Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to ICC's End-of-Day Price Discovery Policies and Procedures, 14300-14302 [2018-06691]
Download as PDF
<![CDATA[
14300
Federal Register / Vol. 83, No. 64 / Tuesday, April 3, 2018 / Notices
amozie on DSK30RV082PROD with NOTICES
the loans’ duration will be no more than
7 days.2
2. Applicants anticipate that the
proposed facility would provide a
borrowing Fund with a source of
liquidity at a rate lower than the bank
borrowing rate at times when the cash
position of the Fund is insufficient to
meet temporary cash requirements. In
addition, Funds making short-term cash
loans directly to other Funds would
earn interest at a rate higher than they
otherwise could obtain from investing
their cash in repurchase agreements or
certain other short-term money market
instruments. Thus, applicants assert that
the facility would benefit both
borrowing and lending Funds.
3. Applicants agree that any order
granting the requested relief will be
subject to the terms and conditions
stated in the application. Among others,
the Adviser, through a designated
committee, would administer the
facility as a disinterested fiduciary as
part of its duties under the investment
management agreements with the Funds
and would receive no additional fee as
compensation for its services in
connection with the administration of
the facility. The facility would be
subject to oversight and certain
approvals by the Funds’ Board,
including, among others, approval of the
interest rate formula and of the method
for allocating loans across Funds, as
well as review of the process in place to
evaluate the liquidity implications for
the Funds. A Fund’s aggregate
outstanding interfund loans will not
exceed 15% of its net assets, and the
Fund’s loans to any one Fund will not
exceed 5% of the lending Fund’s net
assets.3
4. Applicants assert that the facility
does not raise the concerns underlying
section 12(d)(1) of the Act given that the
Funds are part of the same group of
investment companies and there will be
no duplicative costs or fees to the
Funds.4 Applicants also assert that the
proposed transactions do not raise the
concerns underlying sections 17(a)(1),
17(a)(3), 17(d) and 21(b) of the Act as
the Funds would not engage in lending
transactions that unfairly benefit
insiders or are detrimental to the Funds.
Applicants state that the facility will
offer both reduced borrowing costs and
enhanced returns on loaned funds to all
2 Any Fund, however, will be able to call a loan
on one business day’s notice.
3 Under certain circumstances, a borrowing Fund
will be required to pledge collateral to secure the
loan.
4 Applicants state that the obligation to repay an
interfund loan could be deemed to constitute a
security for the purposes of sections 17(a)(1) and
12(d)(1) of the Act.
VerDate Sep<11>2014
16:47 Apr 02, 2018
Jkt 244001
participating Funds and each Fund
would have an equal opportunity to
borrow and lend on equal terms based
on an interest rate formula that is
objective and verifiable. With respect to
the relief from section 17(a)(2) of the
Act, applicants note that any collateral
pledged to secure an interfund loan
would be subject to the same conditions
imposed by any other lender to a Fund
that imposes conditions on the quality
of or access to collateral for a borrowing
(if the lender is another Fund) or the
same or better conditions (in any other
circumstance).5
5. Applicants also believe that the
limited relief from section 18(f)(1) of the
Act that is necessary to implement the
facility (because the lending Funds are
not banks) is appropriate in light of the
conditions and safeguards described in
the application and because the Funds
would remain subject to the
requirement of section 18(f)(1) that all
borrowings of a Fund, including
combined interfund loans and bank
borrowings, have at least 300% asset
coverage.
6. Section 6(c) of the Act permits the
Commission to exempt any persons or
transactions from any provision of the
Act if such exemption is necessary or
appropriate in the public interest and
consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may
exempt any person, security, or
transaction, or any class or classes of
persons, securities, or transactions, from
any provision of section 12(d)(1) if the
exemption is consistent with the public
interest and the protection of investors.
