Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change To Add Rules Related to the Clearing of Standard Western European Sovereign CDS Contracts, 67213-67215 [2014-26692]
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TKELLEY on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 79, No. 218 / Wednesday, November 12, 2014 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
does not (i) significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate if
consistent with the protection of
investors and the public interest,
provided that the self-regulatory
organization has given the Commission
written notice of its intent to file the
proposed rule change at least five
business days prior to the date of filing
of the proposed rule change or such
shorter time as designated by the
Commission,12 the proposed rule
change has become effective pursuant to
Section 19(b)(3)(A) of the Act 13 and
Rule 19b–4(f)(6) thereunder.14
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 15 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
A proposed rule change filed under
Rule 19b–4(f)(6) 16 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b–4(f)(6)(iii),17 the
Commission may designate a shorter
time if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposal may
become operative immediately upon
filing. The Exchange believes that
waiving the 30-day delay is consistent
with the protection of investors and the
public interest because it would permit
the Exchange to more promptly update
its Market Data Fee Schedule about free
product offerings, thereby promoting
transparency regarding already-filed
market data products. The Commission
agrees and has determined to waive the
five-day pre-filing requirement and the
Exchange has fulfilled this requirement.
U.S.C. 78s(b)(3)(A).
14 17 CFR 240.19b–4(f)(6).
15 15 U.S.C. 78s(b)(2)(B).
16 17 CFR 240.19b–4(f)(6).
17 17 CFR 240.19b–4(f)(6)(iii).
30-day operative date so that the
proposal may take effect upon filing.18
2014–57 and should be submitted on or
before December 3, 2014.
IV. Solicitation of Comments
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Kevin M. O’Neill,
Deputy Secretary.
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–
NYSE–2014–57 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSE–2014–57. 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 the
filing will also be available for
inspection and copying at the NYSE’s
principal office and on its Internet Web
site at www.nyse.com. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–NYSE–
12 The
13 15
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18 For purposes only of accelerating the operative
date of this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
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[FR Doc. 2014–26687 Filed 11–10–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73534; File No. SR–ICC–
2014–14]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change To Add Rules
Related to the Clearing of Standard
Western European Sovereign CDS
Contracts
November 5, 2014.
I. Introduction
On August 25, 2014, ICE Clear Credit
LLC (‘‘ICC’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change SR–ICC–2014–14 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 September 4,
2014.3 The Commission did not receive
comments on the proposed rule change.
On October 17, 2014, the Commission
extended the time period in which to
either approve, disapprove, or institute
proceedings to determine whether to
disapprove the proposed rule change to
December 3, 2014.4 For the reasons
discussed below, the Commission is
approving the proposed rule change.
II. Description of the Proposed Rule
Change
ICC proposes to amend Chapter 26 of
the ICC Clearing Rules (‘‘Rules’’) to add
Subchapter 26I and to amend the ICC
Risk Management Framework to provide
for the clearance of Standard Western
European Sovereign (‘‘SWES’’) credit
default swap (‘‘CDS’’) contracts,
specifically the Republic of Ireland, the
Italian Republic, the Portuguese
Republic, and the Kingdom of Spain
(collectively, the ‘‘SWES Contracts’’).
19 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 34–72941
(Aug. 28, 2014), 79 FR 52794 (Sep. 4, 2014) (SR–
ICC–2014–14).
4 Securities Exchange Act Release No. 34–73384
(Oct. 17, 2014), 79 FR 63453 (Oct. 23, 2014) (SR–
ICC–2014–14).
1 15
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Federal Register / Vol. 79, No. 218 / Wednesday, November 12, 2014 / Notices
TKELLEY on DSK3SPTVN1PROD with NOTICES
ICC states that the proposed rule
change is dependent on the approval
and implementation of the proposed
rule change contained in ICC rule filing
SR–ICC–2014–11,5 amending the ICC
Rules, Restructuring Procedures, and
Risk Management Framework to
incorporate references to the revised
Credit Derivatives Definitions, as
published by the International Swaps
and Derivatives Association, Inc.
