Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating To Amending the ICC Clearing Rules Regarding Mark-to-Market Margin, 41118-41121 [2018-17741]
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III. Discussion and Commission’s
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 1, is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.14 In particular, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Section 6(b)(5)
of the Act,15 which requires, among
other things, that the rules of a national
securities exchange be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in regulating
transactions in securities, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest, and that the rules not be
designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers. The
Commission also finds that the
proposed rule change, as modified by
Amendment No. 1, is consistent with
Section 6(b)(8) of the Act,16 which
requires that the rules of an exchange
not impose any burden on competition
that is not necessary or appropriate in
furtherance of the purposes of the Act.
As indicated above, the Commission has
received no comment letters addressing
the proposed rule change.
The Commission believes that
amending NYSE Rule 49 to require
certain member organizations to
participate in scheduled MWCB testing
would enable the Exchange,
participating member organizations, and
others to assess the readiness of
participating member organizations to
respond in the event of unanticipated
market volatility. Member organizations
required to participate in MWCB testing
pursuant to the proposal would be
designated as such using the same
standards used by the Exchange in
determining which member
organizations are subject to mandatory
Regulation SCI testing. Because these
member organizations have been
designated by the Exchange as essential
to the maintenance of a fair and orderly
market, their demonstrated ability to
halt and subsequently re-open trading in
14 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
15 15 U.S.C. 78f(b)(5).
16 15 U.S.C. 78f(b)(8).
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a manner consistent with the MWCB
rules should contribute to the fairness
and orderliness of the market for the
benefit of all market participants. The
Commission therefore believes that the
proposal, as modified by Amendment
No. 1, is designed to remove
impediments to, and perfect the
mechanism of, a free and open market
and a national market system, and to
protect investors and the public interest.
Accordingly, for the reasons
discussed above, the Commission
believes that the Exchange’s proposal, as
modified by Amendment No. 1, is
consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,17 that the
proposed rule change (SR–NYSE–2018–
31), as modified by Amendment No.1,
be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018–17743 Filed 8–16–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83832; File No. SR–ICC–
2018–006]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change Relating To
Amending the ICC Clearing Rules
Regarding Mark-to-Market Margin
August 13, 2018.
I. Introduction
On June 13, 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 and Rule 19b–4
thereunder,2 a proposed rule change to
amend the ICC Clearing Rules (the ‘‘ICC
Rules’’) 3 to more clearly characterize
Mark-to-Market Margin payments as
settled-to-market rather than
collateralized-to-market. The proposed
rule change was published in the
17 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Available at https://www.theice.com/
publicdocs/clear_credit/ICE_Clear_Credit_
Rules.pdf. Capitalized terms used herein but not
otherwise defined have the meaning set forth in the
ICC Rules.
18 17
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Federal Register on June 29, 2018.4 The
Commission has not received any
comments on the proposed rule change.
For the reasons discussed below, the
Commission is approving the proposed
rule change.
II. Description of the Proposed Rule
Change
The proposed rule change would
revise Chapters 4, 8, and 20 of the ICC
Rules to more clearly characterize Markto-Market Margin payments as
settlement payments (‘‘settled-tomarket’’) rather than collateral
(‘‘collateralized-to-market’’).5 The
proposed rule change would not change
the manner in which Mark-to-Market
Margin is calculated, or other current
ICC operational practices.6 Rather, the
proposed rule change would revise
terminology to further clarify the legal
characterization that payments of Markto-Market Margin represent settlement
rather than collateral payments.7 ICC
states that these clarifying changes are
the result of ICC’s analysis of the legal
characterization of Mark-to-Market
Margin payments, at the request of its
Clearing Participants (‘‘CPs’’).8
The proposed rule change would
revise Rule 401 to reference Mark-toMarket Margin Balance, a new term that
is defined in Rule 404 to mean the
aggregate amount of Mark-to-Market
Margin paid or received.9 The new
definition would be used in several
calculations to describe specifics
pertaining to the Mark-to-Market Margin
calculation.10 For example, the
proposed rule change would amend
Rule 401(a), which governs House
Margin, to state that ICC calculates a net
amount of Mark-to-Market Margin by
subtracting a CP’s Mark-to-Market
Margin Balance from a CP’s Mark-toMarket Margin Requirement.11 The
proposed rule change would make
corresponding changes to reference
4 Securities Exchange Act Release No. 34–83513
(June 25, 2018), 83 FR 30802 (June 29, 2018) (SR–
ICC–2018–006) (‘‘Notice’’).
5 Under the settled-to-market model, the transfer
of Mark-to-Market Margin constitutes a settlement
of the contract’s outstanding exposure, with the
receiving party taking outright title to the Mark-toMarket Margin and the transferring party retaining
no rights to such margin. Under the collateralizedto-market model, the transfer of Mark-to-Market
Margin constitutes a pledge of collateral, such that
the transferring party has a right to reclaim the
collateral and the receiving party has an obligation
to return the collateral. For further explanation of
the settled-to-market model and collateralized-tomarket model, see Notice, 83 FR at 30803.