Section 17(b) of the Act authorizes the
Commission to grant an order
permitting a transaction otherwise
prohibited by section 17(a) if it finds
that (a) the terms of the proposed
transaction are fair and reasonable and
do not involve overreaching on the part
of any person concerned; (b) the
proposed transaction is consistent with
the policies of each registered
investment company involved; and (c)
the proposed transaction is consistent
with the general purposes of the Act.
Rule 17d–1(b) under the Act provides
that in passing upon an application filed
under the rule, the Commission will
consider whether the participation of
the registered investment company in a
joint enterprise, joint arrangement or
profit sharing plan on the basis
5 Applicants state that any pledge of securities to
secure an interfund loan could constitute a
purchase of securities for purposes of section
17(a)(2) of the Act.
PO 00000
Frm 00063
Fmt 4703
Sfmt 4703
proposed is consistent with the
provisions, policies and purposes of the
Act and the extent to which such
participation is on a basis different from
or less advantageous than that of the
other participants.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Robert Errett,
Deputy Secretary.
[FR Doc. 2018–06661 Filed 4–2–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82960; File No. SR–ICC–
2018–002]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change Relating to
ICC’s End-of-Day Price Discovery
Policies and Procedures
March 28, 2018.
I. Introduction
On January 26, 2018, ICE Clear Credit
LLC (‘‘ICC’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’),1 a proposed rule
change (SR–ICC–2018–002) to revise its
End-of-Day Price Discovery Policies and
Procedures (‘‘Pricing Policy’’) with
respect to the bid-offer width (‘‘BOW’’)
methodology applicable to single-name
(‘‘SN’’) instruments. The proposed rule
change was published for comment in
the Federal Register on February 12,
2018.2 The Commission did not receive
comments on the proposed rule change.
For the reasons discussed below, the
Commission is approving the proposed
rule change.3
II. Description of the Proposed Rule
Change
ICC proposes to revise its Pricing
Policy to amend the methodology used
to calculate end-of-day BOWs for its SN
instruments. As part of its end-of-day
pricing process, ICC calculates a BOW
for each clearing-eligible instrument.
These BOWs are then used as an input
in determining end-of-day levels, which
are used for mark-to-market and risk
1 15
U.S.C. 78s(b)(1).
Exchange Act Release No. 34–82641
(February 6, 2018), 83 FR 6078 (February 12, 2016)
(SR–ICC–2018–002) (‘‘Notice’’).
3 Capitalized terms used herein but not otherwise
defined have the meaning set forth in the ICC
rulebook, which is available at https://
www.theice.com/publicdocs/clear_credit/ICE_
Clear_Credit_Rules.pdf, or in the Pricing Policy.
2 Securities
E:\FR\FM\03APN1.SGM
03APN1
Federal Register / Vol. 83, No. 64 / Tuesday, April 3, 2018 / Notices
amozie on DSK30RV082PROD with NOTICES
management purposes, including
calculation of certain margin
requirements, and for firm trade
determinations.4 ICC’s current approach
to calculating a BOW for SN
instruments starts by calculating a
‘‘Consensus BOW,’’ which is a spreadbased BOW derived from intraday
quotes (taken from trader emails) for the
most actively traded instrument for a
given SN instrument. Once the
Consensus BOW has been determined,
ICC applies a ‘‘scrape factor’’ to the
Consensus BOW to capture differences
between BOWs provided in intraday
quotes taken from trader emails and
BOWs achieved in the market.
Thereafter, ICC applies additional
scaling factors to capture differences in
instrument liquidity for longer and
shorter maturities, and for higher and
lower coupons.5 Scaling across
maturities is performed in spread terms,
while scaling across coupons is
performed in price terms.6 ICC uses the
ISDA Standard Model for the
transformations from spread to price.7
Under the proposed revisions, ICC
would still start its calculation of endof-day BOWs for SN instruments by
calculating a Consensus BOW, but it
would change the calculation of the
Consensus BOW from being based on
intraday quotes taken from trader emails
to being computed as (i) a price-based
floor, plus (ii) a relative BOW that is
multiplied by the average of price-space
mid-levels submitted by Clearing
Participants through the end-of-day
price discovery process.8
The relative BOW would be
determined by ICC’s Risk Management
Department in consultation with ICC’s
Trade Advisory Committee, and would
be designed to reflect observed
variability in SN instrument levels for
the most actively traded instruments.
