Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change, Security-Based Swap Submission, or Advance Notice Relating to the ICC Clearing Rules, 45191-45196 [2019-18480]
Download as PDF
<![CDATA[
Federal Register / Vol. 84, No. 167 / Wednesday, August 28, 2019 / Notices
jbell on DSK3GLQ082PROD with NOTICES
options by accounting for the costs
facing options market participants.
Further, the move to a LR binomial tree
in the Vanilla Option Model would
allow OCC to generate additional risk
data relevant to the products that OCC
clears. The Commission believes,
therefore, that adoption of the proposed
changes designed to align OCC’s models
assumptions with market dynamics are
consistent with Exchange Act Rule
17Ad–22(e)(6)(i).33
C. Consistency With Rule 17Ad–
22(e)(6)(i) Under the Exchange Act
Rule 17Ad–22(e)(6)(iii) under the
Exchange Act requires that a covered
clearing agency establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
cover, if the covered clearing agency
provides central counterparty services,
its credit exposures to its participants by
establishing a risk-based margin system
that, at a minimum, calculates margin
sufficient to cover its potential future
exposure to participants in the interval
between the last margin collection and
the close out of positions following a
participant default.34
As discussed above, certain changes
that OCC proposes to make to the
Vanilla Option Model and the
Smoothing Algorithm would address
model design issues. OCC proposes to
change the way the Smoothing
Algorithm addresses unacceptably high
volatilities to ensure that theoretical
option prices satisfy certain arbitragefree conditions (i.e., eliminating
butterfly arbitrage opportunities). OCC
also proposes to enhance model
consistency by using the same binomial
tree in both the Vanilla Option Model
and the Smoothing Algorithm. Further,
the proposal to replace the binomial
tree’s fixed number of steps with a
variable number of steps would allow
the Vanilla Option Model to more
accurately price long-dated options.
Finally, the use of basis futures, as
opposed to index futures, to generate
theoretical spot prices for indices
underlying options could avoid
problems in OCC’s margin calculations
arising from market volatility between 3
p.m. and 3:15 p.m.
The Commission believes that
changes proposed to reduce model risk
generally facilitate the effective
functioning of the relevant models. The
Vanilla Option Model and the
Smoothing Algorithm estimate prices
that OCC uses to set margin
requirements. Better price estimates
would allow OCC to better calculate
33 Id.
34 17
CFR 240.17Ad–22(e)(6)(iii).
VerDate Sep<11>2014
20:14 Aug 27, 2019
Jkt 247001
margin sufficient to cover its potential
future exposure to Clearing Members.
The Commission believes, therefore,
that adoption of the changes proposed
to address design issues in OCC’s
margin methodology are consistent with
Exchange Act Rule 17Ad–22(e)(6)(iii).35
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the Proposed
Rule Change is consistent with the
requirements of the Exchange Act, and
in particular, the requirements of
Section 17A of the Exchange Act 36 and
the rules and regulations thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,37
that the Proposed Rule Change (SR–
OCC–2019–005) be, and hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–18481 Filed 8–27–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
Notice is hereby given,
pursuant to the provisions of the
Government in Sunshine Act, Public
Law 94–409, that the Securities and
Exchange Commission Investor
Advisory Committee will hold a
telephonic meeting on Thursday,
September 5, 2019.
PLACE: The meeting will be open to the
public via telephone at 1–800–260–0719
in the United States or (651) 291–1170
outside the United States, participant
code 470756.
STATUS: This meeting will begin at 11:00
a.m. (ET) and conclude at 12:30 p.m.
and will be open to the public via
telephone. The meeting will be webcast
by audio-only on the Commission’s
website at www.sec.gov.
MATTERS TO BE CONSIDERED: On August
12, 2019, the Commission issued notice
of the Committee meeting (Release No.
33–10670), indicating that the meeting
is open to the public via telephone, and
inviting the public to submit written
comments to the Committee. This
TIME AND DATE:
35 Id.
36 In approving this Proposed Rule Change, the
Commission has considered the proposed rules’
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
37 15 U.S.C. 78s(b)(2).
38 17 CFR 200.30–3(a)(12).
PO 00000
Frm 00072
Fmt 4703
Sfmt 4703
45191
Sunshine Act notice is being issued
because a quorum of the Commission
may attend the meeting.
The agenda for the meeting includes:
Welcome remarks; a discussion
regarding the proxy process (including a
recommendation from the Investor as
Owner Subcommittee).
CONTACT PERSON FOR MORE INFORMATION:
For further information and to ascertain
what, if any, matters have been added,
deleted or postponed; please contact
Vanessa A. Countryman from the Office
of the Secretary at (202) 551–5400.
Dated: August 26, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019–18719 Filed 8–26–19; 4:15 pm]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86729; File No. SR–ICC–
2019–010]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Notice of Filing of
Proposed Rule Change, SecurityBased Swap Submission, or Advance
Notice Relating to the ICC Clearing
Rules
August 22, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934,1 and
Rule 19b–4 thereunder,2 notice is
hereby given that on August 8, 2019,
ICE Clear Credit LLC (‘‘ICC’’) filed with
the Securities and Exchange
Commission the proposed rule change,
security-based swap submission, or
advance notice as described in Items I,
II and III below, which Items have been
prepared by ICC. The Commission is
publishing this notice to solicit
comments on the proposed rule change,
security-based swap submission, or
advance notice from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change, Security-Based Swap
Submission, or Advance Notice
The principal purpose of the
proposed rule change is to make
changes to the ICC Clearing Rules (the
‘‘ICC Rules’’) to address the treatment of
certain investment losses, custodial
losses and other non-default losses.
1 15
2 17
E:\FR\FM\28AUN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
28AUN1
45192
Federal Register / Vol. 84, No. 167 / Wednesday, August 28, 2019 / Notices
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change, Security-Based
Swap Submission, or Advance Notice
In its filing with the Commission, ICC
included statements concerning the
purpose of and basis for the proposed
rule change, security-based swap
submission, or advance notice and
discussed any comments it received on
the proposed rule change, securitybased swap submission, or advance
notice. The text of these statements may
be examined at the places specified in
Item IV below. ICC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change, Security-Based
Swap Submission, or Advance Notice
(a) Purpose
ICC is proposing amendments to its
Rules to address the treatment of certain
investment losses, custodial losses and
other non-default losses (in each case,
losses that do not arise from the default
of a clearing participant (a
‘‘Participant’’)).
I. Summary of Proposed Amendments
The amendments would, among other
matters:
• Define three exclusive categories of
relevant losses: (1) Investment losses, (2)
custodial losses and (3) non-default
losses,
• specify the ICC resources that will
be applied to cover each such category
of losses,
• specify the responsibility of
Participants, in appropriate
circumstances, to make contributions
with respect to investment losses and
custodial losses, and
• address the treatment of recoveries
by ICC with respect to such losses.
