Self-Regulatory Organizations; ICE Clear Europe Limited; Order Granting Accelerated Approval of Proposed Rule Change to CDS Policies Relating to EMIR, 46479-46481 [2014-18752]
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Federal Register / Vol. 79, No. 153 / Friday, August 8, 2014 / Notices
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and funds which are in the custody or
control of the clearing agency or for
which it is responsible and, in general,
to protect investors and the public
interest.
The Commission finds that the
proposed amendments to the
Procedures are consistent with the
requirements of Section 17A of the Act 9
and the rules and regulations
thereunder applicable to ICE Clear
Europe. In particular, the Commission
believes that the proposed amendments
to the ICE Clear Europe Procedures,
which are principally designed to
further implement proposed changes to
its Clearing Rules as contained in the
Rule Submission, are designed to
promote the prompt and accurate
clearance and settlement of securities
transactions and, to the extent
applicable, derivative agreements,
contracts, and transactions, and to
assure the safeguarding of securities and
funds which are in the custody or
control of the clearing agency or for
which it is responsible, consistent with
Section 17A(b)(3)(F) of the Act.10
Section 19(b)(2)(C)(iii) of the Act 11
allows the Commission to approve a
proposed rule change earlier than 30
days after the date of publication of the
notice of the proposed rule change in
the Federal Register where the
Commission finds good cause for so
doing and publishes the reason for the
finding. In its filing, ICE Clear Europe
requested that the Commission approve
the proposed rule change on an
accelerated basis for good cause shown.
ICE Clear Europe has represented that
the proposed Procedures changes are
necessary to further implement the rule
changes contained in the Rule
Submission in order to comply with
requirements under EMIR in connection
with its authorization as a central
counterparty under EMIR. ICE Clear
Europe further notes that failure to have
the amendments in effect, and to be in
compliance with the EMIR
requirements, may adversely affect the
approval of its authorization application
and therefore its ability to do business
as a recognised central counterparty.
Accordingly, the Commission finds that
good cause exists to approve the
proposed rule change on an accelerated
basis pursuant to Section 19(b)(2)(C)(iii)
of the Act.12
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
9 15
U.S.C. 78q–1.
U.S.C. 78q–1(b)(3)(F).
11 15 U.S.C. 78s(b)(2)(C)(iii).
12 15 U.S.C. 78s(b)(2)(C)(iii).
10 15
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consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the
Act 13 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,14 that the
proposed rule change (SR–ICEEU–2014–
11) be, and hereby is, approved on an
accelerated basis.15
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–18750 Filed 8–7–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72756; File No. SR–ICEEU–
2014–10]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Order Granting
Accelerated Approval of Proposed
Rule Change to CDS Policies Relating
to EMIR
August 4, 2014.
I. Introduction
On June 30, 2014, ICE Clear Europe
Limited (‘‘ICE Clear Europe’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change SR–ICEEU–2014–
10 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder.2
The proposed rule change was
published for comment in the Federal
Register on July 10, 2014.3 The
Commission received no comment
letters regarding the proposed change.
For the reasons discussed below, the
Commission is granting approval of the
proposed rule change on an accelerated
basis.
II. Description of the Proposed Rule
Change
ICE Clear Europe is proposing this
change to amend certain of the ICE Clear
Europe credit default swaps (‘‘CDS’’)
risk policies (‘‘Risk Policy
13 15
U.S.C. 78q–1.
U.S.C. 78s(b)(2).
15 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition and capital formation. 15
U.S.C. 78c(f).
16 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 34–72544
(July 3, 2014), 79 FR 39421 (July 10, 2014) (SR–
ICEEU–2014–10).
14 15
PO 00000
Frm 00085
Fmt 4703
Sfmt 4703
46479
Amendments’’) in order to facilitate
compliance with requirements under
the European Market Infrastructure
Regulation (including regulations
thereunder, ‘‘EMIR’’) 4 that will apply to
ICE Clear Europe as an authorized
central counterparty.
ICE Clear Europe states that the
relevant policies being modified by the
proposed change are (i) the CDS Risk
Policy (‘‘Risk Policy’’); (ii) the Risk
Model Description (‘‘Model
Description’’); (iii) the CDS Clearing
Back-Testing Framework (‘‘Back-Testing
Framework’’); (iv) the CDS Clearing
Stress-Testing Framework (‘‘StressTesting Framework’’); and (v) the CDS
Default Management Framework
(‘‘Default Management Framework’’).