The price-based floor would reflect
BOWs established for index products
representing baskets of the most
4 Notice, 83 FR at 6078. According to ICC, to
encourage Clearing Participants to provide the best
possible EOD submissions, ICC selects a sub-set of
the potential-trades generated by the cross-and-lock
algorithm and designates them as firm-trades,
which Clearing Participants are entered into as
cleared transactions. See Notice of Filing of
Proposed Rule Change to Revise ICC End-of-Day
Price Discovery Policies and Procedures, Securities
Exchange Act Release No. 34–77771 (May 5, 2016),
81 FR 29309, 29310 (May 11, 2016) (SR–ICC–2016–
007).
5 Id.
6 Id.
7 Id.
8 Id. at 6079. ICC would no longer apply a scrape
factor to the Consensus BOW as the determination
of Consensus BOWs would no longer rely on
‘‘scraped’’ intraday quotes. Id. at 6078.
VerDate Sep<11>2014
16:47 Apr 02, 2018
Jkt 244001
distressed SN instruments.9 In addition,
ICC proposes to extend the application
of the price-based BOW floors from the
0/3-month, 6-month, and 1-year
benchmark tenors to cover the entire set
of benchmark tenors from 0 month to 10
years.10
Under the proposed enhancements,
ICC would continue to apply certain
scaling factors, other than the scrape
factor, to the Consensus BOW.
Specifically, ICC would apply a tenor
scaling factor to the Consensus BOW for
each benchmark instrument at the most
actively traded coupon.11 For
benchmark instruments at other
coupons, ICC would apply a
combination of tenor and coupon
scaling factors. The coupon and tenor
scaling factors would be determined by
the ICC Risk Management Department
in consultation with the Trading
Advisory Committee.12 Once the
applicable scaling factor or factors have
been applied, ICC would then apply a
Single Name Variability Factor, with the
resulting BOW being deemed the
‘‘systematic BOW.’’ 13
ICC also proposes to introduce a new
component to its Pricing Policy: The
‘‘dynamic BOW,’’ which would be the
dispersion of price-space mid-levels
submitted as part of its end-of-day price
discovery process.14 As the last step of
its process, ICC would compare the
systematic BOW with the dynamic BOW
and would select the greater of the two
as the end-of-day BOW for a given SN
instrument.15
In addition to the proposed changes
regarding the computation of the end-ofday BOW for SN instruments, ICC also
proposes changes to the Governance
section of its Pricing Policy.
Specifically, ICC proposes to amend the
Governance section to provide that the
responsibilities of the ICC Risk
Management Department include
determining the price-based floors,
relative BOWs, and tenor and coupon
scaling factors used as inputs into the
BOW determination.16 ICC also
proposes to amend language in the
Governance section to provide that the
ICC Risk Management Department has
9 Id.
at 6079. In addition, because ICC accepts SN
instrument submissions from Clearing Participants
only in price terms under the Pricing Policy, rather
than in both spread and price terms, the need for
spread-based BOWs would be eliminated, as would
the need to use the ISDA Standard Model to achieve
the transformations from spread to price during the
scaling process. See id. at 6078.