ICC proposes to make such changes
effective after Commission approval of
the proposed rule change and after ICC
is permitted to do so under Commodity
Futures Trading Commission (‘‘CFTC’’)
regulation.3 The proposed amendments
are described in more detail below.
II. Definitions of Loss Categories
jbell on DSK3GLQ082PROD with NOTICES
In Rule 102, new definitions of
‘‘Investment Losses’’ and ‘‘Non-Default
Losses’’ would be added, and the
3 As a derivatives clearing organization
designated as systemically important under Title
VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, ICC submitted to the
CFTC, pursuant to CFTC Rule 40.10, as an advance
notice of a proposed rule change the amendments
to the Rules discussed herein.
VerDate Sep<11>2014
20:14 Aug 27, 2019
Jkt 247001
definition of ‘‘Custodial Losses’’ would
be revised.
Non-Default Losses, Investment Losses
and Custodial Losses.
Investment Losses
Investment Losses would be defined
as losses incurred or suffered by ICC in
connection with the default of the issuer
of any investment of Margin or General
Guaranty Fund assets by ICC or the
default of the counterparty to any
repurchase or reverse repurchase
contract or similar transaction used to
invest or reinvest such Margin or
General Guaranty Fund assets.
Investment Losses would also include
other losses with respect to such
investments, including from a change in
value due to market movements.
However, Investment Losses would not
include Custodial Losses (as discussed
below) or losses resulting directly from
a failure by ICC to comply with its own
investment policies.
Certain other circumstances would
not constitute Investment Losses. For
example, a negative yield or interest rate
on an ICC investment will not be an
Investment Loss. If a Participant posts
securities or non-cash assets as Margin
or General Guaranty Fund
contributions, any gain or loss in such
assets will not be an Investment Loss for
purposes of the Rules.
Non-Default Losses
Under new Rule 811(b), Non-Default
Losses would be met from available ICC
capital and other ICC assets (including
available retained earnings). NonDefault Losses would not be covered
from ICC contributions to default
resources (the ICE Clear Credit Initial
Contribution, ICE Clear Credit
Continuing Contribution or Additional
ICC Collateral Deposits). Non-Default
Losses would not be allocated to
Participants, or otherwise covered using
Margin, General Guaranty Fund
contributions or Assessment
Contributions of Participants.
Custodial Losses
Under the revised Rules, Custodial
Losses would be defined as losses of
Margin or General Guaranty Fund assets
(including declines in the value thereof)
as a result of (1) the insolvency or
failure of a Custodian or (2) the
embezzlement or theft of such assets by
any person (other than ICC or its
employees or representatives). A
Custodian for this purpose would
include a bank or trust company, central
bank, central securities depository or
other third party settlement system used
by ICC for the deposit, holding, custody
or transfer of cash or securities.
Custodial Losses would not include
Investment Losses.
Non-Default Losses
Non-Default Losses would be defined
to cover losses incurred or suffered by
ICC that are neither Investment Losses
nor Custodial Losses and arise in
connection with an event other than a
Participant default. The definition thus
captures losses from general business or
operational risk that do not constitute
custodial or investment losses.
III. Treatment of Losses
The amendments set out in new Rule
811 (and related additional definitions
in Rule 102) describe the clearing
house’s approach to the treatment of
PO 00000
Frm 00073
Fmt 4703
Sfmt 4703
Investment Losses
New Rules 811(c)–(e) would set out
the treatment of Investment Losses.
Under Rule 811(c), in the case of an
Investment Loss, ICC would first apply
to the loss any available Investment
Loss Resources held by ICC. Investment
Loss Resources would be defined in
Rule 102 to be $20 million of ICC’s own
assets designated by ICC as available to
be applied to Investment Losses. The
ICC Board may modify the amount of
Investment Loss Resources from time to
time, and that determination would be
risk-based in light of ICC’s potential
exposure to Investment Losses.
In the event the Investment Loss
Resources were insufficient to cover the
Investment Loss (an ‘‘Investment Loss
Shortfall’’), ICC would have the right,
under Rule 811(d), to allocate the
Investment Loss Shortfall to all
Participants (including any Defaulting
Participants). In that case, each
Participant would be obligated to make
a contribution (an ‘‘Investment Loss
Contribution’’), based on its pro rata
share of the Investment Loss Shortfall,
determined based on the proportion of
its aggregate Initial Margin (both house
and customer) and General Guaranty
Fund contributions (its ‘‘Participant IM/
GF Contribution’’) as compared to the
aggregate Participant IM/GF
Contributions for all Participants. Under
Rule 811(e), the maximum contribution
of a Participant for an Investment Loss
Contribution in respect of any event
giving rise to an Investment Loss may
not exceed its Participant IM/GF
Contribution. Investment Loss
Contributions could only be applied to
Investment Loss Shortfalls (and not
Custodial Loss Shortfalls).
Custodial Losses
New Rules 811(f)–(h) would set out
the treatment of Custodial Losses.
Similarly to the treatment of Investment
E:\FR\FM\28AUN1.SGM
28AUN1
Federal Register / Vol. 84, No. 167 / Wednesday, August 28, 2019 / Notices
Losses, under Rule 811(f), in the case of
a Custodial Loss, ICC would first apply
to the loss any available Custodial Loss
Resources held by ICC. Custodial Loss
Resources would be defined to be $32
million of ICC’s own assets designated
by ICC as available to be applied to
Custodial Losses. As with Investment
Loss Resources, the ICC Board may
modify the amount of Custodial Loss
Resources from time to time, and such
determination would be risk-based in
light of ICC’s potential exposure to
Custodial Losses.
In the event the Custodial Loss
Resources were insufficient to cover the
Custodial Loss (a ‘‘Custodial Loss
Shortfall’’), ICC would have the right,
under Rule 811(g), to allocate the
Custodial Loss Shortfall to all
Participants (including any Defaulting
Participants). In that case, each
Participant would be liable to make a
contribution (a ‘‘Custodial Loss
Contribution’’), based on its pro rata
share of the Custodial Loss Shortfall,
determined based on the proportion of
its Participant IM/GF Contribution to
the aggregate Participant IM/GF
Contributions for all Participants. Under
Rule 811(h), the maximum contribution
of a Participant for a Custodial Loss
Contribution in respect of any event
giving rise to an Investment Loss may
not exceed its Participant IM/GF
Contribution. Custodial Loss
Contributions could only be applied to
Custodial Loss Shortfalls (and not
Investment Loss Shortfalls).
Notwithstanding the foregoing, in the
event of a Custodial Loss where the
Custodian is a central bank, ICC is not
obligated to apply Custodial Loss
Resources, and the entire Custodial Loss
would constitute a Custodial Loss
Shortfall subject to allocation to
Participants as described above.
jbell on DSK3GLQ082PROD with NOTICES
IV. Allocation of Recoveries
The amendments would address any
recoveries that ICC is able to obtain in
respect of an Investment Loss or
Custodial Loss after Investment Loss
Contributions or Custodial Loss
Contributions (collectively, ‘‘Loss
Contributions’’) have been made. Rule
811(l) would provide a ‘‘reverse
waterfall’’ for allocation of such
recoveries, after deduction of expenses
of ICC, to the parties that bore the loss
(whether ICC, Participants or both) in
the reverse order from which they were
initially applied. The amendments
would also set out ICC’s obligations to
seek recoveries in respect of Investment
Losses and Custodial Losses, generally
using the same degree of care as it
exercises with respect to its own assets
VerDate Sep<11>2014
20:14 Aug 27, 2019
Jkt 247001
that are not subject to allocation under
Rule 811.