6 Notice, 83 FR at 30803.
7 Id.
8 Id.
9 Id.
10 Id.
11 Notice, 83 FR at 30803.
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Mark-to-Market Margin Balance in Rule
401(b)(ii), which covers Client-Related
Mark-to-Market Margin.12
As stated above, the proposed rule
change would not modify the current
calculation of Mark-to-Market Margin,
or other operational practices, but,
instead, would replace certain specifics
relating to ICC’s Mark-to-Market Margin
calculation with the new defined term
Mark-to-Market Margin Balance.13 In
addition, the proposed rule change
would not change the manner in which
Initial Margin is calculated, posted and
held.14
Further, the proposed rule change
would revise Rule 401(g) to specify that
amounts ICC currently pays to CPs as
interest on any Mark-to-Market Margin
would no longer be considered interest
but instead would be treated as a new
payment obligation between ICC and
CPs and referred to as the ‘‘price
alignment amount.’’ 15 A price
alignment amount would be
economically equivalent to the
‘‘interest’’ that ICC pays or charges a CP
for any net Mark-to-Market Margin
transferred between the parties under
current Rule 401(g).16 Because the term
interest may be more typically
associated with collateral, however, the
proposed rule change would refer to
such an amount as price alignment to
avoid confusion over the proper
characterization of Mark-to-Market
Margin as settlement payments.17 ICC
states that such change would not affect
ICC’s operations because ICC would
continue to pay or charge a CP an
amount, which would serve the same
purpose and would be calculated
identically, for any net Mark-to-Market
Margin transferred between the
parties.18
The proposed rule change would also
clarify in proposed revisions to Rule
401(g) that the rate ICC may pay or
charge a CP for a price alignment
amount on any Mark-to-Market Margin
or interest on any Initial Margin in the
form of cash may be negative. This
proposed revision is intended by ICC to
more clearly address the effect negative
market rate environments could have on
how such amounts might be paid or
charged by ICC to CPs.19
The proposed rule change would add
and clarify references to amounts that
ICC will continue to treat as collateral
12 Id.
13 Id.
14 Id.
to avoid confusion over the proper
characterization of Mark-to-Market
Margin under the ICC Rules.
Specifically, the proposed rule change
would update Rule 401(h) to provide
that CPs may substitute, in accordance
with the ICC Procedures and applicable
law, Eligible Margin only for an amount
of Initial Margin.20 CPs would no longer
be able to substitute Eligible Margin for
Mark-to-Market Margin because under
the proposed rule change, ICC would
take outright title to the Mark-to-Market
Margin and CPs would retain no
substitution or other rights to such
Mark-to-Market Margin. The proposed
changes to Rule 402, which governs
ICC’s rights with respect to the use of
margin, would exclude Mark-to-Market
Margin from subsections (a) and (b),
would remove details relating to Markto-Market Margin from subsection (b),
and would specify subsection (c)’s
applicability to Initial Margin. Because
ICC’s rights with respect to Mark-toMarket Margin would now be set out in
Rule 402(e), it would no longer be
necessary to refer to Mark-to-Market
Margin in Rule 402(a) and (b). To avoid
uncertainty, the proposed rule change
would clarify that the requirements set
forth in Rule 406(c) regarding collateral
for Client-Related Positions apply to
Initial Margin.21
The proposed rule change would
similarly add and clarify references to
amounts that ICC would treat as settled
to avoid confusion over the proper
characterization of Mark-to-Market
Margin under the ICC Rules. The
proposed rule change would add
language to Rule 402(e) to describe ICC’s
rights with respect to Mark-to-Market
Margin and more clearly state that
Mark-to-Market Margin payments
constitute a settlement. The proposed
rule change would also update Rule
401(l) to refer to settlement finality in
relation to Mark-to-Market Margin.22
Further, the proposed rule change
would add new subsection (c) to Rule
404 to define Mark-to-Market Margin
Balance as a sum equal to the Mark-toMarket Margin value transferred by the
CP to ICC minus the Mark-to-Market
Margin value transferred by ICC to the
CP.23
Finally, the proposed rule change
would make clarifications and
conforming changes to Chapters 8 and
20 of the ICC Rules. The proposed rule
change would revise Rule 801(a)(i),
which describes how ICC calculates a
CP’s Required Contribution to the
General Guaranty Fund, to refer to the
transfer of Mark-to-Market Margin.24
This change would characterize Markto-Market Margin as settled, rather than
collateral, by referring to the amount of
Mark-to-Market Margin transferred to
ICC in respect of a defaulting CP’s
positions. The proposed rule change
would not change ICC’s calculation of a
CP’s Required Contribution, which
would continue to take into account the
expected loss to ICC associated with a
CP’s default after the application of
Initial Margin and Mark-to-Market
Margin.25
The proposed rule change would also
replace, in the defined term MTM in
Rule 808, the phrase ‘‘amount of MTM
held by any Participant or ICE Clear
Credit’’ with a conforming reference to
the new defined term Mark-to-Market
Margin Balance.26 This proposed
change would not alter the operation of
Rule 808, which describes how and
when ICC would implement Reduced
Gains Distributions.