10 Id. at 6078.
11 Id. at 6079.
12 Id.
13 Id.
14 Id.
15 Id.
16 Id.
PO 00000
Frm 00064
Fmt 4703
Sfmt 4703
14301
the responsibility of ensuring that
appropriate end-of-day levels are
determined, and to clarify that the
parameters used in the end-of-day
pricing process are to be established by
the Risk Management Department in
consultation with the Trading Advisory
Committee.17 ICC also proposes
revisions to the Governance section that
would provide that the Trading
Advisory Committee would review and
provide input regarding revisions to the
BOW price-based floors.18
Finally, ICC proposes certain
clarifying edits. Specifically, ICC
proposes to remove references to scrape
factors, and to remove the requirement
that the Trading Advisory Committee
review scrape factors, as the scrape
factors, which are applied to the
Consensus BOW under ICC’s current
approach to account for differences
between BOWs obtained from intraday
quotes taken from trader emails and
those achieved in the market, would no
longer be applicable under the proposed
changes as the Consensus BOW under
the proposed amendments would not
rely on such intraday quotes.19 Other
clarifying edits include the addition of
a footnote to the Pricing Policy
describing ICC’s use of the ISDA
Standard Model, the removal of
outdated references, correcting certain
typographical errors, and updates to
section numbering, as well as certain
other minor edits as described in greater
detail in the Notice.20
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if it finds that such
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to such organization.21 For
the reasons given below, the
Commission finds that the proposed
rule change is consistent with Section
17A(b)(3)(F) of the Act,22 and Rules
17Ad–22(b)(2) and (d)(8) thereunder.23
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act
requires, among other things, that the
rules of a registered clearing agency be
designed to promote the prompt and
accurate clearance and settlement of
17 Id.
18 Id.
19 Id.
20 Id.
21 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
23 17 CFR 240.17Ad–22(b)(2) and (d)(8).
22 15
E:\FR\FM\03APN1.SGM
03APN1
amozie on DSK30RV082PROD with NOTICES
14302
Federal Register / Vol. 83, No. 64 / Tuesday, April 3, 2018 / Notices
securities transactions and, to the extent
applicable, derivative agreements,
contracts and transactions, and to assure
the safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible.24 As discussed above, the
proposed rule change would enhance
ICC’s end-of-day price discovery process
for SN instruments in a number of ways,
including but not limited to
incorporating a price-based floor which
would be applied to a wider range of
instruments, adopting a new dynamic
BOW component, and taking into
consideration the dispersion of pricespace mid-levels received from Clearing
Participants, all while continuing to
apply scaling tenor, coupon, and
variability scaling factors.
Taken as a whole, the Commission
believes the proposed changes should
enhance ICC’s ability to determine the
end-of-day BOW for SN instruments.
First, the proposed changes should
permit ICC to determine BOWs
consistently across SN instruments on
all reference entities, including those for
which only sparse intraday data is
available.25 In addition, by extending
the application of the price-based BOW
floor component to the entire set of
benchmark tenors from the 0 month to
10 years instead of solely the 0⁄3 month,
6 month, and 1-year benchmark tenors,
the Commission believes that ICC will
be able to more consistently compute
the end-of-day BOW for a wider range
of SN instruments.
Consequently, the Commission
believes that the proposed changes will
improve ICC’s end-of-day pricing
process as a whole as additional
relevant information will be taken into
consideration and a wider range of
instruments will be considered in the
pricing process. Based on these
improvements, the Commission believes
that ICC’s risk management processes
related to the end-of-day pricing
process, including the calculation and
collection of certain margin
requirements, will also be improved,
resulting in an improved ability to
safeguard the positions that ICC
maintains from the default of a Clearing
Participant. As a result, the Commission
believes that the proposed changes will
promote the prompt and accurate
clearance and settlement of the products
cleared by ICC, and will enhance ICC’s
ability to assure the safeguarding of
securities and funds which are in the
custody or control of ICC or for which
it is responsible. Therefore, the
Commission finds that the proposed
rule change is consistent with the
requirements of Section 17A(b)(3)(F) of
the Act.26
B. Consistency With Rule 17Ad–22(b)(2)
Rule 17Ad–22(b)(2) requires, in
relevant part, a registered clearing
agency that performs central
counterparty services to establish
implement, maintain, and enforce
written policies and procedures
reasonably designed to use margin
requirements to limit its credit
exposures to participants under normal
market conditions. As noted above, ICC
uses the end-of-day BOWs as part of its
mark-to-market and risk management
purposes, including the computation of
certain margin requirements.27
The Commission believes that by
improving the end-of-day pricing
process, as described above, ICC will
also improve its ability to calculate
margin requirements that use the endof-day BOWs as an input. Consequently,
an improved margin calculation should
lead to the collection of margin levels
that enhance ICC’s ability to limit its
credit exposures to participants under
normal market conditions. As a result,
the Commission finds that the proposed
rule change is consistent with the
requirements of Rule 17Ad–22(b)(2).28
C. Consistency With Rule 17Ad–22(d)(8)
Rule 17Ad–22(d)(8) requires, in
relevant part, that a registered clearing
agency that is not a covered clearing
agency to establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to,
as applicable, have governance
arrangements that promote the
effectiveness of the clearing agency’s
risk management procedures.29 ICC
proposed to amend the Governance
section of its Pricing policy to clarify the
responsibilities of the ICC Risk
Management Department and the
Trading Advisory Committee with
respect to the determination of pricebased floors, relative BOWs, and scaling
factors. By updating the Governance
section of the Pricing Policy to delineate
the roles of the ICC Risk Management
Department and the Trading Advisory
Committee, the Commission believes
that ICC will improve the governance
structure surrounding the end-of-day
pricing process.