V. Additional Provisions
Rule 811(u) would contain a general
disclaimer by ICC of losses resulting
from the holding, deposit, custody,
transfer or investment of Margin,
General Guaranty Fund contributions
and Assessment Contributions, except
as otherwise provided in Rule 811, and
provided that Rule 811(u) will not limit
any liability of ICC for its own gross
negligence or willful misconduct. Rule
406 would also be amended to remove
an existing disclaimer for custodial
losses, which would be superseded by
the new provisions.
New Rule 402(k) would address
investment of cash Initial Margin
provided by a Participant in respect of
its client origin account. The Participant
would be required to instruct ICC
whether or not ICC should invest such
Initial Margin. If instructed to invest,
ICC would invest the cash in accordance
with its Rules and investment policies
procedures and applicable law. If
instructed not to invest, ICC would hold
the cash in a deposit account with a
Custodian in accordance with ICC’s
policies and procedures. If a Participant
does not provide an instruction, (1) for
US dollar cash, the Participant would be
deemed to have instructed ICC not to
invest such cash, and (2) for cash in
other currencies, the Participant would
be deemed to have instructed ICC to
invest such cash.
Rule 811 would also address certain
procedures for notices to Participants of
the use of Investment Loss Resources
and Custodial Loss Resources and of
required Loss Contributions in respect
of Investment Losses and Custodial
Losses. The Rule would also provide for
timing and manner of collection of Loss
Contributions (including through offset
against obligations of ICC to return
margin or other assets), and for currency
conversions as necessary. The Rule
would clarify that the requirement to
make Loss Contributions does not
reduce or otherwise affect other
obligations of a Participant to make
payments or deliveries to ICC under the
Rules, or otherwise limit ICC’s netting,
setoff and other rights under the Rules.
In particular, obligations to make Loss
Contributions would be separate from
any obligation to make an Assessment
Contribution, and the limitations on
Assessments under the Rules would not
apply to liabilities for Loss
Contributions. Use of the Loss
Contribution procedures under Rule 811
would also not be deemed to constitute
an ICE Clear Credit Default under the
Rules.
PO 00000
Frm 00074
Fmt 4703
Sfmt 4703
45193
ICC would be required to disclose to
Participants the amount of Custodial
Loss Resources and Investment Loss
Resources, and to notify Participants in
advance of any changes in such
amounts. If such loss resources are
applied as a result of a loss event, any
replenishment of such resources by ICC
would not reduce the amount of any
Custodian Loss Shortfall or Investment
Loss Shortfall (or resulting Loss
Contributions) for that loss event. ICC’s
liability for Custodial Losses or
Investment Losses would not exceed the
amount of designated Custodial Loss
Resources or Investment Loss
Resources, as applicable, from time to
time.
(b) Statutory Basis
ICC believes that the proposed rule
change is consistent with the
requirements of Section 17A of the Act 4
and the regulations thereunder
applicable to it, including the applicable
standards under Rule 17Ad–22.5 In
particular, Section 17A(b)(3)(F) of the
Act 6 requires that the rule change be
consistent with the prompt and accurate
clearance and settlement of securities
transactions, and to the extent
applicable, derivative agreements,
contracts and transactions, the
safeguarding of securities and funds in
the custody or control of ICC or for
which it is responsible, and the
protection of investors and the public
interest.
As discussed herein, the proposed
rule change is principally designed to
address the risks posed to ICC by a
significant loss event not resulting from
a default by one or more Participants.
These events may include investment
losses and custodial losses with respect
to margin and General Guaranty Fund
contributions, as well as other losses
resulting from general business risk,
operational risk or other non-default
scenarios. ICC, like all clearing
organizations, faces the risk that such a
loss event could affect its ability to
continue orderly clearing operations or
otherwise affect its viability as a going
concern. The amendments are thus
intended to enhance the ability of ICC
to manage the risk of certain losses that
do not arise from Participant default or
defaults. The amendments provide a
mechanism for fully allocating
Investment Losses and Custodial Losses,
first to resources provided by ICC in the
first instance and thereafter to
Participants. The amendments also
clarify the responsibility of ICC for Non4 15
U.S.C. 78q–1.
CFR 240.17Ad–22.
6 15 U.S.C. 78q–1(b)(3)(F).
5 17
E:\FR\FM\28AUN1.SGM
28AUN1
jbell on DSK3GLQ082PROD with NOTICES
45194
Federal Register / Vol. 84, No. 167 / Wednesday, August 28, 2019 / Notices
Default Losses (and clarify that
Participants are not responsible for such
losses). The amendments thus enhance
ICC’s ability to address general business
risk, operational risk and other risks that
may otherwise threaten the viability of
the clearing house as a going concern.
The amendments also enhance the
ability of ICC to manage custody and
investment risk and settlement bank risk
in the remote circumstances where its
ordinary course procedures are
insufficient and a Custodian, investment
counterparty or settlement bank fails.
Overall, the amendments will
strengthen the ability of the clearing
house to manage the risks of, and
withstand and/or recover from,
significant non-default loss events.
The amendments also more clearly
allocate certain losses as among ICC and
Participants. ICE Clear Credit believes
that the amendments also reflect the
legitimate interests of clearing
participants, customers and other
stakeholders. The amendments are
designed to plan for remote and
unprecedented, but potentially extreme,
types of loss event, including
Investment Losses, Custodial Losses and
Non-Default Losses. In particular,
Investment Losses and Custodial Losses,
to the extent they exceed clearing house
resources dedicated for such purposes,
will necessarily and adversely affect
some or all Participants, customers or
other stakeholders. ICE Clear Credit
believes that the amendments take a
balanced approach that distributes
potential losses to both ICC and
Participants. ICE Clear Credit also
believes that the amendments further
the interests of Participants in having
greater certainty as to the consequences
of such losses, their potential liability
for them and the resources that would
be available to support clearing
operations, to allow stakeholders to
evaluate more fully the risks and
benefits of clearing.
In light of discussions with
Participants and others, ICE Clear Credit
believes that the amendments provide
an appropriate and equitable method to
allocate the loss from an extreme nondefault loss scenario. ICE Clear Credit
further believes that the approach taken
will facilitate the ability of the clearing
house to allocate such losses so that it
can continue clearing operations. The
amendments therefore further the
prompt and accurate clearance and
settlement of cleared transactions. In so
doing, in light of the importance of
clearing houses to the financial markets
they serve, the policy in favor of
clearing of financial transactions as set
out in the Dodd-Frank Wall Street
Reform and Consumer Protection Act,
VerDate Sep<11>2014
20:14 Aug 27, 2019
Jkt 247001
and the potential consequences of a
clearing house failure, the amendments
will support the stability of the broader
financial system and the public interest.