The proposed rule change would
replace terminology in Rule 810(e) that
is commonly used in conjunction with
collateral by changing the words
‘‘posted’’ to ‘‘transferred’’ and removing
the phrase ‘‘and be offset against’’. This
change would avoid confusion over the
proper characterization of Mark-toMarket Margin as settlement
payments.27 This proposed change
would not alter the operation of Rule
810, which describes ICC’s termination
of clearing operations.
Finally, the proposed rule change
would clarify in Rule 20–605(c)(i)(B),
which specifies the resources to be used
to cover losses with respect to ClientRelated Positions, that ICC would use
the defaulting CP’s Client-Related Markto-Market Margin, to the extent not
previously applied to pay Mark-toMarket Margin to other CPs.28 Because
Mark-to-Market Margin would be settled
with ICC, ICC would obtain outright
title to the Mark-to-Market Margin and
would be able to use the Mark-to-Market
Margin for purposes other than
collateralizing a CP’s position, in
accordance with ICC’s Rules and
applicable regulatory requirements. The
proposed rule change would make this
point clear and therefore clarify that
Mark-to-Market Margin payments
constitute settlement rather than
collateral.
24 Notice,
15 Id.
20 Id.
16 Id.
83 FR at 30803.
25 Id.
21 Id.
26 Id.
18 Id.
22 Id.
27 Id.
19 Id.
23 Id.
28 Notice,
17 Notice,
83 FR at 30803.
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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.29 For
the reasons given below, the
Commission finds that the proposal is
consistent with Section 17A(b)(3)(F) of
the Act 30 and Rules 17Ad–22(b)(2) and
17Ad–22(d)(1) thereunder.31
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 ICC be designed to promote the
prompt and accurate clearance and
settlement of securities transactions
and, to the extent applicable, derivative
agreements, contracts, and transactions,
as well as to assure the safeguarding of
securities and funds which are in the
custody or control of ICC or for which
it is responsible, and, in general, to
protect investors and the public
interest.32
As described above, the proposed rule
change would revise Chapters 4, 8, and
20 of the ICC Rules to more clearly
characterize Mark-to-Market Margin
payments as settlement payments rather
than collateral. To facilitate this
characterization, the proposed rule
change would introduce a new
definition, Mark-to-Market Margin
Balance, and a new concept, price
alignment amount. Moreover, the
proposed rule change would update the
terminology used in certain rules, and
the application of certain rules to Markto-Market Margin, in light of the
characterization of Mark-to-Market
Margin payments as settlement
payments rather than collateral. The
proposed rule change would not change
the manner in which Mark-to-Market
Margin is calculated, or other current
ICC operational practices.
The Commission believes that by
clarifying the treatment of Mark-toMarket Margin payments, the proposed
rule change would help ensure that
Mark-to-Market margin is treated as
settled payments rather than collateral,
consistent with ICC’s intention. In doing
so, the Commission further believes the
proposed rule change would clarify that
ICC has all rights and outright title to
such Mark-to-Market Margin. The
29 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
31 17 CFR 240.17Ad–22(b)(2), (d)(1).
32 15 U.S.C. 78q–1(b)(3)(F).
30 15
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Commission believes the proposed rule
change would clarify ICC’s interest in
and rights to Mark-to-Market Margin,
thereby supporting ICC’s ability to use
Mark-to-Market Margin to cover credit
and market losses.
The Commission further believes that
in this regard the proposed rule change
would remove potential confusion
regarding the treatment of Mark-toMarket Margin, thereby helping to
improve the operation and effectiveness
of ICC’s margin system. Given that an
effective margin system is necessary to
manage ICC’s credit exposures to its CPs
and the risks associated with clearing
security based swap-related portfolios,
the Commission believes that the
proposed rule change would help
improve ICC’s ability to avoid the losses
that could result from the
mismanagement of credit exposures and
the risks associated with clearing
security based swap-related portfolios.
Because such losses could disrupt ICC’s
ability to promptly and accurately clear
security based swap transactions, the
Commission believes that the proposed
rule change, by improving the operation
and effectiveness of ICC’s margin
system, would thereby help promote the
prompt and accurate clearance and
settlement of securities transactions.
Similarly, given that mismanagement
of ICC’s credit exposures to its CPs and
the risks associated with clearing
security based swap-related portfolios
could cause ICC to realize losses on
such portfolios and threaten ICC’s
ability to operate, thereby threatening
access to securities and funds in ICC’s
control, the Commission believes that
the proposed rule change would help
assure the safeguarding of securities and
funds which are in the custody or
control of the ICC or for which it is
responsible. Finally, for both of these
reasons, the Commission believes the
Framework would, in general, protect
investors and the public interest.
Therefore, the Commission finds that
the proposed rule change would
promote the prompt and accurate
clearance and settlement of securities
transactions, assure the safeguarding of
securities and funds in ICC’s custody
and control, and, in general, protect
investors and the public interest,
consistent with the Section 17A(b)(3)(F)
of the Act.33
B. Consistency With Rule 17Ad–22(b)(2)
Rule 17Ad–22(b)(2) requires that ICC
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to use margin
requirements to limit its credit
33 15
PO 00000
U.S.C. 78q–1(b)(3)(F).
