Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change, Security-Based Swap Submission, or Advance Notice Relating to Amendments to the ICE Clear Europe Limited CDS Procedures, CDS Risk Policy, and CDS Risk Model Description, 6909-6912 [2018-03112]
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Federal Register / Vol. 83, No. 32 / Thursday, February 15, 2018 / Notices
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sradovich on DSK3GMQ082PROD with NOTICES
Extension:
Rule 17g–7, SEC File No. 270–0656, OMB
Control No. 3235–0656
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
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20549 or send an email to: PRA_
Mailbox@sec.gov.
Dated: February 9, 2018.
Eduardo A. Aleman,
Assistant Secretary.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
[FR Doc. 2018–03095 Filed 2–14–18; 8:45 am]
(a) Purpose
ICE Clear Europe proposes to modify
certain provisions of its CDS Procedures
to support clearing of a new single-name
CDS transaction type. ICE Clear Europe
also proposes to amend its CDS Risk
Policy and CDS Risk Model Description
to better address certain risks associated
with CDS referencing European banks
relating to the issuance of new debt
structures by those banks. These
revisions do not involve any changes to
the ICE Clear Europe Clearing Rules.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82678; File No. SR–ICEEU–
2018–002]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Notice of Filing
of Proposed Rule Change, SecurityBased Swap Submission, or Advance
Notice Relating to Amendments to the
ICE Clear Europe Limited CDS
Procedures, CDS Risk Policy, and CDS
Risk Model Description
February 9, 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 February
6, 2018, ICE Clear Europe Limited (‘‘ICE
Clear Europe’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
changes described in Items I, II, and III
below, which Items have been prepared
primarily by ICE Clear Europe. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
ICE Clear Europe Limited proposes to
modify certain provisions of its CDS
Procedures to support clearing of a new
single-name CDS transaction type and to
modify its CDS Risk Policy and CDS
Risk Model Description to enhance risk
management relating to CDS involving
European banks.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, ICE
Clear Europe included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. ICE
Clear Europe has prepared summaries,
set forth in sections (A), (B), and (C)
below, of the most significant aspects of
such statements.
1 15
1 See
17 CFR 240.17g–1 and 17 CFR 249b.300.
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2 17
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CFR 240.19b–4.
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Proposed Amendments to the CDS
Procedures
The purpose of the proposed changes
to the CDS Procedures is to support
clearing of a new single-name CDS
transaction type: Standard European
Senior Non-Preferred Financial
Corporate. ICE Clear Europe
understands that market participants
generally propose to commence trading
of this transaction type as of March 20,
2018, and relevant standard
documentation for the transaction type
has recently been published by the
International Swaps and Derivatives
Association, Inc. (‘‘ISDA’’). Transactions
under such standard documentation,
will be generally similar to Standard
European Financial Corporate
transactions currently cleared by the
Clearing House, but will have a
reference obligation that will be
subordinated to other senior obligations,
but will rank senior to so-called ‘‘tier 2’’
obligations that are subordinated for
purposes of European Union bank
regulatory capital requirements. ICE
Clear Europe proposes amending its
CDS Procedures to provide for the
clearance of contracts referencing this
new transaction type. ICE Clear Europe
believes the addition of these contracts
will benefit the market for credit default
swaps by providing market participants
the benefits of clearing, including
reduction in counterparty risk and
safeguarding of margin assets pursuant
to Clearing House Rules.
Specifically, ICE Clear Europe
proposes amending Paragraph 4.3(c)(ii)
of the CDS Procedures to reference
Standard European Senior NonPreferred Financial Corporate as a
transaction type eligible to be submitted
for clearing. Similarly, Paragraph 11.3(i)
is amended in the definition of ‘NonSTEC Single Name Contract’ to include
Standard European Senior NonPreferred Financial Corporate in the list
of types of Reference Entities eligible to
be cleared by ICE Clear Europe. ICE
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Clear Europe also proposes amending
the definition of ‘Single Name Contract
Reference Obligations’ in Paragraph
11.3(j) to remove a requirement that the
relevant obligation must be a ‘‘senior
level’’ obligation, and add instead that
the obligation be of the applicable
seniority level for the terms of the
contract (to accommodate the seniority
level of Senior Non-Preferred
transactions, as discussed above).
sradovich on DSK3GMQ082PROD with NOTICES
Proposed Amendments to the CDS Risk
Model Description
ICE Clear Europe’s risk management
methodology incorporates
considerations of idiosyncratic credit
events and the associated potential
losses. These credit event losses are
termed Loss-Given-Default (‘‘LGD’’). In
order to support clearing of the new
transaction type, ICE Clear Europe
proposes certain LGD enhancements to
its risk model. A description of these
changes is set forth below.
ICE Clear Europe first proposes Risk
Factor (‘‘RF’’) level LGD enhancements.