(‘‘ISDA’’) on February 21, 2014 (the
‘‘2014 ISDA Definitions’’) and that
SWES Contracts will only be offered on
the 2014 ISDA Definitions.6
ICC represents that the SWES
Contracts have similar terms to the
Standard North American Corporate
Single Name CDS contracts (‘‘SNAC
Contracts’’) currently cleared by ICC and
governed by Subchapter 26B of the ICC
Rules, the Standard Emerging Sovereign
CDS contracts (‘‘SES Contracts’’)
currently cleared by ICC and governed
by Subchapter 26D of the ICC Rules, and
the Standard European Corporate Single
Name CDS contracts (‘‘SDEC Contracts’’)
currently cleared at ICC and governed
by Subchapter 26G of the ICC Rules.
Accordingly, ICC states that the
proposed rules found in Subchapter 26I
largely mirror the ICC Rules for SNAC
Contracts in Subchapter 26B, SES
Contracts in Subchapter 26D, and SDEC
Contracts in Subchapter 26G, with
certain modifications that reflect
differences in terms and market
conventions between those contracts
and SWES Contracts.7 SWES Contracts
will be denominated in United States
Dollars.
ICC represents that clearing SWES
Contracts will not require any changes
to ICC’s operational procedures, as the
SWES Contracts operate similarly to the
Standard Emerging European and
Middle Eastern Sovereign Single Names,
currently cleared by ICC. The addition
of the SWES Contracts to ICC’s product
offering requires risk specific changes to
the ICC Risk Management Framework,
which are described below.
ICC’s Risk Management Framework
would be revised to incorporate
additional model features designed to
generalize the currently established
Specific Wrong Way Risk (‘‘SWWR’’)
Initial Margin requirement. ICC states
that the proposed changes to the ICC
5 See Securities Exchange Act Release No. 34–
72701 (Jul. 29, 2014); 79 FR 45565 (Aug. 5, 2014)
(SR–ICC–2014–11).
6 ICC rule filing SR–ICC–2014–11 was approved
by the Commission on September 5, 2014. See
Securities Exchange Act Release No. 34–73007
(Sep. 5, 2014), 79 FR 54331 (Sep. 11, 2014) (SR–
ICC–2014–11).
7 The proposed changes to the ICC Rules are
described in further detail in the notice of filing of
the proposed rule change. See supra note 3.
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Risk Management Framework would
generalize the SWWR relative to General
Wrong Way Risk (‘‘GWWR’’), and that
this generalization of Wrong Way Risk
(‘‘WWR’’) is introduced to account for
additional risk present in CDS
instruments whose reference entities
exhibit a high level of correlation with
those Clearing Participants clearing the
relevant name, or with an entity that is
guaranteed by, or affiliated with, those
Clearing Participants. ICC states that,
accordingly, the offering of SWES
Contracts introduces potential GWWR
in the form of country/region of
domicile WWR. ICC notes that examples
of GWWR related to SWES include but
are not limited to a Clearing Participant
selling protection on its country of
domicile, or a European domiciled
Clearing Participant selling protection
on European sovereign reference
entities. To address such risks, ICC
proposes to establish an additional
Jump To Default Risk (‘‘JTDR’’)
requirement.
Accordingly, the Risk Management
Framework contains revisions to the
calculation of the portfolio JTDR
requirement. Specifically, the
calculations have been updated to
incorporate the concept of WWR as
described below in reference to the
quantitative and qualitative approaches.
ICC represents that these proposed
revisions would have no material
impact on the size of the Guaranty
Fund.
ICC’s proposed changes adopt a
combination of qualitative and
quantitative approaches to capture
GWWR. Under the revised ICC Risk
Management Framework, an additional
contribution to the JTDR requirement
would be required when Clearing
Participants sell protection on SWES
reference entities exhibiting a high
degree of association with itself (based
on a quantitative approach established
by ICC to determine the degree of
correlation) or by virtue of selling
protection on its country of domicile
(based on a qualitative approach
established by ICC to determine a
Clearing Participant’s country of
domicile).