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exposures to participants under normal
market conditions and use risk-based
models and parameters to set margin
requirements and review such margin
requirements and the related risk-based
models and parameters at least
monthly.34
As described above, the proposed rule
change would revise Chapters 4, 8, and
20 of the ICC Rules to more clearly
characterize Mark-to-Market Margin
payments as settlement payments rather
than collateral. Specifically, the
Proposed Rule Change would revise
Rule 401 to reference Mark-to-Market
Margin Balance, a new term that is
defined in Rule 404 to mean the
aggregate amount of Mark-to-Market
Margin paid or received. The new
definition would be used in Rule 401(a),
regarding House Margin, which would
be revised to state that ICC calculates a
net amount of Mark-to-Market Margin
by subtracting a CP’s Mark-to-Market
Margin Balance from a CP’s Mark-toMarket Margin Requirement. Moreover,
under the proposed revised Rule 401(g),
ICC would pay or charge a CP price
alignment, which would be
economically equivalent to interest, on
any Mark-to-Market Margin and interest
on any cash Initial Margin at a rate that
may be negative. The proposed rule
change would not modify the current
calculation of Mark-to-Market Margin,
or other operational practices, but,
instead, would replace certain specifics
relating to ICC’s Mark-to-Market Margin
calculation with the new defined term
Mark-to-Market Margin Balance.
The Commission believes that by
clarifying the treatment of Mark-toMarket Margin payments, the proposed
rule change would help ensure that
Mark-to-Market margin is treated as
settled payments rather than collateral.
The Commission believes that in this
regard the proposed rule change would
help ensure that the margin system is
operating consistently for all CPs and in
a manner that is consistent with ICC’s
view on the treatment of Mark-to-Market
Margin by confirming that all Mark-toMarket Margin would be treated as
settlement payments. In doing so, the
Commission further believes the
proposed rule change would clarify that
ICC has all rights and outright title to
such Mark-to-Market Margin. The
Commission believes the proposed rule
change would thereby clarify ICC’s
interest in and rights to Mark-to-Market
Margin, thereby supporting ICC’s ability
to use Mark-to-Market to cover credit
and market losses. The Commission
therefore believes the proposed rule
change would help ICC maintain and
34 17
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CFR 240.17Ad–22(b)(2).
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enforce written policies and procedures
reasonably designed to use margin
requirements to limit its credit
exposures to participants under normal
market conditions.
Moreover, as noted above, the
proposed rule change resulted from a
request by CPs for ICC to confirm it
treats Mark-to-Market Margin as
settlement payments. CPs therefore may
hesitate to post Mark-to-Market Margin
if ICC does not consistently treat such
margin as settlement payments. Thus,
the Commission believes the proposed
rule change would help ICC enforce
written policies and procedures
reasonably designed to use margin
requirements to limit its credit
exposures to participants under normal
market conditions.
Therefore, for the above reasons the
Commission finds that the proposed
rule change is consistent with Rule
17Ad–22(b)(2).35
C. Consistency With Rule 17Ad–22(d)(1)
Rule 17Ad–22(d)(1) requires that ICC
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to provide for a
well-founded, transparent, and
enforceable legal framework for each
aspect of its activities in all relevant
jurisdictions.36
As discussed above, the proposed rule
change would revise Chapters 4, 8, and
20 of the ICC Rules to more clearly
characterize Mark-to-Market Margin
payments as settlement payments rather
than collateral. The proposed rule
change would also revise terminology to
further clarify the legal characterization
that payments of Mark-to-Market Margin
represent settlement rather than
collateral payments. These clarifying
changes are the result of ICC’s analysis
of the legal characterization of Mark-toMarket Margin payments, at the request
of its CPs.
Thus, ICC intends to treat Mark-toMarket Margin payments as settled
rather than collateral, and the
Commission believes that the proposed
rule change’s clarifications and
additions would help ensure that ICC’s
margin system operates consistently
with this intention. The Commission
further believes that the proposed rule
change would help ensure that the
margin system is operating consistently
for all CPs by confirming that all Markto-Market Margin would be treated as
settlement payments. In ensuring the
consistent treatment of Mark-to-Market
Margin, the Commission believes that
the proposed rule change would help
35 17
36 17
CFR 240.17Ad–22(b)(2).
CFR 240.17Ad–22(d)(1).
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ensure that the policies and procedures
underlying ICC’s margin system provide
a well-founded, transparent, and
enforceable legal framework.
Therefore, for the above reasons the
Commission finds that the proposed
rule change is consistent with Rule
17Ad–22(d)(1).37
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act, and in particular, with the
requirements of Section 17A(b)(3)(F) of
the Act 38 and Rules 17Ad–22(b)(2) and
17Ad–22(d)(1) thereunder.39
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 40 that the
proposed rule change (SR–ICC–2018–
006) be, and hereby is, approved.41
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018–17741 Filed 8–16–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83833; File No. SR–BX–
2018–037]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Section
7018(a) of the Exchange’s Rules
August 13, 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 July 31,
2018, Nasdaq BX, Inc. (‘‘BX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
37 17
CFR 240.17Ad–22(d)(1).