These proposed RF level enhancements
are designed to better capture the LGD
risk associated with the issuance of new
debt structures by European banks, and
provide a consistent recovery rate
scenario approach to different subfactors.
Under ICE Clear Europe’s risk model,
every Single Name (‘‘SN’’) reference
entity is deemed an RF. Each
combination of definition, doc-clause,
tier and currency for a given SN RF
determines a SN Risk Sub-Factor
(‘‘RSF’’). Currently, ICE Clear Europe
measures losses associated with credit
events (‘‘LGD’’) by means of a stressbased approach, which utilizes three
recovery rate (‘‘RR’’) scenarios:
minimum RR, expected RR, and
maximum RR. Outright and indexderived RSF exposures are combined at
each RR scenario.
The results of these RR scenarios are
used as an input into the Profit/LossGiven Default (‘‘P/LGD’’) calculations at
both the RSF and RF levels. For each
RSF, P/LGD is calculated as the worst
credit event outcome, and for each RF,
P/LGD is calculated as the sum of the
worst credit outcomes per RSF. These
final P/LGD results are used as part of
the determination of risk requirements.
ICE Clear Europe proposes
enhancements to the RF level LGD
calculation. Specifically, ICE Clear
Europe proposes a change to the
calculation by incorporating a more
consistent approach in the calculation
of the P/LGD by using the same RR
scenarios applied to the different RSFs
which form part of the considered RF.
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For each RF, ICE Clear Europe will
continue to calculate an ‘‘extreme
outcome’’ as the sum of the worst RSF
P/LGDs across all scenarios. ICE Clear
Europe will also, for each RF, calculate
an ‘‘expected outcome’’ as the worst
sum of all the RSF P/LGDs across all of
the same scenarios. Under the proposed
approach, ICE Clear Europe will then
combine the results of the ‘‘extreme
outcome’’ calculation and the ‘‘expected
outcome’’ calculation to compute the
total LGD for each RF.
ICE Clear Europe also proposes to
expand its LGD analysis to Risk Factor
Groups (‘‘RFG’’). Under the proposed
changes, a collection of related RFs will
form a RFG. These related RFs will be
defined as a RFG based on either (1)
having a common majority parental
sovereign ownership (e.g. quasisovereigns and sovereigns), or (2) being
a majority owned subsidiary of a
common parent entity according to the
Bloomberg Related Securities Analysis.
A RFG can consist of only one RF. This
change will better capture the risk
exposure dynamics of related RFs, and
will allow ICE Clear Europe the ability
to provide limited LGD benefits across
RFs with opposite exposures, as well as
allow for the ability to capture
accumulation of directional exposure
for related RFs.
Under the proposed approach, the
total quantity LGD will be calculated on
a RFG level, and account for the
exposure due to credit events associated
with the reference entities within a
given RFG. If a RFG contains only one
RF, the LGD will continue to be
computed as the risk exposure due to a
credit event for a given underlying
reference entity. Under the proposed
approach, ICE Clear Europe will sum
the P/LGDs for each RF in a given RFG,
with limited offsets in the event RFs
exhibit positive PLGD. Using the results
of the above calculation, ICE Clear
Europe will obtain the RFG level LGD.
The proposed approach also includes a
calculation which allows for the RFG
level LGD to be attributed to each RF
within the considered RFG.
ICE Clear Europe proposes changes to
the ‘Loss Given Default Risk Analysis’
section of the CDS Risk Model
Description Document to reflect the
described RF and RFG LGD calculation
changes. ICE Clear Europe also proposes
conforming changes to other sections of
the CDS Risk Model Description to
incorporate these methodology changes
and reflect the RFG analysis.
ICE Clear Europe proposes a revision
to the ‘Uncollateralized Loss Given
Default’ calculation in order to
incorporate the RFG level LGD
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attribution calculation mentioned
above.
ICE Clear Europe proposes changes to
the ‘Idiosyncratic Jump-to-Default
Requirements’ section of the CDS Risk
Model Description document. Currently,
the portfolio Jump to Default (‘‘JTD’’)
approach collateralizes the worst
uncollateralized LGD (‘‘ULGD’’)
exposure among all RFs. Under the
proposed approach, the portfolio JTD
approach will collateralize, through the
portfolio JTD IM requirement that
accounts for the RFG-specific LGD
collateralization, the worst ULGD
exposure among all RFGs. The ULGD
exposure for a given RFG will be
calculated as a sum of the associated RF
ULGDs.
ICE Clear Europe also proposes minor
edits to the ‘SWWR’ (Specific Wrong
Way Risk) and ‘GWWR’ (General Wrong
Way Risk) sections to update language
and calculation descriptions to
accommodate the introduction of the
RFG to the ‘Idiosyncratic Jump-toDefault Requirements’ section.
