Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Proposed Rule Change, Security-Based Swap Submission or Advance Notice Relating to the ICE Clear Europe Recovery Plan, 2855-2858 [2018-00853]
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Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices
compliance with the continued listing
requirements. If the Fund is not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
NYSE Arca Rule 5.5–E(m).
This approval order is based on all of
the Exchange’s statements and
representations, including those set
forth above and in Amendment No. 6.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 6, is consistent with Section 6(b)(5)
of the Act 32 and Section
11A(a)(1)(C)(iii) of the Act 33 and the
rules and regulations thereunder
applicable to a national securities
exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,34 that the
proposed rule change (SR–NYSEArca–
2017–87), as modified by Amendment
No. 6, be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–00849 Filed 1–18–18; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–82496; File No. SR–ICEEU–
2017–016]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Notice of
Proposed Rule Change, SecurityBased Swap Submission or Advance
Notice Relating to the ICE Clear
Europe Recovery Plan
January 12, 2018.
daltland on DSKBBV9HB2PROD with NOTICES
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
29, 2017, 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
by ICE Clear Europe. The Commission is
publishing this notice to solicit
Commission does not view ‘‘monitor’’ as a more or
less stringent obligation than ‘‘surveil’’ with respect
to the continued listing requirements.
32 15 U.S.C. 78f(b)(5).
33 15 U.S.C. 78k–1(a)(1)(C)(iii).
34 15 U.S.C. 78s(b)(2).
35 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change, Security-Based Swap
Submission, or Advance Notice
Consistent with its obligations under
applicable laws and regulations,3 ICEU
has adopted a Recovery Plan identifying
certain critical clearing services it
provides and addressing its tools,
mechanisms and options for addressing
scenarios that threaten its ability to
continue to provide such services.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change, Security-Based
Swap Submission or Advance Notice
In its filing with the Commission, ICE
Clear Europe included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. ICE
Clear Europe has prepared summaries,
set forth in sections (A), (B), and (C)
below, of the most significant aspects of
such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change, Security-Based
Swap Submission or Advance Notice
SECURITIES AND EXCHANGE
COMMISSION
VerDate Sep<11>2014
comments on the proposed rule change
from interested persons.
(a) Purpose
Consistent with its obligations under
applicable laws and regulations, ICE
Clear Europe has adopted a Recovery
Plan. The Recovery Plan is based on,
and is intended to be consistent with,
ICEU’s Clearing Rules (the ‘‘Rules’’) 4
and Procedures, as well as its existing
risk management frameworks, policies
and procedures.
Overview of the Recovery Plan
The Recovery Plan identifies the
critical services that ICEU provides, and
3 As discussed in further detail herein, ICE Clear
Europe is required to establish a recovery plan
under relevant provisions of the UK Financial
Services and Markets Act 2000 (Recognition
Requirements for Investment Exchanges and
Clearing Houses) Regulations 2001 (SI/2001/1995)
and Commission Rule 17Ad–22(e)(3)(ii), 17 CFR
240.17Ad–22(e)(3)(ii).
The Plan is also designed to be consistent with
the Committee on Payments and Market
Infrastructures (‘‘CPMI’’)—International
Organization of Securities Commissions (‘‘IOSCO’’)
Principles for Financial Market Infrastructures
(‘‘PFMIs’’), including supplemental guidance from
CPMI–IOSCO which includes its report on
‘‘Recovery of financial market infrastructures’’
published in October 2014 and revised July 2017
(the ‘‘Recovery Guidance’’).
4 Capitalized terms used but not defined herein
have the meanings specified in the Rules.
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the business functions that support
those services. In ICEU’s view, its
clearing services (for both the F&O and
CDS product categories), and its related
treasury and banking services, represent
its critical services. The Recovery Plan
outlines a number of firm-specific and
market-wide stress scenarios that, in
ICEU’s determination, may result in
significant losses or liquidity shortfall,
suspension or failure of its critical
services and related functions and
systems, and damage to other market
infrastructure, with resulting
uncertainty in the markets for which
ICEU clears. These include both losses
from Clearing Member default and nondefault loss scenarios. The Recovery
Plan further evaluates different impact
categories and severity levels of these
stress scenarios. The Recovery Plan then
addresses the tools, mechanisms and
options (‘‘Recovery Options’’) upon
which ICEU may draw (based on its
existing Rules, Procedures and policies
and frameworks) in order to address a
stress scenario and continue to provide
its critical services, and the actions to
implement those options (including
appropriate escalation and early
warning procedures). The Recovery Plan
also addresses communication with
regulators and other relevant
stakeholders and related governance
issues. The Recovery Plan further
considers the implications of certain
situations that may be beyond its
control, such as interdependencies with
other institutions.
The Recovery Plan also addresses the
roles and responsibility of ICEU Board,
management and other personnel,
including with respect to development,
review and approval, testing and
maintenance and liaison with relevant
regulatory authorities. The Recovery
Plan also includes a description of
ICEU, its organizational structure, its
applicable regulatory regime and the
standards and guidelines that have
informed the Recovery Plan. The
Recovery Plan is based on the Rules and
Procedures of the clearing house as they
are in effect, and does not itself change
the rights and obligations of the clearing
house or its Clearing Members
thereunder.