ICE Clear Europe states that the
changes to the Risk Policy amend the
calculation of CDS initial margin
requirements to comply with margin
requirements under EMIR Article 41
and Article 24 of the implementing
Regulatory Technical Standards.5 ICE
Clear Europe contends that, as revised,
the initial margin methodology is
designed to provide portfolio risk
coverage against at least 5-day market
realizations that would occur with
probability 99.5% (previously 99.0%),
that is, the estimated requirements
provide risk protection equivalent to at
least a 5-day 99.5% Value-at-Risk
measure. In addition, ICE Clear Europe
states that in order to address
requirements under EMIR related to
procyclicality (Article 28 of the
Regulatory Technical Standards)
changes were made to the maximum
scale used for the initial margin
approach by adding a volatility scale
that assigns a 25% weight to stressed
period observations during the lookback
period from April 2007 to the present
(consistent with Article 28(b) of the
Regulatory Technical Standards). ICE
Clear Europe expects the revised initial
margin requirement, including certain
portfolio benefit assumptions, to result
in more conservative initial margin
requirements than under the previous
approach.
ICE Clear Europe states that similar
amendments to those described above
are also made to the Model Description.
ICE Clear Europe contends that under
the revised Model Description, the
4 Regulation (EU) No 648/2012 of the European
Parliament and of the Council of 4 July 2012 on
OTC derivatives, central counterparties and trade
repositories.
5 Commission Delegated Regulation (EU) No. 153/
2013 of 19 December 2012 Supplementing
Regulation (EU) No. 648/2012 of the European
Parliament and of the Council with regard to
Regulatory Technical Standards on Requirements
for Central Counterparties (the ‘‘Regulatory
Technical Standards’’).
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46480
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overall initial margin methodology, post
portfolio benefits and other risk
components (e.g. jump-to-default and
wrong way risk), will provide portfolio
risk coverage against at least 5-day
market realizations that would occur
with probability 99.5% or higher. ICE
Clear Europe states that conforming
changes with respect to the 99.5%
confidence interval are also made in the
Model Description. ICE Clear Europe
also states that the revised Model
Description reflects the use of stressed
observations described above to limit
procyclicality. Furthermore, ICE Clear
Europe states that the Model
Description has also been revised to
include the Clearing House’s Monte
Carlo Approach for Risk Management
(‘‘MC’’), which has previously been
applied to Western European sovereign
CDS and is proposed to be extended to
all CDS.
ICE Clear Europe states that the CDS
MC approach aims to model the spread
risk component of initial margin by
combining individual risk factors
(‘‘RFs’’), i.e., single name or index
family of instruments, into a copula. ICE
Clear Europe further states that marginal
distributions for individual RFs are
joined together under a Student-t
copula. In this way, ICE Clear Europe
contends, the model preserves historical
behavior of RFs and their dependencies
and that the value-at risk (VaR) for the
profit and loss distribution can be
estimated by sampling from this copula.
ICE Clear Europe contends that the
MC method offers a number of
advantages over the existing scenariobased spread response method (the
‘‘Decomp SR’’), in that (1) the
dependence structure of RFs is encoded
into the copula, as opposed to the longshort offsets algorithm used to
determine portfolio benefits under the
Decomp SR; and (2) the copula can also
capture tail dependence, such that
various extreme scenarios can be easily
simulated.
ICE Clear Europe states that the
scenario-based approach of the spread
risk component with its portfolio benefit
assumptions is generally expected to
result in a more conservative
requirement when compared to the MC
VaR approach for the same coverage
level. ICE Clear Europe further states
that in order to ensure compliance with
the 99.5% confidence interval
requirement for OTC derivatives under
EMIR, the final spread response charge
will be determined as the more
conservative of the Decomp SR and the
MC VaR calculated at a 99.5%
confidence interval.
ICE Clear Europe also states that the
CDS pricing model, used since the
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inception of clearing, has also been
attached to the Risk Model Description
as an annex.