ICE Clear Europe proposes changes to
the ‘Guaranty Fund Methodology’
section. ICE Clear Europe’s risk
management approach establishes GF to
provide for the mutualization of losses
under extreme credit market scenarios.
Specifically, the ICE Clear Europe GF is
designed to provide adequate funds to
cover losses associated with the default
of the two Clearing Member (‘‘CM’’)
affiliate groups that would potentially
cause the largest aggregate credit
exposure to ICE Clear Europe under
extreme, but plausible market
conditions. ICE Clear Europe’s current
GF methodology includes, among other
assumptions and adverse market
conditions, the assumption that up to
three credit events, different from the
ones associated with CMs, occur during
the established risk horizon. ICE Clear
Europe proposes expanding this
analysis to the RFG level. Under this
proposed approach, it will be assumed
that credit events associated with up to
three RFGs, different from the ones
associated with the CMs and the RFs
that are in the RFGs as the CMs, occur
during the established risk horizon. As
such, the uncollateralized losses, used
in the Guaranty Fund analysis, reflect
the proposed expansion to the RFG
level.
ICE Clear Europe also proposes
clarifications to the calculation for the
Specific Wrong Way Risk component of
the Guaranty Fund. Currently, for a
given CM, the Specific Wrong Way Risk
component is based on self-referencing
positions arising from one or more RFs;
ICE Clear Europe proposes clarifying
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this analysis to be based on the RFG
level.
The amendments to the CDS Risk
Model Description also contain
typographical corrections and similar
technical corrections and clarifications.
sradovich on DSK3GMQ082PROD with NOTICES
Proposed Amendments to the CDS Risk
Policy
ICE Clear Europe also proposes
conforming changes to the CDS Risk
Policy consistent with those described
above.
Specifically, the definition of a Risk
Sub-Factor is proposed to be amended
that it will be defined as a specific
combination of SN, tier and currency (as
well as documentation clause), where
the union of all Risk Sub-Factors that
share the same underlying SN forms a
SN Risk Factor.
The CDS Risk Policy is also being
amended such that instead of the worst
SN, the worst LGD associated with a
Risk Factor Group (‘‘RFG’’), will be
selected to establish the portfolio JTD
requirement. The amendments also
clarify that a Risk Factor Group is a set
of Risk Factors related by a common
parental ownership.
With respect to the guaranty fund
calculation, provisions in respect of two
uncollateralized LGD relating to the
guaranty fund calculation is being
amended such that instead of the GF
LGD being estimated for every SN based
on the total portfolio positions in the
SNs, the GF LGD will be estimated for
every RFG based on the total portfolio
positions in the SNs belonging to the
same RFG.
The amendments to the CDS Risk
Policy also contain typographical
corrections and similar technical
corrections and clarifications.
(b) Statutory Basis
Section 17A(b)(3)(F) of the Act 3
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 and to
comply with the provisions of the Act
and the rules and regulations
thereunder. ICE Clear Europe believes
that the proposed rule changes are
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to ICE Clear
Europe, in particular, to Section
17(A)(b)(3)(F),4 because ICE Clear
Europe believes that the proposed rule
changes will promote the prompt and
accurate clearance and settlement of
securities transactions, derivatives
agreements, contracts, and transactions.
In regards to the proposed
amendments to the Procedures,
contracts referencing the Standard
European Senior Non-Preferred
Financial Corporate transaction type are
similar to the Non-STEC Single Name
contracts currently cleared by ICE Clear
Europe, and will be cleared pursuant to
ICE Clear Europe’s existing clearing
arrangements and related financial
safeguards, protections and risk
management procedures (with the
modifications to the CDS Risk Policy
and CDS Risk Model Description
discussed herein). Clearing of these
contracts will allow market participants
an increased ability to manage risk and
will ensure the safeguarding of related
margin assets pursuant to Clearing
House Rules. ICE Clear Europe believes
that acceptance of these contracts, on
the terms and conditions set out in the
Rules, is consistent with the prompt and
accurate clearance of and settlement of
securities transactions and derivative
agreements, contracts and transactions
cleared by ICE Clear Europe, the
safeguarding of securities and funds in
the custody or control of ICE Clear
Europe, and the protection of investors
and the public interest, within the
meaning of Section 17A(b)(3)(F) of the
Act.5
Clearing of contracts referencing the
Standard European Senior NonPreferred Financial Corporate
transaction type will also satisfy the
requirements of Rule 17Ad–22.6 In
particular, in terms of financial
resources, ICE Clear Europe will apply
its existing initial margin methodology
to the contracts (with the modifications
to the CDS Risk Policy and CDS Risk
Model Description discussed herein).