Critical Services and Functions
As noted above, ICEU has determined
that both its F&O and CDS product
category clearing services, as well as its
related treasury and banking services,
are critical services. The Recovery Plan
sets out the methodology used by the
clearing house in assessing the
criticality of services for this purpose.
ICEU has also identified the front-end
business functions and support areas
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(including IT services) that support
these critical services. In particular, the
Recovery Plan identifies the particular
IT systems and services used by ICEU in
providing its clearing services
(including trade management systems,
collateral management systems, risk
systems and delivery systems). The
Recovery Plan notes the locations from
which these services are provided and,
in cases where the services are provided
by an affiliate or other third party,
identifies that party. The Recovery Plan
also identifies other key service
providers on which ICEU relies,
including custodians, concentration
banks, other approved payment banks,
investment managers and delivery
services providers. The Recovery Plan
considers the key services provided by
ICE affiliates in support of the ICEU
clearing activities, including
information technology and risk
management services.
Stress Scenarios
The Recovery Plan analyzes different
stress scenarios that may affect ICEU’s
ability to continue to provide its critical
services. The two relevant categories of
stress scenarios are default losses and
non-default losses. Default losses for
this purpose are losses suffered by ICEU
as a result of the default of one or more
Clearing Member(s). Non-default losses
are those suffered by ICEU from
identified general business and
operational risk events, investment
losses, system outages or world-wide or
regional political or macroeconomic
events. In both categories, ICEU also
considers losses resulting from liquidity
risks and from the risk of contagion.
ICEU uses a risk-based approach to
scenario analysis, consisting of different
impact categories and severity levels.
Specifically, ICEU looks at impacts in
five areas: Financial and operational
impacts (affecting ICEU’s own finances),
Clearing Members and their customers
(affecting their financial viability), other
group infrastructure (affecting the
efficiency or effectiveness of other
related ICE entities (including
exchanges cleared by ICEU), legal and
regulatory considerations and
macroeconomic (affecting market
operations and market stability).
In terms of impact severity, ICEU
assesses scenarios in categories of low,
moderate, high, very high and severe. In
the context of a default loss, a low
severity impact would include a loss
contained to the financial resources of
the defaulting Clearing Member. By
contrast, an event with a severe impact
level would be expected to exhaust the
funded resources of the clearing house
(including ICEU’s contribution and the
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Guaranty Fund contributions of nondefaulting Clearing Members). Other
intermediate severity levels will involve
corresponding levels of resource
consumption and impact on the clearing
house. For non-default losses, a low
severity is generally defined as a loss of
less than 25% of capital resources or a
loss having no direct impact on Clearing
Members. By contrast, a severe nondefault loss would be one in excess of
75% of capital resources are used, or
one that otherwise involves a severe
degradation of operations. The Recovery
Plan contemplates that the range of
responses to a loss scenario, including
the potential Recovery Options used,
will depend on the severity level (with
low severity loss events involving
limited or no use of Recovery Options,
and severe loss scenarios requiring use
of all of the available Recovery Options).
The Recovery Plan also contemplates
different levels of coordination with
other CCPs, market participants,
regulators and others depending on the
severity of the event.
Recovery Options
The Recovery Plan sets out the likely
Recovery Options that ICEU may
implement depending upon the severity
of the impact of the scenario, as
discussed above. The Recovery Options
are based on the rights and obligations
of the clearing house under the Rules,
Procedures, Risk Management
Framework, Default Management
Framework, Liquidity Risk Management
Framework and other relevant policies
and procedures.
The Recovery Plan considers a nonexhaustive list of available Recovery
Options in terms of a number of factors,
including the speed with which each
option can be implemented, the impact
on the clearing house, the impact on
Clearing Members and their customers,
and the effect on other market
infrastructure. The Recovery Plan
analyzes loss impact and the use of
Recovery Tools separately for F&O
defaults, CDS defaults and non-default
losses. In general, in the case of default
losses, relevant Recovery Options
include, consistent with the Rules,
powers of assessment, use of a default
auction in accordance with auction
procedures to fully unwind the
defaulter’s portfolio (for F&O contracts),
forced allocation, to the extent the
defaulter’s positions cannot otherwise
be unwound (for CDS contracts),
variation margin gains haircutting (for
F&O contracts), porting of client
positions and clearing service
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termination (for F&O contracts).5 In
terms of non-default losses, Recovery
Options include emergency liquidity
facilities, investment loss allocation to
Clearing Members to the extent
permitted by the Rules and service
closure. The Plan contains greater detail
regarding how each tool assists with the
recovery process. Consistent with the
Default Management Framework, the
Recovery Plan is intended to be flexible
and provide a structure and guidance to
management. It is not designed to be
prescriptive and it recognizes that the
actions to be taken by the clearing house
may vary depending on the prevailing
circumstances which lead to the default
rules being implemented. The Recovery
Plan also examines the reliability,
timeliness and legal basis of different
Recovery Options.