ICE Clear Europe states that the
changes to the Back-Testing Framework
are also meant to implement the 99.5%
confidence interval. ICE Clear Europe
states that the historical volatility
calculation has changed in the BackTesting Framework to use data from, at
minimum, the most recent year (or, if
shorter, the period in which the relevant
contract has been cleared). In addition,
ICE Clear Europe contends that, per the
amendments, on at least a monthly
basis, the CDS Risk Department will
report the CDS back testing results and
analysis to the CDS Risk Committee in
order to seek their review and, if
needed, their recommendations of the
CDS margin model. ICE Clear Europe
also states that CDS back testing results
and analyses are made available to all
CDS Clearing Members and clients
(where known to ICE Clear Europe) for
their own portfolios and that disclosed
information is aggregated in a form that
does not breach confidentiality. ICE
Clear Europe also contends that the
policy also provides a framework for
monitoring and remediating breaches
that arise during back-testing, based on
the so-called ‘‘Basel Traffic Light
System,’’ depending on the number and
magnitude of the exceedances. Finally,
ICE Clear Europe states that the BackTesting Framework will be reviewed
and approved by the CDS Risk
Committee and ICE Clear Europe Board
at least annually.
ICE Clear Europe states the StressTesting Framework is amended to
provide further detail as to its use of
daily stress testing, which allows ICE
Clear Europe to discover any potential
weaknesses in the risk methodologies as
well as to exercise short-term measures
if the tests reveal that any counterparties
are inadequately collateralized. ICE
Clear Europe contends that a detailed
analysis of the stress testing and
sensitivity testing results is to be
performed by the CDS Risk Department
at least on a monthly basis, or more
frequently in stressed market
conditions, to ensure the adequacy of
the existing stress test scenarios and
framework. ICE Clear Europe states the
Stress-Testing Framework amendments
would also add pure historical
scenarios, as required under EMIR, that
are applied at the single name level,
using the same date across all
instruments. ICE Clear Europe also
states that single-name specific stress
scenarios are based on the same 5-day
period when the on-the-run indices had
the greatest observed related spread
increases or decreases. ICE Clear Europe
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
also states that the guaranty fund stress
scenario has also been clarified, and is
designed to account for: (1) The
occurrence of credit events for two
Clearing Members and three reference
entities on which the defaulted Clearing
Members sold protection, (2) adverse
contracting or widening credit spread
scenarios, (3) adverse widening of
Index-single name ‘‘basis,’’ and (4)
adverse changes of the default-free
discount terms structure. ICE Clear
Europe contends that CDS stress testing
results and analyses are made available
to all CDS Clearing Members and clients
(where known to ICE Clear Europe) for
their own portfolios and disclosed
information is aggregated in a form that
does not breach confidentiality. Finally,
ICE Clear Europe states the CDS Stress
Testing framework is to be reviewed and
approved by the CDS Risk Committee
and ICE Clear Europe Board at least
annually.
ICE Clear Europe contends that minor
improvements have been made to the
Default Management Framework,
namely, (1) ICE Clear Europe will
conduct a quarterly (rather than annual)
review of its Default Management
Framework, and (2) ICE Clear Europe
will perform a mock Clearing Member
default test at least annually.
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act 6 directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if the Commission finds
that such proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to such selfregulatory organization. Section
17A(b)(3)(F) of the Act 7 requires, among
other things, that the rules of a clearing
agency are designed to promote the
prompt and accurate clearance and
settlement of securities transactions
and, to the extent applicable, derivative
agreements, contracts, and transactions,
to assure the safeguarding of securities
and funds which are in the custody or
control of the clearing agency or for
which it is responsible and, in general,
to protect investors and the public
interest. In addition, Rule 17Ad–
22(b)(1)–(3) requires a registered
clearing agency that performs central
counterparty services to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to, among other
things, measure its credit exposures to
its participants at least once a day and
6 15
7 15
E:\FR\FM\08AUN1.SGM
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
08AUN1
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Federal Register / Vol. 79, No. 153 / Friday, August 8, 2014 / Notices
limit its exposures to potential losses
from defaults by its participants, use
margin requirements to limit its credit
exposures to participants under normal
market conditions, and if it performs
central counterparty services for
security-based swaps, maintain
sufficient financial resources to
withstand, at a minimum, a default by
the two participant families to which it
has the largest exposures in extreme but
plausible market conditions.8
The Commission finds that the
proposed rule change is consistent with
Section 17A of the Act 9 and the rules
thereunder applicable to ICE Clear
Europe. ICE Clear Europe represents
that the proposed rule change will
enhance the financial resources
available to the Clearing House by
imposing more conservative initial
margin requirements, while also
reducing the risk of loss to market
participants resulting from a default by
a Clearing Member or other customer.