Because the output of the end-of-day
pricing process is used for mark-tomarket and risk management purposes,
the Commission believes that
26 Id.
27 17
24 15
U.S.C. 78q–1(b)(3)(F).
25 Notice, 83 FR at 6078.
VerDate Sep<11>2014
18:45 Apr 02, 2018
CFR 240.17Ad–22(b)(2).
28 Id.
29 17
Jkt 244001
PO 00000
CFR 240.17Ad–22(d)(8).
Frm 00065
Fmt 4703
Sfmt 4703
improvements to the governance
structure of the end-of-day pricing
process will have the effect of
promoting greater effectiveness of ICC’s
risk management procedures overall.
Therefore, the Commission finds that
the proposed rule change is consistent
with the requirements of Rule 17Ad–
22(d)(8).30
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act, and in
particular with the requirements of
Section 17A of the Act 31 and Rules
17Ad–22(b)(2) and (d)(8) 32 thereunder.
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 33 that the
proposed rule change (SR–ICC–2018–
002) be, and hereby is, approved.34
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
Jill Peterson,
Assistant Secretary.
[FR Doc. 2018–06691 Filed 4–2–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release 34–82961; File No. SR–ISE–2018–
21]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Extend the Delay for
Re-Introduction of Legging
Functionality for Stock-Option Orders
on INET by an Additional Year
March 28, 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 March 16,
2018, Nasdaq ISE, LLC (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II,
below, which Items have been prepared
30 Id.
31 15
U.S.C. 78q–1.
CFR 240.17Ad–22(b)(2) and (d)(8).
33 15 U.S.C. 78s(b)(2).
34 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
35 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
32 17
E:\FR\FM\03APN1.SGM
03APN1
]]>Agencies
[Federal Register Volume 83, Number 64 (Tuesday, April 3, 2018)]
[Notices]
[Pages 14300-14302]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06691]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82960; File No. SR-ICC-2018-002]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to ICC's End-of-Day Price
Discovery Policies and Procedures
March 28, 2018.
I. Introduction
On January 26, 2018, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ a
proposed rule change (SR-ICC-2018-002) to revise its End-of-Day Price
Discovery Policies and Procedures (``Pricing Policy'') with respect to
the bid-offer width (``BOW'') methodology applicable to single-name
(``SN'') instruments. The proposed rule change was published for
comment in the Federal Register on February 12, 2018.\2\ The Commission
did not receive comments on the proposed rule change. For the reasons
discussed below, the Commission is approving the proposed rule
change.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 34-82641 (February 6,
2018), 83 FR 6078 (February 12, 2016) (SR-ICC-2018-002)
(``Notice'').