Recovery Option Application
The Recovery Plan outlines the
situations (and sequence) in which each
of the Recovery Options is likely to be
used, recognizing that the clearing
house has discretion as to the particular
actions to take in a default or nondefault loss scenario. In general, use of
Recovery Options is expected in
extreme circumstances where losses
exceed pre-funded resources of the
clearing house. The Recovery Plan
specifies the expected bases for using
Recovery Options, such as powers of
assessment and variation margin gains
haircutting. It further specifies the
decision-making process for the use of
such options, separately for default and
non-default loss scenarios. These
arrangements generally specify a
particular scenario in which a Recovery
Option may be used, along with the key
decision-makers involved. In most
cases, under the Rules and the default
management frameworks, the decision
will be made by the ICEU president and
managing director pursuant to the
authority delegated by the Board, for
both default and non-default loss
events. In the case of default events,
such actions would be taken having
regard to the advice of the default
management committee. In practice, the
president, where appropriate and time
permitting, would be expected to
consult with the Board or with
individual Board members before taking
significant actions. The president may
also call an emergency Board meeting or
make Board members aware of the
current position. The president will
5 ICEU notes that it is preparing to propose
certain amendments to its Rules relating to
Recovery Options with respect to CDS contracts, to
provide for auctions and variation margin gains
haircutting and to eliminate forced allocation,
among other changes.
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report decisions to the Board at the next
formal Board meeting. If the President is
absent, the Chief Operating Officer will
act in his stead.
The Recovery Plan recognizes the
importance of clear communications
and contemplates that use of Recovery
Options would be expected to be
implemented through close discussions
with the ICEU Board, ICEU Board Risk
Committee, Clearing Members,
regulators, shareholders and other
stakeholders. The Recovery Plan
recognizes the risk that ICEU’s actions
could cause contagion and envisages
communication with regulators and
other financial market infrastructures to
mitigate such effects.
The Recovery Plan also sets out a
series of early warning indicators and
tools intended to notify ICEU
management that use of Recovery
Options may be required, and where
possible, avoid the need for such
actions. These include liquidity
forecasting and monitoring, use of a
conservative approach to counterparty
credit analyses and establishment of
margin and Guaranty Fund
requirements, use of comprehensives
risk metrics to monitor Clearing Member
financial performance, back-testing and
stress testing, and other assessments.
The clearing house also retains the
mechanisms and resources to take
prompt decisions, and allow an
immediate response to an emerging
situation. The Recovery Plan sets out
detailed lists of potential early warning
indications of a potential loss scenario,
such as repeated non-compliance by a
Clearing Member with membership or
other requirements, actions taken by
regulators or other governmental
authorities with respect to a Clearing
Member, certain quantitative factors,
restructuring and similar events. The
Recovery Plan outlines particular means
of monitoring for potential loss
scenarios following such indications.
Limitations of the Recovery Plan and
Related Monitoring
The Recovery Plan has set out
arrangements for identifying and
responding to structural weaknesses in
governance and risk management that
may be identified in a default event or
non-default event. ICEU’s tools to
address such potential weaknesses
include: Default tests, operational risk
measures (including for business
continuity and disaster recovery
purposes), an operational oversight
committee, internal audit and
consultation with external legal counsel.
The Recovery Plan also notes certain
potential limitations of the Recovery
Plan, including the risk of potential
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legal uncertainty (such as a challenge by
Clearing Members or other market
participants to the use of Recovery
Options, notwithstanding the
protections available to ICEU under
applicable law and the legal diligence
conducted by the clearing house with
respect to its Rules and policies and
procedures). The Recovery Plan also
identifies risks of reliance on third party
market infrastructures, and notes that
the risk of such infrastructure being
unavailable is contemplated in stress
scenarios. The Recovery Plan also notes
ICEU’s reliance on the continued
support of Intercontinental Exchange,
Inc., including as to technology,
replenishment of capital resources and
business continuity and disaster
recovery.
Governance
The overall accountability for the
Recovery Plan lies with the ICEU
President. The Recovery Plan was
prepared with the active involvement of
the management of ICEU. The Recovery
Plan is reviewed and approved by the
ICEU Board. The Head of Regulation is
responsible for facilitating the overall
production and implementation of the
Recovery Plan as well as its
maintenance. The ICEU Board Audit
Committee, Chief Risk Officer, Chief
Operating Officer and Executive Risk
Committee also have roles in the
implementation of the Recovery Plan.
Second line functions are responsible
for ensuring that the Recovery Plan
remains up-to-date and reviewed in
accordance with internal review and
governance control arrangements. On an
annual basis, the owner will revise the
Recovery Plan and present the revised
version to the ICEU Board. Material
changes to the Recovery Plan must be
reviewed by ICEU management and be
subject to governance control. Minor
changes can be incorporated as part of
the routine review process.
As part of governance control, the
Recovery Plan is subject to annual
review by the ICEU Board Audit
Committee. Recommendations and
discussions by the ICEU Board Audit
Committee are recorded and submitted
to the Board in a timely manner. The
scenarios and actions that support the
Recovery Plan are subject to ICEU Board
approval annually. Ad hoc reviews may
be commissioned if the business
materially changes, for example upon
the introduction of a new service.