U.S.C. 78q–1(b)(3)(F).
39 17 CFR 240.17Ad–22(b)(2), (d)(1).
40 15 U.S.C. 78s(b)(2).
41 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).
42 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
38 15
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41121
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
Exchange’s transaction fees at Rule
7018(a), as described further below.
While these amendments are effective
upon filing, the Exchange has
designated the proposed amendments to
be operative on August 1, 2018.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqbx.cchwallstreet.com/, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to amend the Exchange’s
transaction fees at Rule 7018 to (i) adjust
the volume threshold for a credit
associated with orders that access
liquidity that are entered by members
that access liquidity equal to or in
excess of a certain percentage of their
[sic] total Consolidated Volume 3 for a
month; and (ii) adding two credit tiers
for orders entered by members that,
during a given month, have a total
volume (accessing and providing
liquidity) equal to or exceeding 0.50%
of total Consolidated Volume, at least
20% more volume during that month (as
a percentage of Consolidated Volume)
than the member’s total volume in July
2018, and where at least 30% of that
20% increase in volume arises from
adding liquidity.
3 Pursuant to Rule 7018(a), the term
‘‘Consolidated Volume’’ means the total
consolidated volume reported to all consolidated
transaction reporting plans by all exchanges and
trade reporting facilities during a month in equity
securities, excluding executed orders with a size of
less than one round lot.
E:\FR\FM\17AUN1.SGM
17AUN1
]]>Agencies
[Federal Register Volume 83, Number 160 (Friday, August 17, 2018)]
[Notices]
[Pages 41118-41121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17741]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83832; File No. SR-ICC-2018-006]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating To Amending the ICC Clearing
Rules Regarding Mark-to-Market Margin
August 13, 2018.
I. Introduction
On June 13, 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\
and Rule 19b-4 thereunder,\2\ a proposed rule change to amend the ICC
Clearing Rules (the ``ICC Rules'') \3\ to more clearly characterize
Mark-to-Market Margin payments as settled-to-market rather than
collateralized-to-market. The proposed rule change was published in the
Federal Register on June 29, 2018.\4\ The Commission has not received
any comments on the proposed rule change. For the reasons discussed
below, the Commission is approving the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Rules.pdf. Capitalized terms used herein but not
otherwise defined have the meaning set forth in the ICC Rules.
\4\ Securities Exchange Act Release No. 34-83513 (June 25,
2018), 83 FR 30802 (June 29, 2018) (SR-ICC-2018-006) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The proposed rule change would revise Chapters 4, 8, and 20 of the
ICC Rules to more clearly characterize Mark-to-Market Margin payments
as settlement payments (``settled-to-market'') rather than collateral
(``collateralized-to-market'').\5\ The proposed rule change would not
change the manner in which Mark-to-Market Margin is calculated, or
other current ICC operational practices.\6\ Rather, the proposed rule
change would revise terminology to further clarify the legal
characterization that payments of Mark-to-Market Margin represent
settlement rather than collateral payments.\7\ ICC states that these
clarifying changes are the result of ICC's analysis of the legal
characterization of Mark-to-Market Margin payments, at the request of
its Clearing Participants (``CPs'').\8\
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\5\ Under the settled-to-market model, the transfer of Mark-to-
Market Margin constitutes a settlement of the contract's outstanding
exposure, with the receiving party taking outright title to the
Mark-to-Market Margin and the transferring party retaining no rights
to such margin. Under the collateralized-to-market model, the
transfer of Mark-to-Market Margin constitutes a pledge of
collateral, such that the transferring party has a right to reclaim
the collateral and the receiving party has an obligation to return
the collateral. For further explanation of the settled-to-market
model and collateralized-to-market model, see Notice, 83 FR at
30803.
\6\ Notice, 83 FR at 30803.
\7\ Id.
\8\ Id.
---------------------------------------------------------------------------
The proposed rule change would revise Rule 401 to reference Mark-
to-Market Margin Balance, a new term that is defined in Rule 404 to
mean the aggregate amount of Mark-to-Market Margin paid or received.\9\
The new definition would be used in several calculations to describe
specifics pertaining to the Mark-to-Market Margin calculation.\10\ For
example, the proposed rule change would amend Rule 401(a), which
governs House Margin, to state that ICC calculates a net amount of
Mark-to-Market Margin by subtracting a CP's Mark-to-Market Margin
Balance from a CP's Mark-to-Market Margin Requirement.\11\ The proposed
rule change would make corresponding changes to reference
[[Page 41119]]
Mark-to-Market Margin Balance in Rule 401(b)(ii), which covers Client-
Related Mark-to-Market Margin.\12\
---------------------------------------------------------------------------
\9\ Id.
\10\ Id.
\11\ Notice, 83 FR at 30803.
\12\ Id.
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As stated above, the proposed rule change would not modify the
current calculation of Mark-to-Market Margin, or other operational
practices, but, instead, would replace certain specifics relating to
ICC's Mark-to-Market Margin calculation with the new defined term Mark-
to-Market Margin Balance.\13\ In addition, the proposed rule change
would not change the manner in which Initial Margin is calculated,
posted and held.\14\
---------------------------------------------------------------------------
\13\ Id.