Accordingly, in ICC’s view, the
amendments are consistent with the
prompt and accurate clearance and
settlement of securities transactions,
derivatives agreements, contracts, and
transactions, the safeguarding of
securities and funds in the custody or
control of ICC or for which it is
responsible, and the protection of
investors and the public interest, within
the meaning of Section 17A(b)(3)(F) of
the Act.7
In addition to the Act, the
amendments are intended to satisfy the
requirements of CFTC Rule 39.39,8
applicable to ICC as a derivatives
clearing organization designated as
systemically important under Title VIII
of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, that ICC
have rules to facilitate recovery or
orderly wind-down necessitated by
general business risk, operational risk or
any other risk that threatens its viability
as a going concern. The amendments are
also intended to be consistent with
relevant international standards,
including the Principles of Financial
Market Infrastructure developed by the
Committee on Payments and Market
Infrastructures (CPMI) and the
International Organization of Securities
Commissions (IOSCO).
The amendments will also satisfy the
specific relevant requirements of Rule
17Ad–22,9 as set forth in the following
discussion.
Rule 17Ad–22(b)(3) 10 requires ICC to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to maintain
sufficient financial resources to
withstand, at a minimum, a default by
the two CP families to which it has the
largest exposures in extreme but
plausible market conditions. ICC does
not propose in these amendments to
change the amount or composition of
financial resources required of
Participants as Initial Margin or
contributions to the General Guaranty
Fund. ICC is also not proposing to
change its own resources that it
contributes to default resources. Under
the amendments, ICC would designate
clearly that ICC’s own capital and other
assets (other than its contributions to
default resources) are available to cover
Non-Default Losses (and that
Participants are not responsible for such
7 Id.
8 17
CFR 39.39.
CFR 240.17Ad–22.
10 17 CFR 240.17Ad–22(b)(3).
9 17
PO 00000
Frm 00075
Fmt 4703
Sfmt 4703
losses). In addition, ICC would
designate specific amounts of its own
assets to serve as Investment Loss
Resources and Custodial Loss
Resources, to provide risk-based, ‘‘first
loss’’ coverage of Investment Losses and
Custodial Losses incurred by ICC.
Specifically, ICC has selected the
level of Investment Loss Resources
based on its assessment of its potential
exposure to investment losses under its
investment policies and procedures, and
the ICC Board would periodically
conduct a risk-based assessment of the
appropriate level of Investment Loss
Resources. As an initial measure of its
potential exposure to investment losses,
ICC has taken into account components
of the European Union capital
requirements applicable to central
counterparties 11 (even though such
requirements are not directly applicable
to ICC), in particular the capital
requirements for credit, counterparty
and market risks and operational and
legal risks. ICC would not be obligated
under the amended Rules to use this
methodology, and could in the future
determine to adopt a different risk-based
methodology based on its experience
with investment losses or other market
or regulatory developments.
Under the amendments, with respect
to Custodial Losses involving
Custodians other than a central bank,
ICC would be responsible for losses up
to the amount of Custodial Loss
Resources, which is established under
the proposed Rule amendments and will
be subject to risk-based adjustment by
the ICC Board from time to time. As
with the Investment Loss Resources, ICC
has determined the initial level of
Custodial Loss Resources taking into
account components of the European
Union capital requirements applicable
to central counterparties, in particular
the capital requirements for credit,
counterparty and market risks and
operational and legal risks. ICC would
not be obligated under the amended
Rules to use this methodology, and
could in the future determine to adopt
a different risk-based methodology
based on its experience with custodial
losses or other market or regulatory
developments.
The amendments would also provide
for allocation of Investment Losses and
Custodial Losses in excess of such
resources to Participants, who would be
obligated to pay Loss Contributions to
the extent of such excess. With respect
11 Commission Delegated Regulation (EU) No
152/2013 of 19 December 2012 supplementing
Regulation (EU) No 648/2012 of the European
Parliament and the Council with regard to
regulatory technical standards on the capital
requirements for central counterparties.
E:\FR\FM\28AUN1.SGM
28AUN1
jbell on DSK3GLQ082PROD with NOTICES
Federal Register / Vol. 84, No. 167 / Wednesday, August 28, 2019 / Notices
to Investment Losses, ICC has designed
its existing investment policies and
procedures such that investments are
limited to instruments with minimal
credit, market and liquidity risks. An
Investment Loss resulting from an
investment made in accordance with its
policies and procedures is ultimately
outside the control of the clearing
house. Furthermore, as a regulatory
matter ICC is not obligated to, and is not
commercially in a position to, guarantee
investments against defaults by an
investment issuer or counterparty. As a
result, in ICC’s view, it is appropriate
for remote losses in excess of the
Investment Loss Resources to be borne
by its Participants. Absent an ability to
allocate such losses to Participants, an
extreme Investment Loss event, beyond
the resources of the clearing house,
could result in clearing house failure or
interference with the clearing house’s
ability to continue operations.
Additionally, for Custodial Losses, ICC’s
existing policies are intended to
mitigate the risk of custodial failure
through appropriate selection and
ongoing monitoring of Custodians and
use of central bank custody where
practical. These procedures are
designed to permit the clearing house to
hold assets in a manner that minimizes
the risk of loss or delay in the access of
ICC to such assets. A Custodial Loss
from a custodial failure is ultimately
outside the control of ICC. ICC is not
itself a depository but is rather an
intermediary. ICC is ultimately not in a
position to backstop or guarantee
performance by third-party Custodians.
If ICC were responsible for all Custodial
Losses in excess of the defined
resources, a custodial failure could lead
to a clearing house failure or other
interference with clearing operations.
As a result, ICC believes it is
appropriate for the Participants to share
in Custodial Losses that exceed ICC’s
Custodial Loss Resources as set out in
the proposed Rules. With respect to
Custodial Losses arising from a central
bank custodial failure, ICC believes that
such a scenario is extremely remote, and
entirely outside of its control. ICC also
notes the preference among regulators
and Participants for the use of central
bank custody. As a result, ICC believes
it is appropriate in that case that
Participants fully bear any such
Custodial Losses.
For Non-Default Losses, ICC would be
solely responsible for covering such
losses through ICC capital and other ICC
resources. In light of the remote and
unpredictable nature of such NonDefault Losses, ICC does not believe
allocation of such Non-Default Losses to
VerDate Sep<11>2014
20:14 Aug 27, 2019
Jkt 247001
Participants is appropriate. ICC believes
that its capital and other resources at the
clearing house are sufficient to permit it
to cover its expected operating
expenses, consistent with regulatory
requirements.