ICE Clear Europe further states that the
proposed rule change will impose more
frequent reviews and tests of its risk
management procedures. The
Commission therefore believes that the
proposed enhancements to ICE Clear
Europe’s risk policies are designed to
assure the safeguarding of securities and
funds which are in the custody or
control of the clearing agency or for
which it is responsible consistent with
Section 17A(b)(3)(F).10 In addition, the
Commission believes the proposed Risk
Policy Amendments are reasonably
designed to ensure that ICE Clear
Europe continues to meet the risk
management requirements of Rule
17Ad–22(b)(1)–(3).11
Section 19(b)(2)(C)(iii) of the Act 12
allows the Commission to approve a
proposed rule change earlier than 30
days after the date of publication of the
notice of the proposed rule change in
the Federal Register where the
Commission finds good cause for so
doing and publishes the reason for the
finding. In its filing, ICE Clear Europe
requested that the Commission approve
the proposed rule change on an
accelerated basis for good cause shown.
ICE Clear Europe has represented that
the proposed Risk Policy Amendments
are necessary in order to comply with
requirements under EMIR in connection
with its authorization as a central
counterparty under EMIR. ICE Clear
Europe further notes that failure to have
the amendments in effect, and to be in
8 17
CFR 240.17Ad–22(b)(1)–(3).
U.S.C. 78q–1.
10 15 U.S.C. 78q–1(b)(3)(F).
11 17 CFR 240.17Ad–22(b)(1)–(3).
12 15 U.S.C. 78s(b)(2)(C)(iii).
9 15
VerDate Mar<15>2010
16:51 Aug 07, 2014
Jkt 232001
compliance with the EMIR
requirements, may adversely affect the
approval of its authorization application
and therefore its ability to do business
as a recognized central counterparty.
Accordingly, the Commission finds that
good cause exists to approve the
proposed rule change on an accelerated
basis pursuant to Section 19(b)(2)(C)(iii)
of the Act.13
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the
Act 14 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,15 that the
proposed rule change (File No. SR–
ICEEU–2014–10) be, and hereby is,
approved on an accelerated basis.16
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–18752 Filed 8–7–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72755; File No. SR–ICEEU–
2014–09]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Order Granting
Accelerated Approval of Proposed
Rule Change Relating to EMIR
Requirements
August 4, 2014.
I. Introduction
On June 30, 2014, ICE Clear Europe
Limited (‘‘ICE Clear Europe’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change SR–ICEEU–2014–
09 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder.2
The proposed rule change was
published for comment in the Federal
13 15
U.S.C. 78s(b)(2)(C)(iii).
U.S.C. 78q–1.
15 15 U.S.C. 78s(b)(2).
16 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition and capital formation. 15
U.S.C. 78c(f).
17 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
14 15
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
46481
Register on July 10, 2014.3 The
Commission did not receive any
comments on the proposed rule change.
For the reasons discussed below, the
Commission is granting approval of the
proposed rule change on an accelerated
basis.
II. Description of the Proposed Rule
Change
The principal purpose of the
proposed change is to amend the ICE
Clear Europe Clearing Rules in order to
comply with requirements under the
European Market Infrastructure
Regulation (including regulations and
implementing technical standards
thereunder, ‘‘EMIR’’) 4 that will apply to
ICE Clear Europe as an authorized
central counterparty,5 and to make
certain other amendments to harmonize
its rules across different products and
make improvements to its rules.
ICE Clear Europe states that the
principal change will be to implement
changes to the structure of customer
accounts for cleared transactions to
enhance segregation options for
customers of Clearing Members.
According to ICE Clear Europe,
pursuant to EMIR,6 ICE Clear Europe
will be required to keep separate records
and accounts that will enable it to
distinguish the assets and positions of:
(i) One Clearing Member from those of
any other Clearing Member, and (ii)
either (A) a Clearing Member from those
of its clients (‘‘omnibus segregation’’) or
(B) a client of a Clearing Member from
any other client of that Clearing Member
(‘‘individual segregation’’). In addition,
each of ICE Clear Europe’s Clearing
Members will be required (i) to keep
separate records and accounts that
enable them to distinguish in both
accounts held with the Clearing House
and their own accounts Clearing
Member assets and positions from those
of its clients; and (ii) to offer clients a
choice of individual or omnibus
segregation at the Clearing House. ICE
Clear Europe has proposed revisions to
its segregation models to implement this
requirement to provide both individual
3 Securities Exchange Act Release No. 34–72540
(July 3, 2014), 79 FR 39429 (July 10, 2014) (SR–
ICEEU–2014–09).