ICE Clear Europe believes that this
model (as proposed to be amended) will
provide sufficient initial margin
requirements to cover its credit
exposure to its Clearing Members from
clearing such contracts, consistent with
the requirements of Rule 17Ad–22(b)(2)
and (e)(6).7 In addition, ICE Clear
Europe believes its Guaranty Fund,
under its methodology as proposed to be
revised, will, together with the required
initial margin, provide sufficient
financial resources to support the
clearing of the contracts consistent with
the requirements of Rule 17Ad–22(b)(3)
and (e)(4).8 ICE Clear Europe also
believes that its existing operational and
5 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22.
7 17 CFR 240.17Ad–22(b)(2) and (e)(6).
8 17 CFR 240.17Ad–22(b)(3) and (e)(4).
6 17
3 15
U.S.C. 78q–1(b)(3)(F).
4 Id.
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6911
managerial resources will be sufficient
for clearing of the contracts, consistent
with the requirements of Rule 17Ad–
22(e)(17),9 as the new contracts are
substantially the same from an
operational perspective as existing
contracts. Similarly, ICE Clear Europe
will use its existing settlement
procedures and account structures for
the new contracts, consistent with the
requirements of Rule 17Ad–22(e)(8), (9)
and (10) 10, as to the finality and
accuracy of its daily settlement process
and addressing the risks associated with
physical deliveries. ICE Clear Europe
determined to accept the contracts for
clearing in accordance with its
governance process, consistent with the
requirements of Rule 17Ad–22(e)(2).11
Finally, ICE Clear Europe will apply its
existing default management policies
and procedures for the contracts. ICE
Clear Europe believes that these
procedures allow for it to take timely
action to contain losses and liquidity
pressures and to continue meeting its
obligations in the event of Clearing
Member insolvencies or defaults in
respect of the additional single names,
in accordance with Rule 17Ad–
22(e)(13).12
With regards to the LGD
enhancements, the proposed risk model
revisions enhance ICE Clear Europe’s
risk methodology and are expected to
impose more conservative requirements,
which would enhance the financial
resources available to ICE Clear Europe
and thereby facilitate its ability to
promptly and accurately clear and settle
its cleared CDS contracts. In addition,
the proposed revisions are consistent
with the relevant requirements of Rule
17Ad–22.13 In particular, the LGD
related amendments will enhance the
financial resources available to the
Clearing House, and continue to ensure
that ICE Clear Europe maintains
sufficient financial resources to
withstand a default by the two Clearing
Member families to which it has the
largest aggregate exposure in extreme,
but plausible market conditions, and are
therefore reasonably designed to meet
the margin and financial resource
requirements of Rule 17Ad–22(b)(2–3)
and (e)(4) and (e)(6).14
(B) Clearing Agency’s Statement on
Burden on Competition
ICE Clear Europe does not believe the
proposed rule changes would have any
9 17
CFR 240.17Ad–22(e)(17).
CFR 240.17Ad–22(e)(8), (9) and (10).
11 17 CFR 240.17Ad–22(e)(2).
12 17 CFR 240.17Ad–22(e)(13).
13 17 CFR§ 240.17Ad–22.
14 17 CFR§ 240.17Ad–22(b)(2–3) and (e)(4) and
(e)(6).
10 17
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impact, or impose any burden, on
competition not necessary or
appropriate in furtherance of the
purpose of the Act. Contracts
referencing the Standard European
Senior Non-Preferred Financial
Corporate transaction type will be
available to all ICE Clear Europe
participants for clearing. The clearing of
these contracts by ICE Clear Europe
does not preclude the offering of the
contracts for clearing by other market
participants. Additionally, the LGD
enhancements apply uniformly across
all Clearing Members. Therefore, ICE
Clear Europe does not believe the
proposed rule changes impose any
burden on competition that is
inappropriate in furtherance of the
purposes of the Act.
(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
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.
sradovich on DSK3GMQ082PROD with NOTICES
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, security-based swap submission
or advance notice is consistent with the
Act. Comments may be submitted by
any of the following methods:
Electronic Comments
19:01 Feb 14, 2018
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ICEEU–2018–002. 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 Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filings will also be available for
inspection and copying at the principal
office of ICE Clear Europe and on ICE
Clear Europe’s website at https://
www.theice.com/clear-europe/
regulation#rule-filing.
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–2018–002
and should be submitted on or before
March 8, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–03112 Filed 2–14–18; 8:45 am]
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml) or
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• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ICEEU–2018–002 on the subject line.
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82676; File No. SR–NSCC–
2017–807]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of No Objection to
an Advance Notice To Increase the
Authorized Amount Under the
Prefunded Liquidity Program
February 9, 2018.