Under the amendments, losses in
excess of the amount of Investment Loss
Resources or Custodial Loss Resources
would be shared among Participants,
proportionally based on their respective
aggregate initial margin and guaranty
fund contributions. ICC has determined
that the allocation of Investment Losses
or Custodial Losses, as the case may be,
to Participants should be made
proportionately based on the relative
Participant IM/GF Contributions. The
approach mutualizes both Investment
Losses and Custodial Losses across all
Participants, in these remote loss
scenarios where such losses exceed
applicable ICC resources allocated to
such losses. Participants may be
required to make Loss Contributions
that are independent of the particular
mix of cash and securities provided by
the Participant as margin or guaranty
fund assets, or any investment elections
made by the Participant with respect to
its customer origin account.
Nonetheless, ICC believes that the
approach is appropriate in light of the
remote nature of the potential losses, the
fact that Participant margin and
guaranty fund assets are invested and
custodied collectively, and the practical
and operational considerations that
would be required for an approach that
attempted to allocate losses based on a
Participant’s particular assets and
elections. In this regard, in ICC’s view,
individual elections by a Participant
with respect to its customer origin
account are unlikely to affect the overall
risk of Investment Loss and Custodial
Loss (and indeed, investment elections
by Participants will generally only shift
the balances between investment assets
(subject to Investment Losses) and
custodial assets (subject to Custodial
Losses)). Regardless of any elections, the
balance of investments, and the
particular investments made, may
change on a daily (or more frequent)
basis, as may the balance of assets (and
types of assets) held with any individual
Custodian, meaning that any attempt to
allocate based on specific Participant
positions would have to be done on a
real-time basis. Furthermore, all
Participant assets are held and invested
on an aggregate basis (such that
investments cannot be allocated to
particular Participants), and all
Participants receive a blended rate of
return from aggregate clearing house
investment activity. As a result, ICC
PO 00000
Frm 00076
Fmt 4703
Sfmt 4703
45195
does not believe it would be
operationally feasible, or beneficial to
Participants, to attempt to allocate
Investment or Custodial Losses based on
particular investment elections made or
assets maintained by individual
Participants with the clearing house on
a real time basis. Instead, ICC believes
it is more appropriate, in light of these
operational and other considerations, to
allocate Investment Losses and
Custodial Losses, if any, to Participants
based on their respective aggregate
amount of Margin and General Guaranty
Fund assets at the clearing house.
As a result, the amendments clarify
the resources available to address
Investment Losses, Custodial Losses and
other losses not resulting from
Participant default. The provisions
relating to Investment and Custodial
Losses also, in effect, provide protection
against the loss of the financial
resources provided by Participants to
support the default waterfall. The
amendments thus enhance the ability of
ICC to manage the risk of certain losses
that do not arise from Participant
default or defaults, thereby ensuring
that ICC continues to maintain sufficient
financial resources to withstand, at a
minimum, a default by the two CP
families to which it has the largest
exposures in extreme but plausible
market conditions, consistent with the
requirements of Rule 17Ad–22(b)(3).12
Rule 17Ad–22(d)(3) 13 requires ICC to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to hold assets in a
manner that minimizes risk of loss or of
delay in its access to them and invest
assets in instruments with minimal
credit, market, and liquidity risks. ICC’s
existing investment policies and
procedures provide for the investment
of cash provided by Participants as
Margin or General Guaranty Fund
contributions in investments with
minimal credit, market and liquidity
risks. Similarly, the policies provide for
the use by ICC of custodians to hold
cash and securities in a manner
designed to minimize the risk of loss or
delay in access to such assets. ICC does
not propose to change such policies and
procedures. The amendments address
the remote scenario where, despite the
protections under such procedures,
there is a failure by an investment issuer
or counterparty or custodian. Such a
circumstance would be remote in ICC’s
view, and in any event, outside the
control of ICC. In such circumstances,
the amendments would allocate the loss
as between ICC and Participants, with
12 17
13 17
E:\FR\FM\28AUN1.SGM
CFR 240.17Ad–22(b)(3).
CFR 240.17Ad–22(d)(3).
28AUN1
jbell on DSK3GLQ082PROD with NOTICES
45196
Federal Register / Vol. 84, No. 167 / Wednesday, August 28, 2019 / Notices
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change, security-based swap
submission, or advance notice that are
filed with the Commission, and all
written communications relating to the
proposed rule change, security-based
swap submission, or advance notice
between the Commission and any
person, other than those that may be
withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will
be available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filings
will also be available for inspection and
copying at the principal office of ICE
Clear Credit and on ICE Clear Credit’s
website at https://www.theice.com/
clear-credit/regulation.
All comments received will be posted
without change. Persons submitting
comments are cautioned that we do not
redact or edit personal identifying
information from comment submissions.
You should submit only information
that you wish to make available
publicly. All submissions should refer
to File Number SR–ICC–2019–010 and
should be submitted on or before
September 18, 2019.
ICC being responsible for a first loss
position up to the amount of defined
resources (except in certain cases of a
central bank failure) and with
Participants being responsible for the
remaining loss, in proportion to their
margin and guaranty fund contributions.
The amendments would thus enhance
the protection of funds and assets
provided to ICC as margin or guaranty
fund contributions and are therefore
reasonably designed to meet the
requirements of Rule 17Ad–22(d)(3).14
Rule 17Ad–22(d)(8) 15 requires ICC to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to have governance
arrangements that are clear and
transparent to fulfill the public interest
requirements in Section 17A of the
Act 16 applicable to clearing agencies, to
support the objectives of owners and
participants, and to promote the
effectiveness of the clearing agency’s
risk management procedures. ICE Clear
Credit believes the amendments
discussed herein satisfy these
requirements. The amendments are
designed to address extreme loss
scenarios other than those resulting
from Participant default, and provide an
orderly means for recovery from such
scenarios if necessary. The amendments
set out the responsibilities of the ICE
Clear Credit Board in connection with
establishing the appropriate level of
Investment Loss Resources and
Custodial Loss Resources provided by
ICC. In taking such decisions, the Rules,
the ICC mission statement, and the
relevant governance committee charters
will require the Board to take into
consideration both the interests of
Participants, customers and other
stakeholders and the broader goal of
providing safe and sound central
counterparty services to reduce systemic
risk in an efficient and compliant
manner, consistent with the
requirements of Rule 17Ad–22(d)(8).17
For the foregoing reasons, ICE Clear
Credit believes that the proposed rule
change is consistent with the
requirements of Section 17A of the
Act 18 and the regulations thereunder
applicable to it, including the standards
under Rule 17Ad–22.19
impose any burden, on competition.
The proposed changes to the ICC Rules
will apply uniformly across all market
participants. Therefore, ICC does not
believe the proposed rule change
imposes any burden on competition that
is inappropriate in furtherance of the
purposes of the Act.
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ICC–2019–010 on the subject line.
SMALL BUSINESS ADMINISTRATION
(B) Clearing Agency’s Statement on
Burden on Competition
ICC does not believe the proposed
rule change would have any impact, or
Paper Comments
Send paper comments in triplicate to
Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549.