For the qualitative case (i.e., a
Clearing Participant selling protection
on its own country of domicile), ICC
would require full collateralization of
the additional Jump To Default (‘‘JTD’’)
loss. In determining a Clearing
Participants’ country of domicile, ICC
refers to the International Organization
for Standardization (‘‘ISO’’) country
code for the issuer’s ultimate parent
country of risk. ICC states that the ISO
methodology considers management
location, country of primary listing,
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country of revenue and reporting
currency of the issuer.
The quantitative approach applies to
the additional risk arising from Clearing
Participants selling protection on SWES
reference entities, other than the
Clearing Participant’s country of
domicile, on which the Clearing
Participant’s domicile has a high degree
of correlation. If the additional SWES
JTD losses and the dependence levels
breach specific quantitative threshold
amounts, additional GWWR
collateralization would be required. The
additional collateralization is a function
of the level of correlation between the
Clearing Participants and the SWES
reference entities and will become more
conservative as the level of correlation
increases.
As a result of these enhancements to
the ICC Risk Management Framework,
Rule 26D–309 (Acceptance of SES
Contracts by ICE Clear Credit), part (c)
would be revised to remove language
which prohibits the acceptance of
Trades for clearance and settlement if at
the time of submission or acceptance of
the Trade or at the time of novation the
Participant submitting the Trade is
domiciled in the country of the Eligible
Standard Emerging Sovereign (‘‘SES’’)
Reference Entity for such SES contract.
ICC states that the new GWWR
methodology will apply to all sovereign
contracts cleared by ICC, including SES
contracts.
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act 8 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 9 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.
The Commission finds that the
proposed revisions to the ICC Rules and
Risk Management Framework are
consistent with the requirements of
8 15
9 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
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Federal Register / Vol. 79, No. 218 / Wednesday, November 12, 2014 / Notices
TKELLEY on DSK3SPTVN1PROD with NOTICES
Section 17A of the Act 10 and the rules
and regulations thereunder applicable to
ICC. Specifically, the Commission
believes that the proposed rules in
Subchapter 26I to allow for the
clearance of SWES Contracts, in
conjunction with existing ICC Rules and
procedures applicable to the clearing of
CDS contracts, are designed to promote
the prompt and accurate clearance and
settlement of securities transactions,
consistent with Section 17A(b)(3)(F) of
the Act.11
Additionally, the Commission
believes that the proposed revisions to
ICC’s Risk Management Framework to
address the wrong way risk associated
with clearing SWES Contracts are
designed to promote the prompt and
accurate clearance and settlement of
securities 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,
consistent with Section 17A(b)(3)(F) of
the Act.12 Specifically, the proposed
changes to the ICC Risk Management
Framework would require additional
collateralization in the form of initial
margin from Clearing Participants that
sell protection on SWES reference
entities exhibiting a high degree of
association with itself or that sell
protection on its country of domicile.
These proposed margin model
enhancements will provide additional
resources to ICC to address the credit
risks associated with the correlation
between the risk of default of an
underlying sovereign and the risk of
default of a Clearing Participant that has
written credit protection through SWES
Contracts on such sovereign.
Accordingly, the Commission believes
that the proposed changes to the Risk
Management Framework, in
combination with ICC’s existing rules
and procedures related to margin and
guaranty fund, are reasonably designed
to meet the requirements of Rules
17Ad–22(b)(1)–(3) 13 related to the
measurement and management of credit
exposures, margin requirements, and
the maintenance of sufficient financial
resources required for a registered
clearing agency acting as a central
counterparty for security-based swaps.
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
10 15
11 15
U.S.C. 78q–1.
U.S.C. 78q–1(b)(3)(F).
12 Id.
13 17
CFR 240.17Ad–22(b)(1)–(3).