Material changes to the Recovery Plan
or the scenarios, including those
brought about by market events, are
subject to ICEU Board approval,
following their review and discussion
by the ICEU Board Audit Committee.
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2857
Deviations from the Recovery Plan must
be reported to the ICEU Board. Elements
of the Recovery Plan are tested as part
of normal operations and risk
management procedures.
(b) Statutory Basis
ICEU believes that the proposed
amendments are consistent with the
requirements of Section 17A of the Act 6
and the regulations thereunder
applicable to it, including the standards
under Rule 17Ad–22.7
Section 17A(b)(3)(F) of the Act 8
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, the
safeguarding of securities and funds in
the custody or control of the clearing
agency or for which it is responsible,
and the protection of investors and the
public interest. In addition, Rule 17Ad–
22(e)(3)(ii) 9 requires that each covered
clearing agency shall establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to, as applicable,
maintain a sound risk management
framework for comprehensively
managing legal, credit, liquidity,
operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency, which includes plans
for the recovery and orderly wind-down
of the covered clearing agency
necessitated by credit losses, liquidity
shortfalls, losses from general business
risk, or any other losses.
The Recovery Plan is designed to
meet the requirements of Rule 17Ad–
22(e)(3)(ii), and is further consistent
with the requirements of the Act. The
Recovery Plan sets out ICEU’s plan for
recovering from severe loss events,
including from credit losses resulting
from Clearing Member default, liquidity
shortfalls, losses from general business
risk, and other types of losses. The
Recovery Plan outlines different loss
scenarios of these types that ICEU
considers as part of its planning process.
The Recovery Plan further builds on the
provisions of the Rules, and other risk
management frameworks, to set out the
different Recovery Options that the
clearing house has available to it to
address loss scenarios, and restore or
maintain normal clearing operations.
The Recovery Plan outlines triggers for
6 15
U.S.C. 78q–1.
CFR 240.17Ad–22.
8 15 U.S.C. 78q–1(b)(3)(F).
9 17 CFR 240.17Ad–22(e)(3)(ii).
7 17
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the use of Recovery Tools, as well as the
governance process around the use of
Recovery Options. The Recovery Plan
also provides greater transparency to
market participants, including Clearing
Members and their customers, about the
expected sequence and scope of
recovery actions that ICEU may take in
a loss scenario. In ICEU’s view, the
Recovery Plan thus meets the
requirements of Rule 17Ad–22(e)(3)(ii).
Furthermore, ICEU views the Recovery
Plan as a key aspect of its general risk
management framework, which furthers
its ability to maintain the prompt and
accurate clearance and settlement of
transactions, including in severe loss
scenarios, and thereby promote the
protection of investors and the public
interest, within the meaning of Section
17A(b)(3)(F) of the Act.
ICEU further notes the requirement in
Rule 17Ad–22(e)(15) 10 to hold
sufficient liquid net assets funded by
equity to cover potential general
business losses so that the covered
clearing agency can continue operations
and services as a going concern if those
losses materialize, including by (i)
determining the amount of liquid net
assets funded by equity based upon its
general business risk profile and the
length of time required to achieve a
recovery or orderly wind-down, as
appropriate, of its critical operations
and services if such action is taken, and
(ii) holding liquid net assets funded by
equity equal to the greater of either (x)
six months of the covered clearing
agency’s current operating expenses, or
(y) the amount determined by the board
of directors to be sufficient to ensure a
recovery or orderly wind-down of
critical operations and services of the
covered clearing agency, as
contemplated by the recovery and winddown plans established under Rule
17Ad–22(e)(3)(ii).
ICEU has determined that it holds
equity capital at least sufficient to cover
the costs of a recovery of its critical
clearing services under the Recovery
Plan, consistent with the requirements
of Rule 17Ad–22(e)(15).11
(B) Clearing Agency’s Statement on
Burden on Competition
ICEU does not believe the proposed
Recovery Plan would have any impact,
or impose any burden, on competition
not necessary or appropriate in
furtherance of the purposes of the Act.
The Recovery Plan does not itself
change the rights or obligations of the
clearing house or Clearing Members,
and reflects the Recovery Options set
10 17
CFR 240.17Ad–22(e)(15).
11 17 CFR 240.17Ad–22(e)(15).
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out in existing Rules and risk
management policies. The Recovery
Plan has been designed to meet specific
regulatory requirements concerning
recovery planning, and is applicable to
all clearing activities. ICEU does not
believe the amendments will impact
competition among Clearing Members
or other market participants, or affect
the ability of market participants to
access clearing generally. While
implementation of the Recovery Plan,
and in particular use of the Recovery
Plan in a severe loss scenario, would
likely impose costs on Clearing
Members or other market participants,
such costs are consistent with the
existing Rules, and are, in ICEU’s view,
appropriate in light of the goals of
recovery and maintenance of critical
clearing service in accordance with
applicable regulations.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants or Others
Written comments relating to the
proposed amendments have not been
solicited or received by ICE Clear
Europe. ICE Clear Europe will notify the
Commission of any comments received
with respect to the proposed rule
change.