All submissions should refer to File
Number SR–ICC–2019–010. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
AGENCY:
14 Id.
15 17
CFR 240.17Ad–22(d)(8).
U.S.C. 78q–1.
17 17 CFR 240.17Ad–22(d)(8).
18 15 U.S.C. 78q–1.
19 17 CFR 240.17Ad–22.
16 15
VerDate Sep<11>2014
20:14 Aug 27, 2019
Jkt 247001
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change, Security-Based Swap
Submission, or Advance Notice
Received From Members, Participants or
Others
Written comments relating to the
proposed rule change have not been
solicited or received. ICC will notify the
Commission of any written comments
received by ICC.
III. Date of Effectiveness of the
Proposed Rule Change, Security-Based
Swap Submission, or Advance Notice
and Timing for Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, security-based swap
submission, or advance notice is
consistent with the Act. Comments may
be submitted by any of the following
methods:
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–18480 Filed 8–27–19; 8:45 am]
BILLING CODE 8011–01–P
[Disaster Declaration #15944 and #15945;
MISSISSIPPI Disaster Number MS–00111]
Presidential Declaration Amendment of
a Major Disaster for Public Assistance
Only for the State of Mississippi
U.S. Small Business
Administration.
ACTION: Amendment 4.
This is an amendment of the
Presidential declaration of a major
disaster for Public Assistance Only for
the State of Mississippi (FEMA–4429–
DR), dated 04/23/2019.
SUMMARY:
20 17
E:\FR\FM\28AUN1.SGM
CFR 200.30–3(a)(12).
28AUN1
]]>Agencies
[Federal Register Volume 84, Number 167 (Wednesday, August 28, 2019)]
[Notices]
[Pages 45191-45196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18480]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86729; File No. SR-ICC-2019-010]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change, Security-Based Swap Submission, or
Advance Notice Relating to the ICC Clearing Rules
August 22, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934,\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on
August 8, 2019, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission the proposed rule change, security-
based swap submission, or advance notice as described in Items I, II
and III below, which Items have been prepared by ICC. The Commission is
publishing this notice to solicit comments on the proposed rule change,
security-based swap submission, or advance notice from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change, Security-Based Swap Submission, or Advance Notice
The principal purpose of the proposed rule change is to make
changes to the ICC Clearing Rules (the ``ICC Rules'') to address the
treatment of certain investment losses, custodial losses and other non-
default losses.
[[Page 45192]]
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change, Security-Based Swap Submission, or
Advance Notice
In its filing with the Commission, ICC included statements
concerning the purpose of and basis for the proposed rule change,
security-based swap submission, or advance notice and discussed any
comments it received on the proposed rule change, security-based swap
submission, or advance notice. The text of these statements may be
examined at the places specified in Item IV below. ICC has prepared
summaries, set forth in sections (A), (B), and (C) below, of the most
significant aspects of these statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change, Security-Based Swap Submission, or
Advance Notice
(a) Purpose
ICC is proposing amendments to its Rules to address the treatment
of certain investment losses, custodial losses and other non-default
losses (in each case, losses that do not arise from the default of a
clearing participant (a ``Participant'')).
I. Summary of Proposed Amendments
The amendments would, among other matters:
Define three exclusive categories of relevant losses: (1)
Investment losses, (2) custodial losses and (3) non-default losses,
specify the ICC resources that will be applied to cover
each such category of losses,
specify the responsibility of Participants, in appropriate
circumstances, to make contributions with respect to investment losses
and custodial losses, and
address the treatment of recoveries by ICC with respect to
such losses.
ICC proposes to make such changes effective after Commission
approval of the proposed rule change and after ICC is permitted to do
so under Commodity Futures Trading Commission (``CFTC'') regulation.\3\
The proposed amendments are described in more detail below.
---------------------------------------------------------------------------
\3\ As a derivatives clearing organization designated as
systemically important under Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, ICC submitted to the
CFTC, pursuant to CFTC Rule 40.10, as an advance notice of a
proposed rule change the amendments to the Rules discussed herein.
---------------------------------------------------------------------------
II. Definitions of Loss Categories
In Rule 102, new definitions of ``Investment Losses'' and ``Non-
Default Losses'' would be added, and the definition of ``Custodial
Losses'' would be revised.
Investment Losses
Investment Losses would be defined as losses incurred or suffered
by ICC in connection with the default of the issuer of any investment
of Margin or General Guaranty Fund assets by ICC or the default of the
counterparty to any repurchase or reverse repurchase contract or
similar transaction used to invest or reinvest such Margin or General
Guaranty Fund assets. Investment Losses would also include other losses
with respect to such investments, including from a change in value due
to market movements. However, Investment Losses would not include
Custodial Losses (as discussed below) or losses resulting directly from
a failure by ICC to comply with its own investment policies.
Certain other circumstances would not constitute Investment Losses.
For example, a negative yield or interest rate on an ICC investment
will not be an Investment Loss. If a Participant posts securities or
non-cash assets as Margin or General Guaranty Fund contributions, any
gain or loss in such assets will not be an Investment Loss for purposes
of the Rules.
Custodial Losses
Under the revised Rules, Custodial Losses would be defined as
losses of Margin or General Guaranty Fund assets (including declines in
the value thereof) as a result of (1) the insolvency or failure of a
Custodian or (2) the embezzlement or theft of such assets by any person
(other than ICC or its employees or representatives). A Custodian for
this purpose would include a bank or trust company, central bank,
central securities depository or other third party settlement system
used by ICC for the deposit, holding, custody or transfer of cash or
securities. Custodial Losses would not include Investment Losses.
Non-Default Losses
Non-Default Losses would be defined to cover losses incurred or
suffered by ICC that are neither Investment Losses nor Custodial Losses
and arise in connection with an event other than a Participant default.
The definition thus captures losses from general business or
operational risk that do not constitute custodial or investment losses.
III. Treatment of Losses
The amendments set out in new Rule 811 (and related additional
definitions in Rule 102) describe the clearing house's approach to the
treatment of Non-Default Losses, Investment Losses and Custodial
Losses.
Non-Default Losses
Under new Rule 811(b), Non-Default Losses would be met from
available ICC capital and other ICC assets (including available
retained earnings). Non-Default Losses would not be covered from ICC
contributions to default resources (the ICE Clear Credit Initial
Contribution, ICE Clear Credit Continuing Contribution or Additional
ICC Collateral Deposits). Non-Default Losses would not be allocated to
Participants, or otherwise covered using Margin, General Guaranty Fund
contributions or Assessment Contributions of Participants.
Investment Losses
New Rules 811(c)-(e) would set out the treatment of Investment
Losses. Under Rule 811(c), in the case of an Investment Loss, ICC would
first apply to the loss any available Investment Loss Resources held by
ICC. Investment Loss Resources would be defined in Rule 102 to be $20
million of ICC's own assets designated by ICC as available to be
applied to Investment Losses. The ICC Board may modify the amount of
Investment Loss Resources from time to time, and that determination
would be risk-based in light of ICC's potential exposure to Investment
Losses.