4 Regulation (EU) No 648/2012 of the European
Parliament and of the Council of 4 July 2012 on
OTC derivatives, central counterparties and trade
repositories, as well as various implementing
regulations and technical standards.
5 ICE Clear Europe has separately filed certain
related changes to its policies and procedures,
including risk management policies. See Securities
Exchange Act Release No. 34–72544 (July 3, 2014),
79 FR 39421 (July 10, 2014) (SR–ICEEU–2014–10)
and Securities Exchange Act Release No. 34–72582
(July 10, 2014), 79 FR 41320 (July 15, 2014) (SR–
ICEEU–2014–11).
6 EMIR Article 39(1)–(3).
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Agencies
[Federal Register Volume 79, Number 153 (Friday, August 8, 2014)]
[Notices]
[Pages 46479-46481]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18752]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72756; File No. SR-ICEEU-2014-10]
Self-Regulatory Organizations; ICE Clear Europe Limited; Order
Granting Accelerated Approval of Proposed Rule Change to CDS Policies
Relating to EMIR
August 4, 2014.
I. Introduction
On June 30, 2014, ICE Clear Europe Limited (``ICE Clear Europe'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-ICEEU-2014-10 pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ The proposed rule change was published for comment in
the Federal Register on July 10, 2014.\3\ The Commission received no
comment letters regarding the proposed change. For the reasons
discussed below, the Commission is granting approval of the proposed
rule change on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-72544 (July 3, 2014),
79 FR 39421 (July 10, 2014) (SR-ICEEU-2014-10).
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
ICE Clear Europe is proposing this change to amend certain of the
ICE Clear Europe credit default swaps (``CDS'') risk policies (``Risk
Policy Amendments'') in order to facilitate compliance with
requirements under the European Market Infrastructure Regulation
(including regulations thereunder, ``EMIR'') \4\ that will apply to ICE
Clear Europe as an authorized central counterparty.
---------------------------------------------------------------------------
\4\ Regulation (EU) No 648/2012 of the European Parliament and
of the Council of 4 July 2012 on OTC derivatives, central
counterparties and trade repositories.
---------------------------------------------------------------------------
ICE Clear Europe states that the relevant policies being modified
by the proposed change are (i) the CDS Risk Policy (``Risk Policy'');
(ii) the Risk Model Description (``Model Description''); (iii) the CDS
Clearing Back-Testing Framework (``Back-Testing Framework''); (iv) the
CDS Clearing Stress-Testing Framework (``Stress-Testing Framework'');
and (v) the CDS Default Management Framework (``Default Management
Framework'').
ICE Clear Europe states that the changes to the Risk Policy amend
the calculation of CDS initial margin requirements to comply with
margin requirements under EMIR Article 41 and Article 24 of the
implementing Regulatory Technical Standards.\5\ ICE Clear Europe
contends that, as revised, the initial margin methodology is designed
to provide portfolio risk coverage against at least 5-day market
realizations that would occur with probability 99.5% (previously
99.0%), that is, the estimated requirements provide risk protection
equivalent to at least a 5-day 99.5% Value-at-Risk measure. In
addition, ICE Clear Europe states that in order to address requirements
under EMIR related to procyclicality (Article 28 of the Regulatory
Technical Standards) changes were made to the maximum scale used for
the initial margin approach by adding a volatility scale that assigns a
25% weight to stressed period observations during the lookback period
from April 2007 to the present (consistent with Article 28(b) of the
Regulatory Technical Standards). ICE Clear Europe expects the revised
initial margin requirement, including certain portfolio benefit
assumptions, to result in more conservative initial margin requirements
than under the previous approach.
---------------------------------------------------------------------------
\5\ Commission Delegated Regulation (EU) No. 153/2013 of 19
December 2012 Supplementing Regulation (EU) No. 648/2012 of the
European Parliament and of the Council with regard to Regulatory
Technical Standards on Requirements for Central Counterparties (the
``Regulatory Technical Standards'').