\14\ Id.
---------------------------------------------------------------------------
Further, the proposed rule change would revise Rule 401(g) to
specify that amounts ICC currently pays to CPs as interest on any Mark-
to-Market Margin would no longer be considered interest but instead
would be treated as a new payment obligation between ICC and CPs and
referred to as the ``price alignment amount.'' \15\ A price alignment
amount would be economically equivalent to the ``interest'' that ICC
pays or charges a CP for any net Mark-to-Market Margin transferred
between the parties under current Rule 401(g).\16\ Because the term
interest may be more typically associated with collateral, however, the
proposed rule change would refer to such an amount as price alignment
to avoid confusion over the proper characterization of Mark-to-Market
Margin as settlement payments.\17\ ICC states that such change would
not affect ICC's operations because ICC would continue to pay or charge
a CP an amount, which would serve the same purpose and would be
calculated identically, for any net Mark-to-Market Margin transferred
between the parties.\18\
---------------------------------------------------------------------------
\15\ Id.
\16\ Id.
\17\ Notice, 83 FR at 30803.
\18\ Id.
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The proposed rule change would also clarify in proposed revisions
to Rule 401(g) that the rate ICC may pay or charge a CP for a price
alignment amount on any Mark-to-Market Margin or interest on any
Initial Margin in the form of cash may be negative. This proposed
revision is intended by ICC to more clearly address the effect negative
market rate environments could have on how such amounts might be paid
or charged by ICC to CPs.\19\
---------------------------------------------------------------------------
\19\ Id.
---------------------------------------------------------------------------
The proposed rule change would add and clarify references to
amounts that ICC will continue to treat as collateral to avoid
confusion over the proper characterization of Mark-to-Market Margin
under the ICC Rules. Specifically, the proposed rule change would
update Rule 401(h) to provide that CPs may substitute, in accordance
with the ICC Procedures and applicable law, Eligible Margin only for an
amount of Initial Margin.\20\ CPs would no longer be able to substitute
Eligible Margin for Mark-to-Market Margin because under the proposed
rule change, ICC would take outright title to the Mark-to-Market Margin
and CPs would retain no substitution or other rights to such Mark-to-
Market Margin. The proposed changes to Rule 402, which governs ICC's
rights with respect to the use of margin, would exclude Mark-to-Market
Margin from subsections (a) and (b), would remove details relating to
Mark-to-Market Margin from subsection (b), and would specify subsection
(c)'s applicability to Initial Margin. Because ICC's rights with
respect to Mark-to-Market Margin would now be set out in Rule 402(e),
it would no longer be necessary to refer to Mark-to-Market Margin in
Rule 402(a) and (b). To avoid uncertainty, the proposed rule change
would clarify that the requirements set forth in Rule 406(c) regarding
collateral for Client-Related Positions apply to Initial Margin.\21\
---------------------------------------------------------------------------
\20\ Id.
\21\ Id.
---------------------------------------------------------------------------
The proposed rule change would similarly add and clarify references
to amounts that ICC would treat as settled to avoid confusion over the
proper characterization of Mark-to-Market Margin under the ICC Rules.
The proposed rule change would add language to Rule 402(e) to describe
ICC's rights with respect to Mark-to-Market Margin and more clearly
state that Mark-to-Market Margin payments constitute a settlement. The
proposed rule change would also update Rule 401(l) to refer to
settlement finality in relation to Mark-to-Market Margin.\22\ Further,
the proposed rule change would add new subsection (c) to Rule 404 to
define Mark-to-Market Margin Balance as a sum equal to the Mark-to-
Market Margin value transferred by the CP to ICC minus the Mark-to-
Market Margin value transferred by ICC to the CP.\23\
---------------------------------------------------------------------------
\22\ Id.
\23\ Id.
---------------------------------------------------------------------------
Finally, the proposed rule change would make clarifications and
conforming changes to Chapters 8 and 20 of the ICC Rules. The proposed
rule change would revise Rule 801(a)(i), which describes how ICC
calculates a CP's Required Contribution to the General Guaranty Fund,
to refer to the transfer of Mark-to-Market Margin.\24\ This change
would characterize Mark-to-Market Margin as settled, rather than
collateral, by referring to the amount of Mark-to-Market Margin
transferred to ICC in respect of a defaulting CP's positions. The
proposed rule change would not change ICC's calculation of a CP's
Required Contribution, which would continue to take into account the
expected loss to ICC associated with a CP's default after the
application of Initial Margin and Mark-to-Market Margin.\25\
---------------------------------------------------------------------------
\24\ Notice, 83 FR at 30803.
\25\ Id.
---------------------------------------------------------------------------
The proposed rule change would also replace, in the defined term
MTM in Rule 808, the phrase ``amount of MTM held by any Participant or
ICE Clear Credit'' with a conforming reference to the new defined term
Mark-to-Market Margin Balance.\26\ This proposed change would not alter
the operation of Rule 808, which describes how and when ICC would
implement Reduced Gains Distributions.
