the clearing house whether to
so invest such cash or to leave it uninvested (and deems the clearing
member to have instructed the clearing house to invest such collateral
if it does not provide direction).
ICE Clear Europe believes that the proposed rule changes are
consistent with the requirements of Section 17A of the Act \4\ and the
regulations thereunder applicable to it, including the standards under
Rule 17Ad-22.\5\ Section 17A(b)(3)(F) of the Act \6\ 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. Neither Section 17A of the Act \7\ nor
Rule 17Ad-22 \8\ specifically addresses non-default losses of the type
contemplated by the proposed rules. Nonetheless, ICE Clear Europe
believes that the proposed rule changes are consistent with the Act and
the regulations thereunder applicable to ICE Clear Europe, in
particular, Section 17(A)(b)(3)(F),\9\ because ICE Clear Europe
believes that the new rules will enhance the clearing house's ability
to bear such losses. This will in turn further the clearing house's
ability to continue operations if faced by investment or non-default
losses, which will facilitate prompt and accurate settlement of
securities transactions and, to the extent applicable, derivative
[[Page 32795]]
agreements, contracts and transactions and contribute to the
safeguarding of securities and funds which are in the custody or
control of ICE Clear Europe or for which it is responsible, as set
forth herein.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78q-1.
\5\ 17 CFR 240.17Ad-22.
\6\ 15 U.S.C. 78q-1(b)(3)(F).
\7\ 15 U.S.C. 78q-1.
\8\ 17 CFR 240.17Ad-22.
\9\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
ICE Clear Europe has developed the proposed rules to satisfy
paragraphs 29A and 29B under the UK's Financial Services and Markets
Act 2000 (Recognition Requirements for Investment Exchanges and
Clearing Houses) Regulations 2001, Schedule, as inserted by the
Financial Services and Markets Act 2000 (Over the Counter Derivatives,
Central Counterparties and Trade Repositories) (No. 2) Regulations
2013. Rules addressing allocation of investment and non-default losses
are also contemplated under the PFMIs. Consistent with these
requirements, the proposed rules are designed to allocate investment
losses (i.e., losses from a default under an investment) to the
clearing house and clearing members, while other non-default losses
(i.e., other losses not resulting from clearing member default) are
allocated only to the clearing house. The rules further limit the
liability of the clearing house for losses resulting from a failure of
a Custodian--losses that are outside of the control of the clearing
house but which could threaten the solvency of the clearing house. ICE
Clear Europe does not expect that these rules will affect the ordinary
course operation of the clearing house or its existing protections for
the securities and funds in its custody or control or for which it is
responsible. ICE Clear Europe believes that the proposed rule changes
will enhance the stability of ICE Clear Europe if it experiences
significant investment losses or non-default losses, by providing new
resources to cover such losses. The proposed rules will also provide
greater certainty for clearing members and the clearing house itself as
to the scope of resources that will be available to cover such losses
and the liability of the clearing house and clearing members for such
losses. Taken together, the amendments will thus promote the prompt and
accurate clearance and settlement of contracts cleared by ICE Clear
Europe, consistent with the requirements of Section 17A(b)(3)(F).\10\
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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The amendments also are consistent with the relevant requirements
of Rule 17Ad-22, and in particular the financial resources requirements
of Rule 17Ad-22(b)(2-3).\11\ ICE Clear Europe does not propose to
change the amount of financial resources (both pre-funded resources and
potential assessment resources) currently available to support its
clearing operations in any product category. The amendments would
provide an additional financial resource to address investment losses
and non-default losses. In addition, ICE Clear Europe believes that the
changes will enhance its ability to continue clearing operations
following an investment loss or non-default loss and provide it and
market participants with greater certainty as to the financial
resources that will be available to the clearing house following such
losses.
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\11\ 17 CFR 240.17Ad-22(b)(2)-(3).
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B. Self-Regulatory Organization's Statement on Burden on Competition
ICE Clear Europe does not believe the proposed rule changes would
have any material impact, or impose any material burden, on competition
not necessary or appropriate in furtherance of the purposes of the Act.
The rule amendments will by definition impose additional potential
costs on clearing members in investment loss scenarios, as they may be
required to make collateral offset obligations, up to the defined
maximum amount. The limitation on liability for custodial losses may
also impose costs on clearing members. As discussed above, ICE believes
this approach is warranted in light of the need to allocate such losses
and implement recovery and wind-down plans as a result of such losses,
as required under applicable UK legislation. Moreover, ICE Clear Europe
does not believe these costs are likely to have a material impact on
the ordinary course operation of the clearing house, as they are
relevant only under extreme non-default loss scenarios where the
alternative could be clearinghouse failure or insolvency.
In terms of access to the clearing house, ICE Clear Europe is not
proposing to change its standards for clearing membership or financial
requirements for clearing membership. As such, ICE Clear Europe does
not believe the changes will reduce access by clearing members to the
clearing house. While there will be additional potential costs for
clearing members, the limit on collateral offset obligations is
intended to provide clearing members with greater certainty as to the
extent of their financial obligations to the clearinghouse, and to
limit their maximum potential liability. As a result, the amendments
may make it easier for some market participants to become members, and
a failure to adopt the amendments could, in ICE Clear Europe's view,
dissuade some market participants from being members. As a result, ICE
Clear Europe does not believe the amendments will reduce clearing
member access to the clearing house. In addition, ICE Clear Europe does
not believe the proposed amendments are likely to adversely affect
competition among clearing members. The proposed rules will apply to
all clearing members in the same way. Enhanced certainty, and greater
stability of the clearing house in the event of non-default losses, may
also benefit the market for cleared derivatives generally, which in
turn may enhance competition.