III. Date of Effectiveness of the
Proposed Rule Change, Security-Based
Swap Submission and Advance Notice
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.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, security-based swap submission
or advance notice is consistent with the
Act. Comments may be submitted by
any of the following methods:
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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–2017–016 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–ICEEU–2017–016. 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 website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change, security-based swap submission
or advance notice that are filed with the
Commission, and all written
communications relating to the
proposed rule change, security-based
swap submission or advance notice
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 website viewing and
printing in the Commission’s Public
Reference Section, 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 website at https://
www.theice.com/notices/Notices.shtml?
regulatoryFilings.
All comments received will be posted
without change. Persons submitting
comments are cautioned that we do not
redact or edit personal identifying
information from comment submissions.
You should submit only information
that you wish to make available
publicly. All submissions should refer
to File Number SR–ICEEU–2017–016
and should be submitted on or before
February 9, 2018].
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–00853 Filed 1–18–18; 8:45 am]
BILLING CODE 8011–01–P
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[Federal Register Volume 83, Number 13 (Friday, January 19, 2018)]
[Notices]
[Pages 2855-2858]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00853]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82496; File No. SR-ICEEU-2017-016]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Proposed Rule Change, Security-Based Swap Submission or Advance
Notice Relating to the ICE Clear Europe Recovery Plan
January 12, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 29, 2017, 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 by ICE Clear Europe. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change, Security-Based Swap Submission, or Advance Notice
Consistent with its obligations under applicable laws and
regulations,\3\ ICEU has adopted a Recovery Plan identifying certain
critical clearing services it provides and addressing its tools,
mechanisms and options for addressing scenarios that threaten its
ability to continue to provide such services.
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\3\ As discussed in further detail herein, ICE Clear Europe is
required to establish a recovery plan under relevant provisions of
the UK Financial Services and Markets Act 2000 (Recognition
Requirements for Investment Exchanges and Clearing Houses)
Regulations 2001 (SI/2001/1995) and Commission Rule 17Ad-
22(e)(3)(ii), 17 CFR 240.17Ad-22(e)(3)(ii).
The Plan is also designed to be consistent with the Committee on
Payments and Market Infrastructures (``CPMI'')--International
Organization of Securities Commissions (``IOSCO'') Principles for
Financial Market Infrastructures (``PFMIs''), including supplemental
guidance from CPMI-IOSCO which includes its report on ``Recovery of
financial market infrastructures'' published in October 2014 and
revised July 2017 (the ``Recovery Guidance'').
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change, Security-Based Swap Submission or
Advance Notice
In its filing with the Commission, ICE Clear Europe included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. ICE Clear Europe has prepared summaries,
set forth in sections (A), (B), and (C) below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change, Security-Based Swap Submission or
Advance Notice
(a) Purpose
Consistent with its obligations under applicable laws and
regulations, ICE Clear Europe has adopted a Recovery Plan. The Recovery
Plan is based on, and is intended to be consistent with, ICEU's
Clearing Rules (the ``Rules'') \4\ and Procedures, as well as its
existing risk management frameworks, policies and procedures.
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\4\ Capitalized terms used but not defined herein have the
meanings specified in the Rules.
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Overview of the Recovery Plan
The Recovery Plan identifies the critical services that ICEU
provides, and the business functions that support those services. In
ICEU's view, its clearing services (for both the F&O and CDS product
categories), and its related treasury and banking services, represent
its critical services. The Recovery Plan outlines a number of firm-
specific and market-wide stress scenarios that, in ICEU's
determination, may result in significant losses or liquidity shortfall,
suspension or failure of its critical services and related functions
and systems, and damage to other market infrastructure, with resulting
uncertainty in the markets for which ICEU clears. These include both
losses from Clearing Member default and non-default loss scenarios. The
Recovery Plan further evaluates different impact categories and
severity levels of these stress scenarios. The Recovery Plan then
addresses the tools, mechanisms and options (``Recovery Options'') upon
which ICEU may draw (based on its existing Rules, Procedures and
policies and frameworks) in order to address a stress scenario and
continue to provide its critical services, and the actions to implement
those options (including appropriate escalation and early warning
procedures). The Recovery Plan also addresses communication with
regulators and other relevant stakeholders and related governance
issues. The Recovery Plan further considers the implications of certain
situations that may be beyond its control, such as interdependencies
with other institutions.
The Recovery Plan also addresses the roles and responsibility of
ICEU Board, management and other personnel, including with respect to
development, review and approval, testing and maintenance and liaison
with relevant regulatory authorities. The Recovery Plan also includes a
description of ICEU, its organizational structure, its applicable
regulatory regime and the standards and guidelines that have informed
the Recovery Plan. The Recovery Plan is based on the Rules and
Procedures of the clearing house as they are in effect, and does not
itself change the rights and obligations of the clearing house or its
Clearing Members thereunder.