---------------------------------------------------------------------------
ICE Clear Europe states that similar amendments to those described
above are also made to the Model Description. ICE Clear Europe contends
that under the revised Model Description, the
[[Page 46480]]
overall initial margin methodology, post portfolio benefits and other
risk components (e.g. jump-to-default and wrong way risk), will provide
portfolio risk coverage against at least 5-day market realizations that
would occur with probability 99.5% or higher. ICE Clear Europe states
that conforming changes with respect to the 99.5% confidence interval
are also made in the Model Description. ICE Clear Europe also states
that the revised Model Description reflects the use of stressed
observations described above to limit procyclicality. Furthermore, ICE
Clear Europe states that the Model Description has also been revised to
include the Clearing House's Monte Carlo Approach for Risk Management
(``MC''), which has previously been applied to Western European
sovereign CDS and is proposed to be extended to all CDS.
ICE Clear Europe states that the CDS MC approach aims to model the
spread risk component of initial margin by combining individual risk
factors (``RFs''), i.e., single name or index family of instruments,
into a copula. ICE Clear Europe further states that marginal
distributions for individual RFs are joined together under a Student-t
copula. In this way, ICE Clear Europe contends, the model preserves
historical behavior of RFs and their dependencies and that the value-at
risk (VaR) for the profit and loss distribution can be estimated by
sampling from this copula.
ICE Clear Europe contends that the MC method offers a number of
advantages over the existing scenario-based spread response method (the
``Decomp SR''), in that (1) the dependence structure of RFs is encoded
into the copula, as opposed to the long-short offsets algorithm used to
determine portfolio benefits under the Decomp SR; and (2) the copula
can also capture tail dependence, such that various extreme scenarios
can be easily simulated.
ICE Clear Europe states that the scenario-based approach of the
spread risk component with its portfolio benefit assumptions is
generally expected to result in a more conservative requirement when
compared to the MC VaR approach for the same coverage level. ICE Clear
Europe further states that in order to ensure compliance with the 99.5%
confidence interval requirement for OTC derivatives under EMIR, the
final spread response charge will be determined as the more
conservative of the Decomp SR and the MC VaR calculated at a 99.5%
confidence interval.
ICE Clear Europe also states that the CDS pricing model, used since
the inception of clearing, has also been attached to the Risk Model
Description as an annex.
ICE Clear Europe states that the changes to the Back-Testing
Framework are also meant to implement the 99.5% confidence interval.
ICE Clear Europe states that the historical volatility calculation has
changed in the Back-Testing Framework to use data from, at minimum, the
most recent year (or, if shorter, the period in which the relevant
contract has been cleared). In addition, ICE Clear Europe contends
that, per the amendments, on at least a monthly basis, the CDS Risk
Department will report the CDS back testing results and analysis to the
CDS Risk Committee in order to seek their review and, if needed, their
recommendations of the CDS margin model. ICE Clear Europe also states
that CDS back testing results and analyses are made available to all
CDS Clearing Members and clients (where known to ICE Clear Europe) for
their own portfolios and that disclosed information is aggregated in a
form that does not breach confidentiality. ICE Clear Europe also
contends that the policy also provides a framework for monitoring and
remediating breaches that arise during back-testing, based on the so-
called ``Basel Traffic Light System,'' depending on the number and
magnitude of the exceedances. Finally, ICE Clear Europe states that the
Back-Testing Framework will be reviewed and approved by the CDS Risk
Committee and ICE Clear Europe Board at least annually.
ICE Clear Europe states the Stress-Testing Framework is amended to
provide further detail as to its use of daily stress testing, which
allows ICE Clear Europe to discover any potential weaknesses in the
risk methodologies as well as to exercise short-term measures if the
tests reveal that any counterparties are inadequately collateralized.
ICE Clear Europe contends that a detailed analysis of the stress
testing and sensitivity testing results is to be performed by the CDS
Risk Department at least on a monthly basis, or more frequently in
stressed market conditions, to ensure the adequacy of the existing
stress test scenarios and framework. ICE Clear Europe states the
Stress-Testing Framework amendments would also add pure historical
scenarios, as required under EMIR, that are applied at the single name
level, using the same date across all instruments. ICE Clear Europe
also states that single-name specific stress scenarios are based on the
same 5-day period when the on-the-run indices had the greatest observed
related spread increases or decreases. ICE Clear Europe also states
that the guaranty fund stress scenario has also been clarified, and is
designed to account for: (1) The occurrence of credit events for two
Clearing Members and three reference entities on which the defaulted
Clearing Members sold protection, (2) adverse contracting or widening
credit spread scenarios, (3) adverse widening of Index-single name
``basis,'' and (4) adverse changes of the default-free discount terms
structure. ICE Clear Europe contends that CDS stress testing results
and analyses are made available to all CDS Clearing Members and clients
(where known to ICE Clear Europe) for their own portfolios and
disclosed information is aggregated in a form that does not breach
confidentiality. Finally, ICE Clear Europe states the CDS Stress
Testing framework is to be reviewed and approved by the CDS Risk
Committee and ICE Clear Europe Board at least annually.