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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 (SR–ICC–2014–
14) be, and hereby is, approved.16
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–26692 Filed 11–10–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73531; File No. SR–
ISEGemini-2014–24]
Self-Regulatory Organizations; ISE
Gemini, LLC; Notice of Filing of
Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, Relating to
a Corporate Transaction Involving Its
Indirect Parent
November 5, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that, on October
22, 2014, the ISE Gemini, LLC (the
‘‘Exchange’’ or the ‘‘ISE Gemini’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change, as described in
Items I and II below, which items have
been prepared by the self-regulatory
organization. On October 31, 2014, the
Exchange filed Amendment No. 1 to the
proposal.3 The Commission is
publishing this notice to solicit
comments on the proposed rule change,
as modified by Amendment No. 1, from
interested persons.
14 15
U.S.C. 78q–1.
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.
3 In Amendment No. 1, the Exchange proposed
non-substantive changes to amend Exhibits 5E
(Form of Eurex Global Derivatives AG Corporate
Resolutions) and 5F (Form of Agreement and
Consent by and between Eurex Global Derivatives
¨
AG and Eurex Zurich AG) so that the text the
Exchange proposes to delete accurately reflects the
existing text of the resolutions previously submitted
to, and approved by, the Commission.
15 15
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67215
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to make
changes to its indirect, non-U.S.
upstream ownership structure (the
‘‘Transactions’’), in connection with
which the Series A Preferred Stock of
the Exchange’s sole, direct parent,
International Securities Exchange
Holdings, Inc. (‘‘ISE Holdings’’), will be
converted to shares of ISE Holdings
common stock (the ‘‘Conversion’’). In
order to consummate the Transactions,
including the Conversion, the Exchange
proposes to: (i) Amend and restate the
Certificate of Designations of Series A
Preferred Stock of ISE Holdings (the
‘‘COD’’); (ii) amend and restate the
Amended and Restated Certificate of
Incorporation of ISE Holdings (the
‘‘COI’’); and (iii) amend and restate the
Second Amended and Restated Trust
Agreement (the ‘‘Trust Agreement’’) that
exists among ISE Holdings, U.S.
Exchange Holdings, Inc. (‘‘U.S.
Exchange Holdings’’), and the Trustees
(as defined therein). The Exchange also
proposes that certain corporate
resolutions and agreements that were
previously established or entered into
by entities that will cease to be
upstream owners of ISE Gemini after the
Transactions will no longer be rules of
the Exchange. In addition, the Exchange
proposes to amend and restate the
Amended and Restated Limited
Liability Company Agreement of ISE
Gemini (‘‘ISE Gemini LLC Agreement’’)
with respect to distributions. Finally,
the Exchange proposes to make a nonsubstantive, administrative change to
the Second Amended and Restated
Certificate of Incorporation of U.S.
Exchange Holdings (‘‘U.S. Exchange
Holdings COI’’), the direct U.S.
upstream owner of ISE Holdings, to
update a reference therein to the Trust
Agreement.
The text of the proposed rule change
is available at the Commission’s Public
Reference Room and on the Exchange’s
Internet Web site at https://www.ise.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
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]]>Agencies
[Federal Register Volume 79, Number 218 (Wednesday, November 12, 2014)]
[Notices]
[Pages 67213-67215]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26692]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73534; File No. SR-ICC-2014-14]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change To Add Rules Related to the Clearing of
Standard Western European Sovereign CDS Contracts
November 5, 2014.
I. Introduction
On August 25, 2014, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change SR-ICC-2014-14 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 September 4, 2014.\3\ The Commission did not receive comments on the
proposed rule change. On October 17, 2014, the Commission extended the
time period in which to either approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule change
to December 3, 2014.\4\ For the reasons discussed below, the Commission
is approving the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-72941 (Aug. 28,
2014), 79 FR 52794 (Sep. 4, 2014) (SR-ICC-2014-14).
\4\ Securities Exchange Act Release No. 34-73384 (Oct. 17,
2014), 79 FR 63453 (Oct. 23, 2014) (SR-ICC-2014-14).
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
ICC proposes to amend Chapter 26 of the ICC Clearing Rules
(``Rules'') to add Subchapter 26I and to amend the ICC Risk Management
Framework to provide for the clearance of Standard Western European
Sovereign (``SWES'') credit default swap (``CDS'') contracts,
specifically the Republic of Ireland, the Italian Republic, the
Portuguese Republic, and the Kingdom of Spain (collectively, the ``SWES
Contracts'').