\3\ Capitalized terms used herein but not otherwise defined have
the meaning set forth in the ICC rulebook, which is available at
https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Rules.pdf, or in the Pricing Policy.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
ICC proposes to revise its Pricing Policy to amend the methodology
used to calculate end-of-day BOWs for its SN instruments. As part of
its end-of-day pricing process, ICC calculates a BOW for each clearing-
eligible instrument. These BOWs are then used as an input in
determining end-of-day levels, which are used for mark-to-market and
risk
[[Page 14301]]
management purposes, including calculation of certain margin
requirements, and for firm trade determinations.\4\ ICC's current
approach to calculating a BOW for SN instruments starts by calculating
a ``Consensus BOW,'' which is a spread-based BOW derived from intraday
quotes (taken from trader emails) for the most actively traded
instrument for a given SN instrument. Once the Consensus BOW has been
determined, ICC applies a ``scrape factor'' to the Consensus BOW to
capture differences between BOWs provided in intraday quotes taken from
trader emails and BOWs achieved in the market. Thereafter, ICC applies
additional scaling factors to capture differences in instrument
liquidity for longer and shorter maturities, and for higher and lower
coupons.\5\ Scaling across maturities is performed in spread terms,
while scaling across coupons is performed in price terms.\6\ ICC uses
the ISDA Standard Model for the transformations from spread to
price.\7\
---------------------------------------------------------------------------
\4\ Notice, 83 FR at 6078. According to ICC, to encourage
Clearing Participants to provide the best possible EOD submissions,
ICC selects a sub-set of the potential-trades generated by the
cross-and-lock algorithm and designates them as firm-trades, which
Clearing Participants are entered into as cleared transactions. See
Notice of Filing of Proposed Rule Change to Revise ICC End-of-Day
Price Discovery Policies and Procedures, Securities Exchange Act
Release No. 34-77771 (May 5, 2016), 81 FR 29309, 29310 (May 11,
2016) (SR-ICC-2016-007).
\5\ Id.
\6\ Id.
\7\ Id.
---------------------------------------------------------------------------
Under the proposed revisions, ICC would still start its calculation
of end-of-day BOWs for SN instruments by calculating a Consensus BOW,
but it would change the calculation of the Consensus BOW from being
based on intraday quotes taken from trader emails to being computed as
(i) a price-based floor, plus (ii) a relative BOW that is multiplied by
the average of price-space mid-levels submitted by Clearing
Participants through the end-of-day price discovery process.\8\
---------------------------------------------------------------------------
\8\ Id. at 6079. ICC would no longer apply a scrape factor to
the Consensus BOW as the determination of Consensus BOWs would no
longer rely on ``scraped'' intraday quotes. Id. at 6078.
---------------------------------------------------------------------------
The relative BOW would be determined by ICC's Risk Management
Department in consultation with ICC's Trade Advisory Committee, and
would be designed to reflect observed variability in SN instrument
levels for the most actively traded instruments. The price-based floor
would reflect BOWs established for index products representing baskets
of the most distressed SN instruments.\9\ In addition, ICC proposes to
extend the application of the price-based BOW floors from the 0/3-
month, 6-month, and 1-year benchmark tenors to cover the entire set of
benchmark tenors from 0 month to 10 years.\10\
---------------------------------------------------------------------------
\9\ Id. at 6079. In addition, because ICC accepts SN instrument
submissions from Clearing Participants only in price terms under the
Pricing Policy, rather than in both spread and price terms, the need
for spread-based BOWs would be eliminated, as would the need to use
the ISDA Standard Model to achieve the transformations from spread
to price during the scaling process. See id. at 6078.
\10\ Id. at 6078.
---------------------------------------------------------------------------
Under the proposed enhancements, ICC would continue to apply
certain scaling factors, other than the scrape factor, to the Consensus
BOW. Specifically, ICC would apply a tenor scaling factor to the
Consensus BOW for each benchmark instrument at the most actively traded
coupon.\11\ For benchmark instruments at other coupons, ICC would apply
a combination of tenor and coupon scaling factors. The coupon and tenor
scaling factors would be determined by the ICC Risk Management
Department in consultation with the Trading Advisory Committee.\12\
Once the applicable scaling factor or factors have been applied, ICC
would then apply a Single Name Variability Factor, with the resulting
BOW being deemed the ``systematic BOW.'' \13\
---------------------------------------------------------------------------
\11\ Id. at 6079.