In the event the Investment Loss Resources were insufficient to
cover the Investment Loss (an ``Investment Loss Shortfall''), ICC would
have the right, under Rule 811(d), to allocate the Investment Loss
Shortfall to all Participants (including any Defaulting Participants).
In that case, each Participant would be obligated to make a
contribution (an ``Investment Loss Contribution''), based on its pro
rata share of the Investment Loss Shortfall, determined based on the
proportion of its aggregate Initial Margin (both house and customer)
and General Guaranty Fund contributions (its ``Participant IM/GF
Contribution'') as compared to the aggregate Participant IM/GF
Contributions for all Participants. Under Rule 811(e), the maximum
contribution of a Participant for an Investment Loss Contribution in
respect of any event giving rise to an Investment Loss may not exceed
its Participant IM/GF Contribution. Investment Loss Contributions could
only be applied to Investment Loss Shortfalls (and not Custodial Loss
Shortfalls).
Custodial Losses
New Rules 811(f)-(h) would set out the treatment of Custodial
Losses. Similarly to the treatment of Investment
[[Page 45193]]
Losses, under Rule 811(f), in the case of a Custodial Loss, ICC would
first apply to the loss any available Custodial Loss Resources held by
ICC. Custodial Loss Resources would be defined to be $32 million of
ICC's own assets designated by ICC as available to be applied to
Custodial Losses. As with Investment Loss Resources, the ICC Board may
modify the amount of Custodial Loss Resources from time to time, and
such determination would be risk-based in light of ICC's potential
exposure to Custodial Losses.
In the event the Custodial Loss Resources were insufficient to
cover the Custodial Loss (a ``Custodial Loss Shortfall''), ICC would
have the right, under Rule 811(g), to allocate the Custodial Loss
Shortfall to all Participants (including any Defaulting Participants).
In that case, each Participant would be liable to make a contribution
(a ``Custodial Loss Contribution''), based on its pro rata share of the
Custodial Loss Shortfall, determined based on the proportion of its
Participant IM/GF Contribution to the aggregate Participant IM/GF
Contributions for all Participants. Under Rule 811(h), the maximum
contribution of a Participant for a Custodial Loss Contribution in
respect of any event giving rise to an Investment Loss may not exceed
its Participant IM/GF Contribution. Custodial Loss Contributions could
only be applied to Custodial Loss Shortfalls (and not Investment Loss
Shortfalls).
Notwithstanding the foregoing, in the event of a Custodial Loss
where the Custodian is a central bank, ICC is not obligated to apply
Custodial Loss Resources, and the entire Custodial Loss would
constitute a Custodial Loss Shortfall subject to allocation to
Participants as described above.
IV. Allocation of Recoveries
The amendments would address any recoveries that ICC is able to
obtain in respect of an Investment Loss or Custodial Loss after
Investment Loss Contributions or Custodial Loss Contributions
(collectively, ``Loss Contributions'') have been made. Rule 811(l)
would provide a ``reverse waterfall'' for allocation of such
recoveries, after deduction of expenses of ICC, to the parties that
bore the loss (whether ICC, Participants or both) in the reverse order
from which they were initially applied. The amendments would also set
out ICC's obligations to seek recoveries in respect of Investment
Losses and Custodial Losses, generally using the same degree of care as
it exercises with respect to its own assets that are not subject to
allocation under Rule 811.
V. Additional Provisions
Rule 811(u) would contain a general disclaimer by ICC of losses
resulting from the holding, deposit, custody, transfer or investment of
Margin, General Guaranty Fund contributions and Assessment
Contributions, except as otherwise provided in Rule 811, and provided
that Rule 811(u) will not limit any liability of ICC for its own gross
negligence or willful misconduct. Rule 406 would also be amended to
remove an existing disclaimer for custodial losses, which would be
superseded by the new provisions.
New Rule 402(k) would address investment of cash Initial Margin
provided by a Participant in respect of its client origin account. The
Participant would be required to instruct ICC whether or not ICC should
invest such Initial Margin. If instructed to invest, ICC would invest
the cash in accordance with its Rules and investment policies
procedures and applicable law. If instructed not to invest, ICC would
hold the cash in a deposit account with a Custodian in accordance with
ICC's policies and procedures. If a Participant does not provide an
instruction, (1) for US dollar cash, the Participant would be deemed to
have instructed ICC not to invest such cash, and (2) for cash in other
currencies, the Participant would be deemed to have instructed ICC to
invest such cash.
Rule 811 would also address certain procedures for notices to
Participants of the use of Investment Loss Resources and Custodial Loss
Resources and of required Loss Contributions in respect of Investment
Losses and Custodial Losses. The Rule would also provide for timing and
manner of collection of Loss Contributions (including through offset
against obligations of ICC to return margin or other assets), and for
currency conversions as necessary. The Rule would clarify that the
requirement to make Loss Contributions does not reduce or otherwise
affect other obligations of a Participant to make payments or
deliveries to ICC under the Rules, or otherwise limit ICC's netting,
setoff and other rights under the Rules. In particular, obligations to
make Loss Contributions would be separate from any obligation to make
an Assessment Contribution, and the limitations on Assessments under
the Rules would not apply to liabilities for Loss Contributions. Use of
the Loss Contribution procedures under Rule 811 would also not be
deemed to constitute an ICE Clear Credit Default under the Rules.
ICC would be required to disclose to Participants the amount of
Custodial Loss Resources and Investment Loss Resources, and to notify
Participants in advance of any changes in such amounts. If such loss
resources are applied as a result of a loss event, any replenishment of
such resources by ICC would not reduce the amount of any Custodian Loss
Shortfall or Investment Loss Shortfall (or resulting Loss
Contributions) for that loss event. ICC's liability for Custodial
Losses or Investment Losses would not exceed the amount of designated
Custodial Loss Resources or Investment Loss Resources, as applicable,
from time to time.
(b) Statutory Basis
ICC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \4\ and the regulations
thereunder applicable to it, including the applicable standards under
Rule 17Ad-22.\5\ In particular, Section 17A(b)(3)(F) of the Act \6\
requires that the rule change be consistent with the prompt and
accurate clearance and settlement of securities transactions, and to
the extent applicable, derivative agreements, contracts and
transactions, the safeguarding of securities and funds in the custody
or control of ICC or for which it is responsible, and the protection of
investors and the public interest.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78q-1.
\5\ 17 CFR 240.17Ad-22.
\6\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As discussed herein, the proposed rule change is principally
designed to address the risks posed to ICC by a significant loss event
not resulting from a default by one or more Participants. These events
may include investment losses and custodial losses with respect to
margin and General Guaranty Fund contributions, as well as other losses
resulting from general business risk, operational risk or other non-
default scenarios. ICC, like all clearing organizations, faces the risk
that such a loss event could affect its ability to continue orderly
clearing operations or otherwise affect its viability as a going
concern. The amendments are thus intended to enhance the ability of ICC
to manage the risk of certain losses that do not arise from Participant
default or defaults. The amendments provide a mechanism for fully
allocating Investment Losses and Custodial Losses, first to resources
provided by ICC in the first instance and thereafter to Participants.