On December 12, 2017, National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
advance notice SR–NSCC–2017–807
(‘‘Advance Notice’’) pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act entitled the Payment,
Clearing, and Settlement Supervision
Act of 2010 (‘‘Clearing Supervision
Act’’) 1 and Rule 19b–4(n)(1)(i) 2 under
the Securities Exchange Act of 1934
(‘‘Exchange Act’’).3 The Advance Notice
was published for comment in the
Federal Register on January 2, 2018.4
The Commission received one comment
on the Advance Notice. The comment
letter was supportive, but brief, and
without specific reasons for the view.5
This publication serves as notice that
the Commission does not object to the
changes set forth in the Advance Notice.
I. Description of the Advance Notice
The Advance Notice is a proposal by
NSCC to address liquidity risk that is
present when NSCC acts as central
counterparty (‘‘CCP’’) to a transaction
with an NSCC member. Liquidity risk
can arise for NSCC where there is a
member default and NSCC must
continue to complete end-of-day
settlement on an ongoing basis. In such
circumstances, NSCC will need to
complete settlement of guaranteed
transactions by delivering to its other
members cash or securities on the
failing member’s behalf from the date of
default through the remainder of the
settlement cycle.
1 12 U.S.C. 5465(e)(1). The Financial Stability
Oversight Council designated NSCC a systemically
important financial market utility on July 18, 2012.
See Financial Stability Oversight Council 2012
Annual Report, Appendix A, https://
www.treasury.gov/initiatives/fsoc/Documents/2012
%20Annual%20Report.pdf. Therefore, NSCC is
required to comply with the Clearing Supervision
Act and file advance notices with the Commission.
See 12 U.S.C. 5465(e).
2 17 CFR 240.19b–4(n)(1)(i).
3 15 U.S.C. 78s(b)(1).
4 Securities Exchange Act Release No. 82403
(December 26, 2017), 83 FR 176 (January 2, 2017)
(File No. SR–NSCC–2017–807) (‘‘Notice’’).
5 See letter from Alexandre Blais, dated January
1, 2018 (‘‘[I] am all for this.’’).
E:\FR\FM\15FEN1.SGM
15FEN1
]]>Agencies
[Federal Register Volume 83, Number 32 (Thursday, February 15, 2018)]
[Notices]
[Pages 6909-6912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03112]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82678; File No. SR-ICEEU-2018-002]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing of Proposed Rule Change, Security-Based Swap Submission, or
Advance Notice Relating to Amendments to the ICE Clear Europe Limited
CDS Procedures, CDS Risk Policy, and CDS Risk Model Description
February 9, 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 February 6, 2018, ICE Clear Europe Limited (``ICE Clear Europe'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule changes described in Items I, II, and III below, which
Items have been prepared primarily by ICE Clear Europe. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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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
ICE Clear Europe Limited proposes to modify certain provisions of
its CDS Procedures to support clearing of a new single-name CDS
transaction type and to modify its CDS Risk Policy and CDS Risk Model
Description to enhance risk management relating to CDS involving
European banks.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, ICE Clear Europe included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. ICE Clear Europe has prepared summaries,
set forth in sections (A), (B), and (C) below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(a) Purpose
ICE Clear Europe proposes to modify certain provisions of its CDS
Procedures to support clearing of a new single-name CDS transaction
type. ICE Clear Europe also proposes to amend its CDS Risk Policy and
CDS Risk Model Description to better address certain risks associated
with CDS referencing European banks relating to the issuance of new
debt structures by those banks. These revisions do not involve any
changes to the ICE Clear Europe Clearing Rules.
Proposed Amendments to the CDS Procedures
The purpose of the proposed changes to the CDS Procedures is to
support clearing of a new single-name CDS transaction type: Standard
European Senior Non-Preferred Financial Corporate. ICE Clear Europe
understands that market participants generally propose to commence
trading of this transaction type as of March 20, 2018, and relevant
standard documentation for the transaction type has recently been
published by the International Swaps and Derivatives Association, Inc.
(``ISDA''). Transactions under such standard documentation, will be
generally similar to Standard European Financial Corporate transactions
currently cleared by the Clearing House, but will have a reference
obligation that will be subordinated to other senior obligations, but
will rank senior to so-called ``tier 2'' obligations that are
subordinated for purposes of European Union bank regulatory capital
requirements. ICE Clear Europe proposes amending its CDS Procedures to
provide for the clearance of contracts referencing this new transaction
type. ICE Clear Europe believes the addition of these contracts will
benefit the market for credit default swaps by providing market
participants the benefits of clearing, including reduction in
counterparty risk and safeguarding of margin assets pursuant to
Clearing House Rules.