[[Page 67214]]
ICC states that the proposed rule change is dependent on the
approval and implementation of the proposed rule change contained in
ICC rule filing SR-ICC-2014-11,\5\ amending the ICC Rules,
Restructuring Procedures, and Risk Management Framework to incorporate
references to the revised Credit Derivatives Definitions, as published
by the International Swaps and Derivatives Association, Inc. (``ISDA'')
on February 21, 2014 (the ``2014 ISDA Definitions'') and that SWES
Contracts will only be offered on the 2014 ISDA Definitions.\6\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 34-72701 (Jul. 29,
2014); 79 FR 45565 (Aug. 5, 2014) (SR-ICC-2014-11).
\6\ ICC rule filing SR-ICC-2014-11 was approved by the
Commission on September 5, 2014. See Securities Exchange Act Release
No. 34-73007 (Sep. 5, 2014), 79 FR 54331 (Sep. 11, 2014) (SR-ICC-
2014-11).
---------------------------------------------------------------------------
ICC represents that the SWES Contracts have similar terms to the
Standard North American Corporate Single Name CDS contracts (``SNAC
Contracts'') currently cleared by ICC and governed by Subchapter 26B of
the ICC Rules, the Standard Emerging Sovereign CDS contracts (``SES
Contracts'') currently cleared by ICC and governed by Subchapter 26D of
the ICC Rules, and the Standard European Corporate Single Name CDS
contracts (``SDEC Contracts'') currently cleared at ICC and governed by
Subchapter 26G of the ICC Rules. Accordingly, ICC states that the
proposed rules found in Subchapter 26I largely mirror the ICC Rules for
SNAC Contracts in Subchapter 26B, SES Contracts in Subchapter 26D, and
SDEC Contracts in Subchapter 26G, with certain modifications that
reflect differences in terms and market conventions between those
contracts and SWES Contracts.\7\ SWES Contracts will be denominated in
United States Dollars.
---------------------------------------------------------------------------
\7\ The proposed changes to the ICC Rules are described in
further detail in the notice of filing of the proposed rule change.
See supra note 3.
---------------------------------------------------------------------------
ICC represents that clearing SWES Contracts will not require any
changes to ICC's operational procedures, as the SWES Contracts operate
similarly to the Standard Emerging European and Middle Eastern
Sovereign Single Names, currently cleared by ICC. The addition of the
SWES Contracts to ICC's product offering requires risk specific changes
to the ICC Risk Management Framework, which are described below.
ICC's Risk Management Framework would be revised to incorporate
additional model features designed to generalize the currently
established Specific Wrong Way Risk (``SWWR'') Initial Margin
requirement. ICC states that the proposed changes to the ICC Risk
Management Framework would generalize the SWWR relative to General
Wrong Way Risk (``GWWR''), and that this generalization of Wrong Way
Risk (``WWR'') is introduced to account for additional risk present in
CDS instruments whose reference entities exhibit a high level of
correlation with those Clearing Participants clearing the relevant
name, or with an entity that is guaranteed by, or affiliated with,
those Clearing Participants. ICC states that, accordingly, the offering
of SWES Contracts introduces potential GWWR in the form of country/
region of domicile WWR. ICC notes that examples of GWWR related to SWES
include but are not limited to a Clearing Participant selling
protection on its country of domicile, or a European domiciled Clearing
Participant selling protection on European sovereign reference
entities. To address such risks, ICC proposes to establish an
additional Jump To Default Risk (``JTDR'') requirement.
Accordingly, the Risk Management Framework contains revisions to
the calculation of the portfolio JTDR requirement. Specifically, the
calculations have been updated to incorporate the concept of WWR as
described below in reference to the quantitative and qualitative
approaches. ICC represents that these proposed revisions would have no
material impact on the size of the Guaranty Fund.