Critical Services and Functions
As noted above, ICEU has determined that both its F&O and CDS
product category clearing services, as well as its related treasury and
banking services, are critical services. The Recovery Plan sets out the
methodology used by the clearing house in assessing the criticality of
services for this purpose. ICEU has also identified the front-end
business functions and support areas
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(including IT services) that support these critical services. In
particular, the Recovery Plan identifies the particular IT systems and
services used by ICEU in providing its clearing services (including
trade management systems, collateral management systems, risk systems
and delivery systems). The Recovery Plan notes the locations from which
these services are provided and, in cases where the services are
provided by an affiliate or other third party, identifies that party.
The Recovery Plan also identifies other key service providers on which
ICEU relies, including custodians, concentration banks, other approved
payment banks, investment managers and delivery services providers. The
Recovery Plan considers the key services provided by ICE affiliates in
support of the ICEU clearing activities, including information
technology and risk management services.
Stress Scenarios
The Recovery Plan analyzes different stress scenarios that may
affect ICEU's ability to continue to provide its critical services. The
two relevant categories of stress scenarios are default losses and non-
default losses. Default losses for this purpose are losses suffered by
ICEU as a result of the default of one or more Clearing Member(s). Non-
default losses are those suffered by ICEU from identified general
business and operational risk events, investment losses, system outages
or world-wide or regional political or macroeconomic events. In both
categories, ICEU also considers losses resulting from liquidity risks
and from the risk of contagion. ICEU uses a risk-based approach to
scenario analysis, consisting of different impact categories and
severity levels. Specifically, ICEU looks at impacts in five areas:
Financial and operational impacts (affecting ICEU's own finances),
Clearing Members and their customers (affecting their financial
viability), other group infrastructure (affecting the efficiency or
effectiveness of other related ICE entities (including exchanges
cleared by ICEU), legal and regulatory considerations and macroeconomic
(affecting market operations and market stability).
In terms of impact severity, ICEU assesses scenarios in categories
of low, moderate, high, very high and severe. In the context of a
default loss, a low severity impact would include a loss contained to
the financial resources of the defaulting Clearing Member. By contrast,
an event with a severe impact level would be expected to exhaust the
funded resources of the clearing house (including ICEU's contribution
and the Guaranty Fund contributions of non-defaulting Clearing
Members). Other intermediate severity levels will involve corresponding
levels of resource consumption and impact on the clearing house. For
non-default losses, a low severity is generally defined as a loss of
less than 25% of capital resources or a loss having no direct impact on
Clearing Members. By contrast, a severe non-default loss would be one
in excess of 75% of capital resources are used, or one that otherwise
involves a severe degradation of operations. The Recovery Plan
contemplates that the range of responses to a loss scenario, including
the potential Recovery Options used, will depend on the severity level
(with low severity loss events involving limited or no use of Recovery
Options, and severe loss scenarios requiring use of all of the
available Recovery Options). The Recovery Plan also contemplates
different levels of coordination with other CCPs, market participants,
regulators and others depending on the severity of the event.
Recovery Options
The Recovery Plan sets out the likely Recovery Options that ICEU
may implement depending upon the severity of the impact of the
scenario, as discussed above. The Recovery Options are based on the
rights and obligations of the clearing house under the Rules,
Procedures, Risk Management Framework, Default Management Framework,
Liquidity Risk Management Framework and other relevant policies and
procedures.
The Recovery Plan considers a non-exhaustive list of available
Recovery Options in terms of a number of factors, including the speed
with which each option can be implemented, the impact on the clearing
house, the impact on Clearing Members and their customers, and the
effect on other market infrastructure. The Recovery Plan analyzes loss
impact and the use of Recovery Tools separately for F&O defaults, CDS
defaults and non-default losses. In general, in the case of default
losses, relevant Recovery Options include, consistent with the Rules,
powers of assessment, use of a default auction in accordance with
auction procedures to fully unwind the defaulter's portfolio (for F&O
contracts), forced allocation, to the extent the defaulter's positions
cannot otherwise be unwound (for CDS contracts), variation margin gains
haircutting (for F&O contracts), porting of client positions and
clearing service termination (for F&O contracts).\5\ In terms of non-
default losses, Recovery Options include emergency liquidity
facilities, investment loss allocation to Clearing Members to the
extent permitted by the Rules and service closure. The Plan contains
greater detail regarding how each tool assists with the recovery
process. Consistent with the Default Management Framework, the Recovery
Plan is intended to be flexible and provide a structure and guidance to
management. It is not designed to be prescriptive and it recognizes
that the actions to be taken by the clearing house may vary depending
on the prevailing circumstances which lead to the default rules being
implemented. The Recovery Plan also examines the reliability,
timeliness and legal basis of different Recovery Options.
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\5\ ICEU notes that it is preparing to propose certain
amendments to its Rules relating to Recovery Options with respect to
CDS contracts, to provide for auctions and variation margin gains
haircutting and to eliminate forced allocation, among other changes.