Specifically, ICE Clear Europe proposes amending Paragraph
4.3(c)(ii) of the CDS Procedures to reference Standard European Senior
Non-Preferred Financial Corporate as a transaction type eligible to be
submitted for clearing. Similarly, Paragraph 11.3(i) is amended in the
definition of `Non-STEC Single Name Contract' to include Standard
European Senior Non-Preferred Financial Corporate in the list of types
of Reference Entities eligible to be cleared by ICE Clear Europe. ICE
[[Page 6910]]
Clear Europe also proposes amending the definition of `Single Name
Contract Reference Obligations' in Paragraph 11.3(j) to remove a
requirement that the relevant obligation must be a ``senior level''
obligation, and add instead that the obligation be of the applicable
seniority level for the terms of the contract (to accommodate the
seniority level of Senior Non-Preferred transactions, as discussed
above).
Proposed Amendments to the CDS Risk Model Description
ICE Clear Europe's risk management methodology incorporates
considerations of idiosyncratic credit events and the associated
potential losses. These credit event losses are termed Loss-Given-
Default (``LGD''). In order to support clearing of the new transaction
type, ICE Clear Europe proposes certain LGD enhancements to its risk
model. A description of these changes is set forth below.
ICE Clear Europe first proposes Risk Factor (``RF'') level LGD
enhancements. These proposed RF level enhancements are designed to
better capture the LGD risk associated with the issuance of new debt
structures by European banks, and provide a consistent recovery rate
scenario approach to different sub-factors.
Under ICE Clear Europe's risk model, every Single Name (``SN'')
reference entity is deemed an RF. Each combination of definition, doc-
clause, tier and currency for a given SN RF determines a SN Risk Sub-
Factor (``RSF''). Currently, ICE Clear Europe measures losses
associated with credit events (``LGD'') by means of a stress-based
approach, which utilizes three recovery rate (``RR'') scenarios:
minimum RR, expected RR, and maximum RR. Outright and index-derived RSF
exposures are combined at each RR scenario.
The results of these RR scenarios are used as an input into the
Profit/Loss-Given Default (``P/LGD'') calculations at both the RSF and
RF levels. For each RSF, P/LGD is calculated as the worst credit event
outcome, and for each RF, P/LGD is calculated as the sum of the worst
credit outcomes per RSF. These final P/LGD results are used as part of
the determination of risk requirements.
ICE Clear Europe proposes enhancements to the RF level LGD
calculation. Specifically, ICE Clear Europe proposes a change to the
calculation by incorporating a more consistent approach in the
calculation of the P/LGD by using the same RR scenarios applied to the
different RSFs which form part of the considered RF.
For each RF, ICE Clear Europe will continue to calculate an
``extreme outcome'' as the sum of the worst RSF P/LGDs across all
scenarios. ICE Clear Europe will also, for each RF, calculate an
``expected outcome'' as the worst sum of all the RSF P/LGDs across all
of the same scenarios. Under the proposed approach, ICE Clear Europe
will then combine the results of the ``extreme outcome'' calculation
and the ``expected outcome'' calculation to compute the total LGD for
each RF.
ICE Clear Europe also proposes to expand its LGD analysis to Risk
Factor Groups (``RFG''). Under the proposed changes, a collection of
related RFs will form a RFG. These related RFs will be defined as a RFG
based on either (1) having a common majority parental sovereign
ownership (e.g. quasi-sovereigns and sovereigns), or (2) being a
majority owned subsidiary of a common parent entity according to the
Bloomberg Related Securities Analysis. A RFG can consist of only one
RF. This change will better capture the risk exposure dynamics of
related RFs, and will allow ICE Clear Europe the ability to provide
limited LGD benefits across RFs with opposite exposures, as well as
allow for the ability to capture accumulation of directional exposure
for related RFs.
Under the proposed approach, the total quantity LGD will be
calculated on a RFG level, and account for the exposure due to credit
events associated with the reference entities within a given RFG. If a
RFG contains only one RF, the LGD will continue to be computed as the
risk exposure due to a credit event for a given underlying reference
entity. Under the proposed approach, ICE Clear Europe will sum the P/
LGDs for each RF in a given RFG, with limited offsets in the event RFs
exhibit positive PLGD. Using the results of the above calculation, ICE
Clear Europe will obtain the RFG level LGD. The proposed approach also
includes a calculation which allows for the RFG level LGD to be
attributed to each RF within the considered RFG.
ICE Clear Europe proposes changes to the `Loss Given Default Risk
Analysis' section of the CDS Risk Model Description Document to reflect
the described RF and RFG LGD calculation changes. ICE Clear Europe also
proposes conforming changes to other sections of the CDS Risk Model
Description to incorporate these methodology changes and reflect the
RFG analysis.
ICE Clear Europe proposes a revision to the `Uncollateralized Loss
Given Default' calculation in order to incorporate the RFG level LGD
attribution calculation mentioned above.