\12\ Id.
\13\ Id.
---------------------------------------------------------------------------
ICC also proposes to introduce a new component to its Pricing
Policy: The ``dynamic BOW,'' which would be the dispersion of price-
space mid-levels submitted as part of its end-of-day price discovery
process.\14\ As the last step of its process, ICC would compare the
systematic BOW with the dynamic BOW and would select the greater of the
two as the end-of-day BOW for a given SN instrument.\15\
---------------------------------------------------------------------------
\14\ Id.
\15\ Id.
---------------------------------------------------------------------------
In addition to the proposed changes regarding the computation of
the end-of-day BOW for SN instruments, ICC also proposes changes to the
Governance section of its Pricing Policy. Specifically, ICC proposes to
amend the Governance section to provide that the responsibilities of
the ICC Risk Management Department include determining the price-based
floors, relative BOWs, and tenor and coupon scaling factors used as
inputs into the BOW determination.\16\ ICC also proposes to amend
language in the Governance section to provide that the ICC Risk
Management Department has the responsibility of ensuring that
appropriate end-of-day levels are determined, and to clarify that the
parameters used in the end-of-day pricing process are to be established
by the Risk Management Department in consultation with the Trading
Advisory Committee.\17\ ICC also proposes revisions to the Governance
section that would provide that the Trading Advisory Committee would
review and provide input regarding revisions to the BOW price-based
floors.\18\
---------------------------------------------------------------------------
\16\ Id.
\17\ Id.
\18\ Id.
---------------------------------------------------------------------------
Finally, ICC proposes certain clarifying edits. Specifically, ICC
proposes to remove references to scrape factors, and to remove the
requirement that the Trading Advisory Committee review scrape factors,
as the scrape factors, which are applied to the Consensus BOW under
ICC's current approach to account for differences between BOWs obtained
from intraday quotes taken from trader emails and those achieved in the
market, would no longer be applicable under the proposed changes as the
Consensus BOW under the proposed amendments would not rely on such
intraday quotes.\19\ Other clarifying edits include the addition of a
footnote to the Pricing Policy describing ICC's use of the ISDA
Standard Model, the removal of outdated references, correcting certain
typographical errors, and updates to section numbering, as well as
certain other minor edits as described in greater detail in the
Notice.\20\
---------------------------------------------------------------------------
\19\ Id.
\20\ Id.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\21\ For the reasons given below, the Commission finds
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act,\22\ and Rules 17Ad-22(b)(2) and (d)(8) thereunder.\23\
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78s(b)(2)(C).
\22\ 15 U.S.C. 78q-1(b)(3)(F).
\23\ 17 CFR 240.17Ad-22(b)(2) and (d)(8).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a registered clearing agency be designed to promote the
prompt and accurate clearance and settlement of
[[Page 14302]]
securities transactions and, to the extent applicable, derivative
agreements, contracts and transactions, and to assure the safeguarding
of securities and funds which are in the custody or control of the
clearing agency or for which it is responsible.\24\ As discussed above,
the proposed rule change would enhance ICC's end-of-day price discovery
process for SN instruments in a number of ways, including but not
limited to incorporating a price-based floor which would be applied to
a wider range of instruments, adopting a new dynamic BOW component, and
taking into consideration the dispersion of price-space mid-levels
received from Clearing Participants, all while continuing to apply
scaling tenor, coupon, and variability scaling factors.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Taken as a whole, the Commission believes the proposed changes
should enhance ICC's ability to determine the end-of-day BOW for SN
instruments. First, the proposed changes should permit ICC to determine
BOWs consistently across SN instruments on all reference entities,
including those for which only sparse intraday data is available.\25\
In addition, by extending the application of the price-based BOW floor
component to the entire set of benchmark tenors from the 0 month to 10
years instead of solely the \0/3\ month, 6 month, and 1-year benchmark
tenors, the Commission believes that ICC will be able to more
consistently compute the end-of-day BOW for a wider range of SN
instruments.