In terms of the impact on customers of clearing members, it is
possible that the added costs to clearing members of potential
collateral offset obligations, and the limitation on liability for
custodial losses, will result in higher costs for customers in some
circumstances. As with the costs on clearing members themselves, ICE
Clear Europe believes that the proposed rule changes are warranted in
light of the UK requirements to allocate investment and non-default
losses, and benefits of enhanced financial resources and stability for
the clearing house. In addition, ICE Clear Europe does not believe that
the potential additional costs will have a significant burden on
competition, as they apply to all clearing members equally.
ICE Clear Europe also does not believe the rule amendments will
adversely affect the ability of market participants to continue to
clear transactions or otherwise limit market participants' choices for
clearing transactions. ICE Clear Europe expects that, in light of the
PFMIs and applicable regulatory requirements in the US and EU, other
clearing organizations will similarly need to develop procedures for
addressing non-default losses. The rule amendments are intended to
provide a stronger framework for the clearing house to deal with non-
default loss events and keep clearing services in operation despite
such losses. This should generally enhance the ability of market
participants to continue to clear derivative products, reduce systemic
effects on the cleared markets generally and reduce the risk of failure
of a clearinghouse (which would generally be expected to have an
adverse impact on competition). To the extent market participants have
greater certainty as to how investment and non-default losses would be
handled by the clearing house, they may have greater confidence in
clearing generally, which will also tend to enhance the stability and
strength of the market for cleared products, consistent with the goals
of the Act.
For the foregoing reasons, the proposed rules are, in ICE Clear
[[Page 32796]]
Europe's view, appropriate in furtherance of the purposes of the Act
and other legal requirements applicable to ICE Clear Europe. The
clearing house does not believe that the proposed amendments will
impose any burden on competition not necessary or appropriate in
furtherance of the purpose of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Comments relating to the rule changes were solicited from clearing
members by Circular No. C14/056 (May 2, 2014). ICE Clear Europe has
received comments from the Futures Industry Association and comments
provided on behalf of various clearing members. These comments raised
certain objections to the proposed rules, including that (i) allocation
of investment losses in respect of an FCM customer account is
inconsistent with CFTC Rule 1.29(b), (ii) allocation of investment
losses would create undue and potentially unlimited and unquantifiable
risk to clearing members, (iii) the proposed rules lack a formula for
determining the amount of loss assets provided by ICE Clear Europe, and
should require that ICE Clear Europe replenish the loss assets, (iv)
collateral offset obligations should not be netted against unrelated
payment obligations of ICE Clear Europe, (v) loss assets should not be
used for both investment losses and non-default losses, (vi) the loss
assets and ICE contributions to the guaranty funds should each be held
in a separate account, (vii) the manner of allocation of investment
losses attempts should be revised, including to allocate investment
losses between customer accounts and proprietary accounts, based on
product categories, and/or based on cash margin rather than total
margin.
ICE Clear Europe has considered and disagrees with these comments.
Specifically, ICE Clear Europe believes that in light of the provisions
of proposed Rule 1606(b), the allocation of investment losses in
respect of the FCM customer account is consistent with the requirements
of CFTC Rule 1.29(b), and further that because of the cap on collateral
offset obligations in Rule 919(e), the liability for collateral offset
obligations is neither unlimited nor unquantifiable. ICE Clear Europe
does not believe a defined formula for loss assets is necessary. In ICE
Clear Europe's view, the proposed rule provides a significant
additional resource to cover investment losses and non-default losses
as compared to the current rules. For this reason, ICE Clear Europe
does not believe it is necessary to provide separate resources for non-
default losses and investment losses, or to have an obligation to
replenish such assets or otherwise provide even more resources. Netting
under Rule 919(f) would apply to obligations to return margin or
guaranty fund contributions, which are not unrelated to investment
losses, and in ICE Clear Europe's view is appropriate with a view to
reducing unnecessary payment flows. ICE Clear Europe further does not
believe it is necessary for loss assets and ICE Clear Europe guaranty
fund contributions to be held in separate accounts, given that such
amounts are kept separate from amounts provided by clearing members and
the limitations on the use of such amounts are unchanged. In light of
the limited scenarios in which the loss allocation rules of Rule 919
are expected to be used, and the fact that a loss may not be readily
allocable to any particular clearing member, customer or product
category, ICE Clear Europe does not believe it is desirable to attempt
to allocate losses between customer and proprietary accounts, or to
particular product categories. ICE Clear Europe further believes that
allocating based on overall initial margin and guaranty fund
contributions is an efficient and equitable means of allocating the
losses.
ICE Clear Europe notes that certain comments also suggested that
ICE Clear Europe provide additional information and transparency
concerning its investment policies. ICE Clear Europe is continuing to
consider such changes, in consultation with clearing members, although
it does not believe such changes would affect the proposed rules.
ICE Clear Europe will notify the Commission of any additional
written comments received by ICE Clear Europe.
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-2014-06 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-ICEEU-2014-06. 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-2014-06
and should be submitted on or before June 27, 2014.
[[Page 32797]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-13152 Filed 6-5-14; 8:45 am]
BILLING CODE 8011-01-P