ICE Clear Europe proposes changes to the `Idiosyncratic Jump-to-
Default Requirements' section of the CDS Risk Model Description
document. Currently, the portfolio Jump to Default (``JTD'') approach
collateralizes the worst uncollateralized LGD (``ULGD'') exposure among
all RFs. Under the proposed approach, the portfolio JTD approach will
collateralize, through the portfolio JTD IM requirement that accounts
for the RFG-specific LGD collateralization, the worst ULGD exposure
among all RFGs. The ULGD exposure for a given RFG will be calculated as
a sum of the associated RF ULGDs.
ICE Clear Europe also proposes minor edits to the `SWWR' (Specific
Wrong Way Risk) and `GWWR' (General Wrong Way Risk) sections to update
language and calculation descriptions to accommodate the introduction
of the RFG to the `Idiosyncratic Jump-to-Default Requirements' section.
ICE Clear Europe proposes changes to the `Guaranty Fund
Methodology' section. ICE Clear Europe's risk management approach
establishes GF to provide for the mutualization of losses under extreme
credit market scenarios. Specifically, the ICE Clear Europe GF is
designed to provide adequate funds to cover losses associated with the
default of the two Clearing Member (``CM'') affiliate groups that would
potentially cause the largest aggregate credit exposure to ICE Clear
Europe under extreme, but plausible market conditions. ICE Clear
Europe's current GF methodology includes, among other assumptions and
adverse market conditions, the assumption that up to three credit
events, different from the ones associated with CMs, occur during the
established risk horizon. ICE Clear Europe proposes expanding this
analysis to the RFG level. Under this proposed approach, it will be
assumed that credit events associated with up to three RFGs, different
from the ones associated with the CMs and the RFs that are in the RFGs
as the CMs, occur during the established risk horizon. As such, the
uncollateralized losses, used in the Guaranty Fund analysis, reflect
the proposed expansion to the RFG level.
ICE Clear Europe also proposes clarifications to the calculation
for the Specific Wrong Way Risk component of the Guaranty Fund.
Currently, for a given CM, the Specific Wrong Way Risk component is
based on self-referencing positions arising from one or more RFs; ICE
Clear Europe proposes clarifying
[[Page 6911]]
this analysis to be based on the RFG level.
The amendments to the CDS Risk Model Description also contain
typographical corrections and similar technical corrections and
clarifications.
Proposed Amendments to the CDS Risk Policy
ICE Clear Europe also proposes conforming changes to the CDS Risk
Policy consistent with those described above.
Specifically, the definition of a Risk Sub-Factor is proposed to be
amended that it will be defined as a specific combination of SN, tier
and currency (as well as documentation clause), where the union of all
Risk Sub-Factors that share the same underlying SN forms a SN Risk
Factor.
The CDS Risk Policy is also being amended such that instead of the
worst SN, the worst LGD associated with a Risk Factor Group (``RFG''),
will be selected to establish the portfolio JTD requirement. The
amendments also clarify that a Risk Factor Group is a set of Risk
Factors related by a common parental ownership.
With respect to the guaranty fund calculation, provisions in
respect of two uncollateralized LGD relating to the guaranty fund
calculation is being amended such that instead of the GF LGD being
estimated for every SN based on the total portfolio positions in the
SNs, the GF LGD will be estimated for every RFG based on the total
portfolio positions in the SNs belonging to the same RFG.
The amendments to the CDS Risk Policy also contain typographical
corrections and similar technical corrections and clarifications.
(b) Statutory Basis
Section 17A(b)(3)(F) of the Act \3\ 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 and to comply with the provisions of the Act and the rules
and regulations thereunder. ICE Clear Europe believes that the proposed
rule changes are consistent with the requirements of the Act and the
rules and regulations thereunder applicable to ICE Clear Europe, in
particular, to Section 17(A)(b)(3)(F),\4\ because ICE Clear Europe
believes that the proposed rule changes will promote the prompt and
accurate clearance and settlement of securities transactions,
derivatives agreements, contracts, and transactions.
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\3\ 15 U.S.C. 78q-1(b)(3)(F).
\4\ Id.
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In regards to the proposed amendments to the Procedures, contracts
referencing the Standard European Senior Non-Preferred Financial
Corporate transaction type are similar to the Non-STEC Single Name
contracts currently cleared by ICE Clear Europe, and will be cleared
pursuant to ICE Clear Europe's existing clearing arrangements and
related financial safeguards, protections and risk management
procedures (with the modifications to the CDS Risk Policy and CDS Risk
Model Description discussed herein). Clearing of these contracts will
allow market participants an increased ability to manage risk and will
ensure the safeguarding of related margin assets pursuant to Clearing
House Rules. ICE Clear Europe believes that acceptance of these
contracts, on the terms and conditions set out in the Rules, is
consistent with the prompt and accurate clearance of and settlement of
securities transactions and derivative agreements, contracts and
transactions cleared by ICE Clear Europe, the safeguarding of
securities and funds in the custody or control of ICE Clear Europe, and
the protection of investors and the public interest, within the meaning
of Section 17A(b)(3)(F) of the Act.\5\
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\5\ 15 U.S.C. 78q-1(b)(3)(F).