---------------------------------------------------------------------------
\26\ Id.
---------------------------------------------------------------------------
The proposed rule change would replace terminology in Rule 810(e)
that is commonly used in conjunction with collateral by changing the
words ``posted'' to ``transferred'' and removing the phrase ``and be
offset against''. This change would avoid confusion over the proper
characterization of Mark-to-Market Margin as settlement payments.\27\
This proposed change would not alter the operation of Rule 810, which
describes ICC's termination of clearing operations.
---------------------------------------------------------------------------
\27\ Id.
---------------------------------------------------------------------------
Finally, the proposed rule change would clarify in Rule 20-
605(c)(i)(B), which specifies the resources to be used to cover losses
with respect to Client-Related Positions, that ICC would use the
defaulting CP's Client-Related Mark-to-Market Margin, to the extent not
previously applied to pay Mark-to-Market Margin to other CPs.\28\
Because Mark-to-Market Margin would be settled with ICC, ICC would
obtain outright title to the Mark-to-Market Margin and would be able to
use the Mark-to-Market Margin for purposes other than collateralizing a
CP's position, in accordance with ICC's Rules and applicable regulatory
requirements. The proposed rule change would make this point clear and
therefore clarify that Mark-to-Market Margin payments constitute
settlement rather than collateral.
---------------------------------------------------------------------------
\28\ Notice, 83 FR at 30803.
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[[Page 41120]]
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.\29\ For the reasons given below, the Commission finds
that the proposal is consistent with Section 17A(b)(3)(F) of the Act
\30\ and Rules 17Ad-22(b)(2) and 17Ad-22(d)(1) thereunder.\31\
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\29\ 15 U.S.C. 78s(b)(2)(C).
\30\ 15 U.S.C. 78q-1(b)(3)(F).
\31\ 17 CFR 240.17Ad-22(b)(2), (d)(1).
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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 ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, as well
as to assure the safeguarding of securities and funds which are in the
custody or control of ICC or for which it is responsible, and, in
general, to protect investors and the public interest.\32\
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above, the proposed rule change would revise Chapters
4, 8, and 20 of the ICC Rules to more clearly characterize Mark-to-
Market Margin payments as settlement payments rather than collateral.
To facilitate this characterization, the proposed rule change would
introduce a new definition, Mark-to-Market Margin Balance, and a new
concept, price alignment amount. Moreover, the proposed rule change
would update the terminology used in certain rules, and the application
of certain rules to Mark-to-Market Margin, in light of the
characterization of Mark-to-Market Margin payments as settlement
payments rather than collateral. The proposed rule change would not
change the manner in which Mark-to-Market Margin is calculated, or
other current ICC operational practices.
The Commission believes that by clarifying the treatment of Mark-
to-Market Margin payments, the proposed rule change would help ensure
that Mark-to-Market margin is treated as settled payments rather than
collateral, consistent with ICC's intention. In doing so, the
Commission further believes the proposed rule change would clarify that
ICC has all rights and outright title to such Mark-to-Market Margin.
The Commission believes the proposed rule change would clarify ICC's
interest in and rights to Mark-to-Market Margin, thereby supporting
ICC's ability to use Mark-to-Market Margin to cover credit and market
losses.
The Commission further believes that in this regard the proposed
rule change would remove potential confusion regarding the treatment of
Mark-to-Market Margin, thereby helping to improve the operation and
effectiveness of ICC's margin system. Given that an effective margin
system is necessary to manage ICC's credit exposures to its CPs and the
risks associated with clearing security based swap-related portfolios,
the Commission believes that the proposed rule change would help
improve ICC's ability to avoid the losses that could result from the
mismanagement of credit exposures and the risks associated with
clearing security based swap-related portfolios. Because such losses
could disrupt ICC's ability to promptly and accurately clear security
based swap transactions, the Commission believes that the proposed rule
change, by improving the operation and effectiveness of ICC's margin
system, would thereby help promote the prompt and accurate clearance
and settlement of securities transactions.
Similarly, given that mismanagement of ICC's credit exposures to
its CPs and the risks associated with clearing security based swap-
related portfolios could cause ICC to realize losses on such portfolios
and threaten ICC's ability to operate, thereby threatening access to
securities and funds in ICC's control, the Commission believes that the
proposed rule change would help assure the safeguarding of securities
and funds which are in the custody or control of the ICC or for which
it is responsible. Finally, for both of these reasons, the Commission
believes the Framework would, in general, protect investors and the
public interest.
Therefore, the Commission finds that the proposed rule change would
promote the prompt and accurate clearance and settlement of securities
transactions, assure the safeguarding of securities and funds in ICC's
custody and control, and, in general, protect investors and the public
interest, consistent with the Section 17A(b)(3)(F) of the Act.\33\
---------------------------------------------------------------------------
\33\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(b)(2)
Rule 17Ad-22(b)(2) requires that ICC 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 and use risk-based models and parameters to
set margin requirements and review such margin requirements and the
related risk-based models and parameters at least monthly.\34\
---------------------------------------------------------------------------
\34\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------
As described above, the proposed rule change would revise Chapters
4, 8, and 20 of the ICC Rules to more clearly characterize Mark-to-
Market Margin payments as settlement payments rather than collateral.