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Recovery Option Application
The Recovery Plan outlines the situations (and sequence) in which
each of the Recovery Options is likely to be used, recognizing that the
clearing house has discretion as to the particular actions to take in a
default or non-default loss scenario. In general, use of Recovery
Options is expected in extreme circumstances where losses exceed pre-
funded resources of the clearing house. The Recovery Plan specifies the
expected bases for using Recovery Options, such as powers of assessment
and variation margin gains haircutting. It further specifies the
decision-making process for the use of such options, separately for
default and non-default loss scenarios. These arrangements generally
specify a particular scenario in which a Recovery Option may be used,
along with the key decision-makers involved. In most cases, under the
Rules and the default management frameworks, the decision will be made
by the ICEU president and managing director pursuant to the authority
delegated by the Board, for both default and non-default loss events.
In the case of default events, such actions would be taken having
regard to the advice of the default management committee. In practice,
the president, where appropriate and time permitting, would be expected
to consult with the Board or with individual Board members before
taking significant actions. The president may also call an emergency
Board meeting or make Board members aware of the current position. The
president will
[[Page 2857]]
report decisions to the Board at the next formal Board meeting. If the
President is absent, the Chief Operating Officer will act in his stead.
The Recovery Plan recognizes the importance of clear communications
and contemplates that use of Recovery Options would be expected to be
implemented through close discussions with the ICEU Board, ICEU Board
Risk Committee, Clearing Members, regulators, shareholders and other
stakeholders. The Recovery Plan recognizes the risk that ICEU's actions
could cause contagion and envisages communication with regulators and
other financial market infrastructures to mitigate such effects.
The Recovery Plan also sets out a series of early warning
indicators and tools intended to notify ICEU management that use of
Recovery Options may be required, and where possible, avoid the need
for such actions. These include liquidity forecasting and monitoring,
use of a conservative approach to counterparty credit analyses and
establishment of margin and Guaranty Fund requirements, use of
comprehensives risk metrics to monitor Clearing Member financial
performance, back-testing and stress testing, and other assessments.
The clearing house also retains the mechanisms and resources to take
prompt decisions, and allow an immediate response to an emerging
situation. The Recovery Plan sets out detailed lists of potential early
warning indications of a potential loss scenario, such as repeated non-
compliance by a Clearing Member with membership or other requirements,
actions taken by regulators or other governmental authorities with
respect to a Clearing Member, certain quantitative factors,
restructuring and similar events. The Recovery Plan outlines particular
means of monitoring for potential loss scenarios following such
indications.
Limitations of the Recovery Plan and Related Monitoring
The Recovery Plan has set out arrangements for identifying and
responding to structural weaknesses in governance and risk management
that may be identified in a default event or non-default event. ICEU's
tools to address such potential weaknesses include: Default tests,
operational risk measures (including for business continuity and
disaster recovery purposes), an operational oversight committee,
internal audit and consultation with external legal counsel.
The Recovery Plan also notes certain potential limitations of the
Recovery Plan, including the risk of potential legal uncertainty (such
as a challenge by Clearing Members or other market participants to the
use of Recovery Options, notwithstanding the protections available to
ICEU under applicable law and the legal diligence conducted by the
clearing house with respect to its Rules and policies and procedures).
The Recovery Plan also identifies risks of reliance on third party
market infrastructures, and notes that the risk of such infrastructure
being unavailable is contemplated in stress scenarios. The Recovery
Plan also notes ICEU's reliance on the continued support of
Intercontinental Exchange, Inc., including as to technology,
replenishment of capital resources and business continuity and disaster
recovery.
Governance
The overall accountability for the Recovery Plan lies with the ICEU
President. The Recovery Plan was prepared with the active involvement
of the management of ICEU. The Recovery Plan is reviewed and approved
by the ICEU Board. The Head of Regulation is responsible for
facilitating the overall production and implementation of the Recovery
Plan as well as its maintenance. The ICEU Board Audit Committee, Chief
Risk Officer, Chief Operating Officer and Executive Risk Committee also
have roles in the implementation of the Recovery Plan.
Second line functions are responsible for ensuring that the
Recovery Plan remains up-to-date and reviewed in accordance with
internal review and governance control arrangements. On an annual
basis, the owner will revise the Recovery Plan and present the revised
version to the ICEU Board. Material changes to the Recovery Plan must
be reviewed by ICEU management and be subject to governance control.
Minor changes can be incorporated as part of the routine review
process.
As part of governance control, the Recovery Plan is subject to
annual review by the ICEU Board Audit Committee. Recommendations and
discussions by the ICEU Board Audit Committee are recorded and
submitted to the Board in a timely manner. The scenarios and actions
that support the Recovery Plan are subject to ICEU Board approval
annually. Ad hoc reviews may be commissioned if the business materially
changes, for example upon the introduction of a new service. Material
changes to the Recovery Plan or the scenarios, including those brought
about by market events, are subject to ICEU Board approval, following
their review and discussion by the ICEU Board Audit Committee.
Deviations from the Recovery Plan must be reported to the ICEU Board.
Elements of the Recovery Plan are tested as part of normal operations
and risk management procedures.
(b) Statutory Basis
ICEU believes that the proposed amendments are consistent with the
requirements of Section 17A of the Act \6\ and the regulations
thereunder applicable to it, including the standards under Rule 17Ad-
22.\7\
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\6\ 15 U.S.C. 78q-1.