---------------------------------------------------------------------------
\25\ Notice, 83 FR at 6078.
---------------------------------------------------------------------------
Consequently, the Commission believes that the proposed changes
will improve ICC's end-of-day pricing process as a whole as additional
relevant information will be taken into consideration and a wider range
of instruments will be considered in the pricing process. Based on
these improvements, the Commission believes that ICC's risk management
processes related to the end-of-day pricing process, including the
calculation and collection of certain margin requirements, will also be
improved, resulting in an improved ability to safeguard the positions
that ICC maintains from the default of a Clearing Participant. As a
result, the Commission believes that the proposed changes will promote
the prompt and accurate clearance and settlement of the products
cleared by ICC, and will enhance ICC's ability to assure the
safeguarding of securities and funds which are in the custody or
control of ICC or for which it is responsible. Therefore, the
Commission finds that the proposed rule change is consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\26\
---------------------------------------------------------------------------
\26\ Id.
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(b)(2)
Rule 17Ad-22(b)(2) requires, in relevant part, a registered
clearing agency that performs central counterparty services to
establish implement, maintain, and enforce written policies and
procedures reasonably designed to use margin requirements to limit its
credit exposures to participants under normal market conditions. As
noted above, ICC uses the end-of-day BOWs as part of its mark-to-market
and risk management purposes, including the computation of certain
margin requirements.\27\
---------------------------------------------------------------------------
\27\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------
The Commission believes that by improving the end-of-day pricing
process, as described above, ICC will also improve its ability to
calculate margin requirements that use the end-of-day BOWs as an input.
Consequently, an improved margin calculation should lead to the
collection of margin levels that enhance ICC's ability to limit its
credit exposures to participants under normal market conditions. As a
result, the Commission finds that the proposed rule change is
consistent with the requirements of Rule 17Ad-22(b)(2).\28\
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(d)(8)
Rule 17Ad-22(d)(8) requires, in relevant part, that a registered
clearing agency that is not a covered clearing agency to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to, as applicable, have governance arrangements
that promote the effectiveness of the clearing agency's risk management
procedures.\29\ ICC proposed to amend the Governance section of its
Pricing policy to clarify the responsibilities of the ICC Risk
Management Department and the Trading Advisory Committee with respect
to the determination of price-based floors, relative BOWs, and scaling
factors. By updating the Governance section of the Pricing Policy to
delineate the roles of the ICC Risk Management Department and the
Trading Advisory Committee, the Commission believes that ICC will
improve the governance structure surrounding the end-of-day pricing
process.
---------------------------------------------------------------------------
\29\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------
Because the output of the end-of-day pricing process is used for
mark-to-market and risk management purposes, the Commission believes
that improvements to the governance structure of the end-of-day pricing
process will have the effect of promoting greater effectiveness of
ICC's risk management procedures overall. Therefore, the Commission
finds that the proposed rule change is consistent with the requirements
of Rule 17Ad-22(d)(8).\30\
---------------------------------------------------------------------------
\30\ Id.
---------------------------------------------------------------------------
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular with the requirements of Section 17A of the Act \31\
and Rules 17Ad-22(b)(2) and (d)(8) \32\ thereunder.
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78q-1.
\32\ 17 CFR 240.17Ad-22(b)(2) and (d)(8).
---------------------------------------------------------------------------
It is therefore ordered pursuant to Section 19(b)(2) of the Act
\33\ that the proposed rule change (SR-ICC-2018-002) be, and hereby is,
approved.\34\
---------------------------------------------------------------------------
\33\ 15 U.S.C. 78s(b)(2).
\34\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\35\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
Jill Peterson,
Assistant Secretary.
[FR Doc. 2018-06691 Filed 4-2-18; 8:45 am]
BILLING CODE 8011-01-P