Specifically, the Proposed Rule Change would revise Rule 401 to
reference Mark-to-Market Margin Balance, a new term that is defined in
Rule 404 to mean the aggregate amount of Mark-to-Market Margin paid or
received. The new definition would be used in Rule 401(a), regarding
House Margin, which would be revised to state that ICC calculates a net
amount of Mark-to-Market Margin by subtracting a CP's Mark-to-Market
Margin Balance from a CP's Mark-to-Market Margin Requirement. Moreover,
under the proposed revised Rule 401(g), ICC would pay or charge a CP
price alignment, which would be economically equivalent to interest, on
any Mark-to-Market Margin and interest on any cash Initial Margin at a
rate that may be negative. The proposed rule change would not modify
the current calculation of Mark-to-Market Margin, or other operational
practices, but, instead, would replace certain specifics relating to
ICC's Mark-to-Market Margin calculation with the new defined term Mark-
to-Market Margin Balance.
The Commission believes that by clarifying the treatment of Mark-
to-Market Margin payments, the proposed rule change would help ensure
that Mark-to-Market margin is treated as settled payments rather than
collateral. The Commission believes that in this regard the proposed
rule change would help ensure that the margin system is operating
consistently for all CPs and in a manner that is consistent with ICC's
view on the treatment of Mark-to-Market Margin by confirming that all
Mark-to-Market Margin would be treated as settlement payments. In doing
so, the Commission further believes the proposed rule change would
clarify that ICC has all rights and outright title to such Mark-to-
Market Margin. The Commission believes the proposed rule change would
thereby clarify ICC's interest in and rights to Mark-to-Market Margin,
thereby supporting ICC's ability to use Mark-to-Market to cover credit
and market losses. The Commission therefore believes the proposed rule
change would help ICC maintain and
[[Page 41121]]
enforce written policies and procedures reasonably designed to use
margin requirements to limit its credit exposures to participants under
normal market conditions.
Moreover, as noted above, the proposed rule change resulted from a
request by CPs for ICC to confirm it treats Mark-to-Market Margin as
settlement payments. CPs therefore may hesitate to post Mark-to-Market
Margin if ICC does not consistently treat such margin as settlement
payments. Thus, the Commission believes the proposed rule change would
help ICC enforce written policies and procedures reasonably designed to
use margin requirements to limit its credit exposures to participants
under normal market conditions.
Therefore, for the above reasons the Commission finds that the
proposed rule change is consistent with Rule 17Ad-22(b)(2).\35\
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\35\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(d)(1)
Rule 17Ad-22(d)(1) requires that ICC establish, implement, maintain
and enforce written policies and procedures reasonably designed to
provide for a well-founded, transparent, and enforceable legal
framework for each aspect of its activities in all relevant
jurisdictions.\36\
---------------------------------------------------------------------------
\36\ 17 CFR 240.17Ad-22(d)(1).
---------------------------------------------------------------------------
As discussed above, the proposed rule change would revise Chapters
4, 8, and 20 of the ICC Rules to more clearly characterize Mark-to-
Market Margin payments as settlement payments rather than collateral.
The proposed rule change would also revise terminology to further
clarify the legal characterization that payments of Mark-to-Market
Margin represent settlement rather than collateral payments. These
clarifying changes are the result of ICC's analysis of the legal
characterization of Mark-to-Market Margin payments, at the request of
its CPs.
Thus, ICC intends to treat Mark-to-Market Margin payments as
settled rather than collateral, and the Commission believes that the
proposed rule change's clarifications and additions would help ensure
that ICC's margin system operates consistently with this intention. The
Commission further believes that the proposed rule change would help
ensure that the margin system is operating consistently for all CPs by
confirming that all Mark-to-Market Margin would be treated as
settlement payments. In ensuring the consistent treatment of Mark-to-
Market Margin, the Commission believes that the proposed rule change
would help ensure that the policies and procedures underlying ICC's
margin system provide a well-founded, transparent, and enforceable
legal framework.
Therefore, for the above reasons the Commission finds that the
proposed rule change is consistent with Rule 17Ad-22(d)(1).\37\
---------------------------------------------------------------------------
\37\ 17 CFR 240.17Ad-22(d)(1).
---------------------------------------------------------------------------
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act, and in
particular, with the requirements of Section 17A(b)(3)(F) of the Act
\38\ and Rules 17Ad-22(b)(2) and 17Ad-22(d)(1) thereunder.\39\
---------------------------------------------------------------------------
\38\ 15 U.S.C. 78q-1(b)(3)(F).
\39\ 17 CFR 240.17Ad-22(b)(2), (d)(1).
---------------------------------------------------------------------------
It is therefore ordered pursuant to Section 19(b)(2) of the Act
\40\ that the proposed rule change (SR-ICC-2018-006) be, and hereby is,
approved.\41\
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\40\ 15 U.S.C. 78s(b)(2).
\41\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
---------------------------------------------------------------------------
\42\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-17741 Filed 8-16-18; 8:45 am]
BILLING CODE 8011-01-P