ICC's proposed changes adopt a combination of qualitative and
quantitative approaches to capture GWWR. Under the revised ICC Risk
Management Framework, an additional contribution to the JTDR
requirement would be required when Clearing Participants sell
protection on SWES reference entities exhibiting a high degree of
association with itself (based on a quantitative approach established
by ICC to determine the degree of correlation) or by virtue of selling
protection on its country of domicile (based on a qualitative approach
established by ICC to determine a Clearing Participant's country of
domicile).
For the qualitative case (i.e., a Clearing Participant selling
protection on its own country of domicile), ICC would require full
collateralization of the additional Jump To Default (``JTD'') loss. In
determining a Clearing Participants' country of domicile, ICC refers to
the International Organization for Standardization (``ISO'') country
code for the issuer's ultimate parent country of risk. ICC states that
the ISO methodology considers management location, country of primary
listing, country of revenue and reporting currency of the issuer.
The quantitative approach applies to the additional risk arising
from Clearing Participants selling protection on SWES reference
entities, other than the Clearing Participant's country of domicile, on
which the Clearing Participant's domicile has a high degree of
correlation. If the additional SWES JTD losses and the dependence
levels breach specific quantitative threshold amounts, additional GWWR
collateralization would be required. The additional collateralization
is a function of the level of correlation between the Clearing
Participants and the SWES reference entities and will become more
conservative as the level of correlation increases.
As a result of these enhancements to the ICC Risk Management
Framework, Rule 26D-309 (Acceptance of SES Contracts by ICE Clear
Credit), part (c) would be revised to remove language which prohibits
the acceptance of Trades for clearance and settlement if at the time of
submission or acceptance of the Trade or at the time of novation the
Participant submitting the Trade is domiciled in the country of the
Eligible Standard Emerging Sovereign (``SES'') Reference Entity for
such SES contract. ICC states that the new GWWR methodology will apply
to all sovereign contracts cleared by ICC, including SES contracts.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \8\ 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 \9\ 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.
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\8\ 15 U.S.C. 78s(b)(2)(C).
\9\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission finds that the proposed revisions to the ICC Rules
and Risk Management Framework are consistent with the requirements of
[[Page 67215]]
Section 17A of the Act \10\ and the rules and regulations thereunder
applicable to ICC. Specifically, the Commission believes that the
proposed rules in Subchapter 26I to allow for the clearance of SWES
Contracts, in conjunction with existing ICC Rules and procedures
applicable to the clearing of CDS contracts, are designed to promote
the prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.\11\
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\10\ 15 U.S.C. 78q-1.
\11\ 15 U.S.C. 78q-1(b)(3)(F).
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Additionally, the Commission believes that the proposed revisions
to ICC's Risk Management Framework to address the wrong way risk
associated with clearing SWES Contracts are designed to promote the
prompt and accurate clearance and settlement of securities
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, consistent with Section 17A(b)(3)(F) of the Act.\12\
Specifically, the proposed changes to the ICC Risk Management Framework
would require additional collateralization in the form of initial
margin from Clearing Participants that sell protection on SWES
reference entities exhibiting a high degree of association with itself
or that sell protection on its country of domicile. These proposed
margin model enhancements will provide additional resources to ICC to
address the credit risks associated with the correlation between the
risk of default of an underlying sovereign and the risk of default of a
Clearing Participant that has written credit protection through SWES
Contracts on such sovereign. Accordingly, the Commission believes that
the proposed changes to the Risk Management Framework, in combination
with ICC's existing rules and procedures related to margin and guaranty
fund, are reasonably designed to meet the requirements of Rules 17Ad-
22(b)(1)-(3) \13\ related to the measurement and management of credit
exposures, margin requirements, and the maintenance of sufficient
financial resources required for a registered clearing agency acting as
a central counterparty for security-based swaps.
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\12\ Id.
\13\ 17 CFR 240.17Ad-22(b)(1)-(3).
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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 (SR-ICC-2014-14) be, and hereby
is, approved.\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. 2014-26692 Filed 11-10-14; 8:45 am]
BILLING CODE 8011-01-P