ICE Clear Europe contends that minor improvements have been made to
the Default Management Framework, namely, (1) ICE Clear Europe will
conduct a quarterly (rather than annual) review of its Default
Management Framework, and (2) ICE Clear Europe will perform a mock
Clearing Member default test at least annually.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \6\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if the
Commission finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such self-regulatory organization. Section 17A(b)(3)(F)
of the Act \7\ requires, among other things, that the rules of a
clearing agency are designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, to
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible and, in general, to protect investors and the public
interest. In addition, Rule 17Ad-22(b)(1)-(3) requires a registered
clearing agency that performs central counterparty services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, among other things, measure its
credit exposures to its participants at least once a day and
[[Page 46481]]
limit its exposures to potential losses from defaults by its
participants, use margin requirements to limit its credit exposures to
participants under normal market conditions, and if it performs central
counterparty services for security-based swaps, maintain sufficient
financial resources to withstand, at a minimum, a default by the two
participant families to which it has the largest exposures in extreme
but plausible market conditions.\8\
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\6\ 15 U.S.C. 78s(b)(2)(C).
\7\ 15 U.S.C. 78q-1(b)(3)(F).
\8\ 17 CFR 240.17Ad-22(b)(1)-(3).
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The Commission finds that the proposed rule change is consistent
with Section 17A of the Act \9\ and the rules thereunder applicable to
ICE Clear Europe. ICE Clear Europe represents that the proposed rule
change will enhance the financial resources available to the Clearing
House by imposing more conservative initial margin requirements, while
also reducing the risk of loss to market participants resulting from a
default by a Clearing Member or other customer. ICE Clear Europe
further states that the proposed rule change will impose more frequent
reviews and tests of its risk management procedures. The Commission
therefore believes that the proposed enhancements to ICE Clear Europe's
risk policies are designed to assure the safeguarding of securities and
funds which are in the custody or control of the clearing agency or for
which it is responsible consistent with Section 17A(b)(3)(F).\10\ In
addition, the Commission believes the proposed Risk Policy Amendments
are reasonably designed to ensure that ICE Clear Europe continues to
meet the risk management requirements of Rule 17Ad-22(b)(1)-(3).\11\
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\9\ 15 U.S.C. 78q-1.
\10\ 15 U.S.C. 78q-1(b)(3)(F).
\11\ 17 CFR 240.17Ad-22(b)(1)-(3).
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Section 19(b)(2)(C)(iii) of the Act \12\ allows the Commission to
approve a proposed rule change earlier than 30 days after the date of
publication of the notice of the proposed rule change in the Federal
Register where the Commission finds good cause for so doing and
publishes the reason for the finding. In its filing, ICE Clear Europe
requested that the Commission approve the proposed rule change on an
accelerated basis for good cause shown. ICE Clear Europe has
represented that the proposed Risk Policy Amendments are necessary in
order to comply with requirements under EMIR in connection with its
authorization as a central counterparty under EMIR. ICE Clear Europe
further notes that failure to have the amendments in effect, and to be
in compliance with the EMIR requirements, may adversely affect the
approval of its authorization application and therefore its ability to
do business as a recognized central counterparty. Accordingly, the
Commission finds that good cause exists to approve the proposed rule
change on an accelerated basis pursuant to Section 19(b)(2)(C)(iii) of
the Act.\13\
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\12\ 15 U.S.C. 78s(b)(2)(C)(iii).
\13\ 15 U.S.C. 78s(b)(2)(C)(iii).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \14\ and the
rules and regulations thereunder.
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\14\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (File No. SR-ICEEU-2014-10) be,
and hereby is, approved on an accelerated basis.\16\
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\15\ 15 U.S.C. 78s(b)(2).
\16\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18752 Filed 8-7-14; 8:45 am]
BILLING CODE 8011-01-P