\7\ 17 CFR 240.17Ad-22.
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Section 17A(b)(3)(F) of the Act \8\ 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, the safeguarding of securities and funds in the custody
or control of the clearing agency or for which it is responsible, and
the protection of investors and the public interest. In addition, Rule
17Ad-22(e)(3)(ii) \9\ requires that each covered clearing agency shall
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable, maintain a sound risk
management framework for comprehensively managing legal, credit,
liquidity, operational, general business, investment, custody, and
other risks that arise in or are borne by the covered clearing agency,
which includes plans for the recovery and orderly wind-down of the
covered clearing agency necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses.
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\8\ 15 U.S.C. 78q-1(b)(3)(F).
\9\ 17 CFR 240.17Ad-22(e)(3)(ii).
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The Recovery Plan is designed to meet the requirements of Rule
17Ad-22(e)(3)(ii), and is further consistent with the requirements of
the Act. The Recovery Plan sets out ICEU's plan for recovering from
severe loss events, including from credit losses resulting from
Clearing Member default, liquidity shortfalls, losses from general
business risk, and other types of losses. The Recovery Plan outlines
different loss scenarios of these types that ICEU considers as part of
its planning process. The Recovery Plan further builds on the
provisions of the Rules, and other risk management frameworks, to set
out the different Recovery Options that the clearing house has
available to it to address loss scenarios, and restore or maintain
normal clearing operations. The Recovery Plan outlines triggers for
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the use of Recovery Tools, as well as the governance process around the
use of Recovery Options. The Recovery Plan also provides greater
transparency to market participants, including Clearing Members and
their customers, about the expected sequence and scope of recovery
actions that ICEU may take in a loss scenario. In ICEU's view, the
Recovery Plan thus meets the requirements of Rule 17Ad-22(e)(3)(ii).
Furthermore, ICEU views the Recovery Plan as a key aspect of its
general risk management framework, which furthers its ability to
maintain the prompt and accurate clearance and settlement of
transactions, including in severe loss scenarios, and thereby promote
the protection of investors and the public interest, within the meaning
of Section 17A(b)(3)(F) of the Act.
ICEU further notes the requirement in Rule 17Ad-22(e)(15) \10\ to
hold sufficient liquid net assets funded by equity to cover potential
general business losses so that the covered clearing agency can
continue operations and services as a going concern if those losses
materialize, including by (i) determining the amount of liquid net
assets funded by equity based upon its general business risk profile
and the length of time required to achieve a recovery or orderly wind-
down, as appropriate, of its critical operations and services if such
action is taken, and (ii) holding liquid net assets funded by equity
equal to the greater of either (x) six months of the covered clearing
agency's current operating expenses, or (y) the amount determined by
the board of directors to be sufficient to ensure a recovery or orderly
wind-down of critical operations and services of the covered clearing
agency, as contemplated by the recovery and wind-down plans established
under Rule 17Ad-22(e)(3)(ii).
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\10\ 17 CFR 240.17Ad-22(e)(15).
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ICEU has determined that it holds equity capital at least
sufficient to cover the costs of a recovery of its critical clearing
services under the Recovery Plan, consistent with the requirements of
Rule 17Ad-22(e)(15).\11\
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\11\ 17 CFR 240.17Ad-22(e)(15).
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(B) Clearing Agency's Statement on Burden on Competition
ICEU does not believe the proposed Recovery Plan would have any
impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purposes of the Act. The Recovery
Plan does not itself change the rights or obligations of the clearing
house or Clearing Members, and reflects the Recovery Options set out in
existing Rules and risk management policies. The Recovery Plan has been
designed to meet specific regulatory requirements concerning recovery
planning, and is applicable to all clearing activities. ICEU does not
believe the amendments will impact competition among Clearing Members
or other market participants, or affect the ability of market
participants to access clearing generally. While implementation of the
Recovery Plan, and in particular use of the Recovery Plan in a severe
loss scenario, would likely impose costs on Clearing Members or other
market participants, such costs are consistent with the existing Rules,
and are, in ICEU's view, appropriate in light of the goals of recovery
and maintenance of critical clearing service in accordance with
applicable regulations.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments relating to the proposed amendments have not been
solicited or received by ICE Clear Europe. ICE Clear Europe will notify
the Commission of any comments received with respect to the proposed
rule change.
III. Date of Effectiveness of the Proposed Rule Change, Security-Based
Swap Submission and Advance Notice 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.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, security-based swap submission or advance notice 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 [email protected]. Please include
File Number SR-ICEEU-2017-016 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-ICEEU-2017-016. 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 website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change, security-based
swap submission or advance notice that are filed with the Commission,
and all written communications relating to the proposed rule change,
security-based swap submission or advance notice 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 website viewing and printing in the Commission's Public Reference
Section, 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 website
at https://www.theice.com/notices/Notices.shtml?regulatoryFilings.
All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-ICEEU-2017-016 and should be
submitted on or before February 9, 2018].
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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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00853 Filed 1-18-18; 8:45 am]
BILLING CODE 8011-01-P