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Clearing of contracts referencing the Standard European Senior Non-
Preferred Financial Corporate transaction type will also satisfy the
requirements of Rule 17Ad-22.\6\ In particular, in terms of financial
resources, ICE Clear Europe will apply its existing initial margin
methodology to the contracts (with the modifications to the CDS Risk
Policy and CDS Risk Model Description discussed herein). ICE Clear
Europe believes that this model (as proposed to be amended) will
provide sufficient initial margin requirements to cover its credit
exposure to its Clearing Members from clearing such contracts,
consistent with the requirements of Rule 17Ad-22(b)(2) and (e)(6).\7\
In addition, ICE Clear Europe believes its Guaranty Fund, under its
methodology as proposed to be revised, will, together with the required
initial margin, provide sufficient financial resources to support the
clearing of the contracts consistent with the requirements of Rule
17Ad-22(b)(3) and (e)(4).\8\ ICE Clear Europe also believes that its
existing operational and managerial resources will be sufficient for
clearing of the contracts, consistent with the requirements of Rule
17Ad-22(e)(17),\9\ as the new contracts are substantially the same from
an operational perspective as existing contracts. Similarly, ICE Clear
Europe will use its existing settlement procedures and account
structures for the new contracts, consistent with the requirements of
Rule 17Ad-22(e)(8), (9) and (10) \10\, as to the finality and accuracy
of its daily settlement process and addressing the risks associated
with physical deliveries. ICE Clear Europe determined to accept the
contracts for clearing in accordance with its governance process,
consistent with the requirements of Rule 17Ad-22(e)(2).\11\ Finally,
ICE Clear Europe will apply its existing default management policies
and procedures for the contracts. ICE Clear Europe believes that these
procedures allow for it to take timely action to contain losses and
liquidity pressures and to continue meeting its obligations in the
event of Clearing Member insolvencies or defaults in respect of the
additional single names, in accordance with Rule 17Ad-22(e)(13).\12\
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\6\ 17 CFR 240.17Ad-22.
\7\ 17 CFR 240.17Ad-22(b)(2) and (e)(6).
\8\ 17 CFR 240.17Ad-22(b)(3) and (e)(4).
\9\ 17 CFR 240.17Ad-22(e)(17).
\10\ 17 CFR 240.17Ad-22(e)(8), (9) and (10).
\11\ 17 CFR 240.17Ad-22(e)(2).
\12\ 17 CFR 240.17Ad-22(e)(13).
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With regards to the LGD enhancements, the proposed risk model
revisions enhance ICE Clear Europe's risk methodology and are expected
to impose more conservative requirements, which would enhance the
financial resources available to ICE Clear Europe and thereby
facilitate its ability to promptly and accurately clear and settle its
cleared CDS contracts. In addition, the proposed revisions are
consistent with the relevant requirements of Rule 17Ad-22.\13\ In
particular, the LGD related amendments will enhance the financial
resources available to the Clearing House, and continue to ensure that
ICE Clear Europe maintains sufficient financial resources to withstand
a default by the two Clearing Member families to which it has the
largest aggregate exposure in extreme, but plausible market conditions,
and are therefore reasonably designed to meet the margin and financial
resource requirements of Rule 17Ad-22(b)(2-3) and (e)(4) and
(e)(6).\14\
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\13\ 17 CFRSec. 240.17Ad-22.
\14\ 17 CFRSec. 240.17Ad-22(b)(2-3) and (e)(4) and (e)(6).
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(B) Clearing Agency's Statement on Burden on Competition
ICE Clear Europe does not believe the proposed rule changes would
have any
[[Page 6912]]
impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purpose of the Act. Contracts
referencing the Standard European Senior Non-Preferred Financial
Corporate transaction type will be available to all ICE Clear Europe
participants for clearing. The clearing of these contracts by ICE Clear
Europe does not preclude the offering of the contracts for clearing by
other market participants. Additionally, the LGD enhancements apply
uniformly across all Clearing Members. Therefore, ICE Clear Europe does
not believe the proposed rule changes impose any burden on competition
that is inappropriate in furtherance of the purposes of the Act.
(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
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-2018-002 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-ICEEU-2018-002. 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
Room, 100 F Street NE, Washington, DC 20549, on official business days
between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filings
will also be available for inspection and copying at the principal
office of ICE Clear Europe and on ICE Clear Europe's website at https://www.theice.com/clear-europe/regulation#rule-filing.
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-2018-002 and should be
submitted on or before March 8, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-03112 Filed 2-14-18; 8:45 am]
BILLING CODE 8011-01-P