The amendments also clarify the responsibility of ICC for Non-
[[Page 45194]]
Default Losses (and clarify that Participants are not responsible for
such losses). The amendments thus enhance ICC's ability to address
general business risk, operational risk and other risks that may
otherwise threaten the viability of the clearing house as a going
concern. The amendments also enhance the ability of ICC to manage
custody and investment risk and settlement bank risk in the remote
circumstances where its ordinary course procedures are insufficient and
a Custodian, investment counterparty or settlement bank fails. Overall,
the amendments will strengthen the ability of the clearing house to
manage the risks of, and withstand and/or recover from, significant
non-default loss events.
The amendments also more clearly allocate certain losses as among
ICC and Participants. ICE Clear Credit believes that the amendments
also reflect the legitimate interests of clearing participants,
customers and other stakeholders. The amendments are designed to plan
for remote and unprecedented, but potentially extreme, types of loss
event, including Investment Losses, Custodial Losses and Non-Default
Losses. In particular, Investment Losses and Custodial Losses, to the
extent they exceed clearing house resources dedicated for such
purposes, will necessarily and adversely affect some or all
Participants, customers or other stakeholders. ICE Clear Credit
believes that the amendments take a balanced approach that distributes
potential losses to both ICC and Participants. ICE Clear Credit also
believes that the amendments further the interests of Participants in
having greater certainty as to the consequences of such losses, their
potential liability for them and the resources that would be available
to support clearing operations, to allow stakeholders to evaluate more
fully the risks and benefits of clearing.
In light of discussions with Participants and others, ICE Clear
Credit believes that the amendments provide an appropriate and
equitable method to allocate the loss from an extreme non-default loss
scenario. ICE Clear Credit further believes that the approach taken
will facilitate the ability of the clearing house to allocate such
losses so that it can continue clearing operations. The amendments
therefore further the prompt and accurate clearance and settlement of
cleared transactions. In so doing, in light of the importance of
clearing houses to the financial markets they serve, the policy in
favor of clearing of financial transactions as set out in the Dodd-
Frank Wall Street Reform and Consumer Protection Act, and the potential
consequences of a clearing house failure, the amendments will support
the stability of the broader financial system and the public interest.
Accordingly, in ICC's view, the amendments are consistent with the
prompt and accurate clearance and settlement of securities
transactions, derivatives agreements, contracts, and transactions, the
safeguarding of securities and funds in the custody or control of ICC
or for which it is responsible, and the protection of investors and the
public interest, within the meaning of Section 17A(b)(3)(F) of the
Act.\7\
---------------------------------------------------------------------------
\7\ Id.
---------------------------------------------------------------------------
In addition to the Act, the amendments are intended to satisfy the
requirements of CFTC Rule 39.39,\8\ applicable to ICC as a derivatives
clearing organization designated as systemically important under Title
VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
that ICC have rules to facilitate recovery or orderly wind-down
necessitated by general business risk, operational risk or any other
risk that threatens its viability as a going concern. The amendments
are also intended to be consistent with relevant international
standards, including the Principles of Financial Market Infrastructure
developed by the Committee on Payments and Market Infrastructures
(CPMI) and the International Organization of Securities Commissions
(IOSCO).
---------------------------------------------------------------------------
\8\ 17 CFR 39.39.
---------------------------------------------------------------------------
The amendments will also satisfy the specific relevant requirements
of Rule 17Ad-22,\9\ as set forth in the following discussion.
---------------------------------------------------------------------------
\9\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------
Rule 17Ad-22(b)(3) \10\ requires ICC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to maintain sufficient financial resources to withstand, at a
minimum, a default by the two CP families to which it has the largest
exposures in extreme but plausible market conditions. ICC does not
propose in these amendments to change the amount or composition of
financial resources required of Participants as Initial Margin or
contributions to the General Guaranty Fund. ICC is also not proposing
to change its own resources that it contributes to default resources.
Under the amendments, ICC would designate clearly that ICC's own
capital and other assets (other than its contributions to default
resources) are available to cover Non-Default Losses (and that
Participants are not responsible for such losses). In addition, ICC
would designate specific amounts of its own assets to serve as
Investment Loss Resources and Custodial Loss Resources, to provide
risk-based, ``first loss'' coverage of Investment Losses and Custodial
Losses incurred by ICC.
---------------------------------------------------------------------------
\10\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------
Specifically, ICC has selected the level of Investment Loss
Resources based on its assessment of its potential exposure to
investment losses under its investment policies and procedures, and the
ICC Board would periodically conduct a risk-based assessment of the
appropriate level of Investment Loss Resources. As an initial measure
of its potential exposure to investment losses, ICC has taken into
account components of the European Union capital requirements
applicable to central counterparties \11\ (even though such
requirements are not directly applicable to ICC), in particular the
capital requirements for credit, counterparty and market risks and
operational and legal risks. ICC would not be obligated under the
amended Rules to use this methodology, and could in the future
determine to adopt a different risk-based methodology based on its
experience with investment losses or other market or regulatory
developments.
---------------------------------------------------------------------------
\11\ Commission Delegated Regulation (EU) No 152/2013 of 19
December 2012 supplementing Regulation (EU) No 648/2012 of the
European Parliament and the Council with regard to regulatory
technical standards on the capital requirements for central
counterparties.
---------------------------------------------------------------------------
Under the amendments, with respect to Custodial Losses involving
Custodians other than a central bank, ICC would be responsible for
losses up to the amount of Custodial Loss Resources, which is
established under the proposed Rule amendments and will be subject to
risk-based adjustment by the ICC Board from time to time. As with the
Investment Loss Resources, ICC has determined the initial level of
Custodial Loss Resources taking into account components of the European
Union capital requirements applicable to central counterparties, in
particular the capital requirements for credit, counterparty and market
risks and operational and legal risks. ICC would not be obligated under
the amended Rules to use this methodology, and could in the future
determine to adopt a different risk-based methodology based on its
experience with custodial losses or other market or regulatory
developments.
The amendments would also provide for allocation of Investment
Losses and Custodial Losses in excess of such resources to
Participants, who would be obligated to pay Loss Contributions to the
extent of such excess. With respect
[[Page 45195]]
to Investment Losses, ICC has designed its existing investment policies
and procedures such that investments are limited to instruments with
minimal credit, market and liquidity risks. An Investment Loss
resulting from an investment made in accordance with its policies and
procedures is ultimately outside the control of the clearing house.
Furthermore, as a regulatory matter ICC is not obligated to, and is not
commercially in a position to, guarantee investments against defaults
by an investment issuer or counterparty. As a result, in ICC's view, it
is appropriate for remote losses in excess of the Investment Loss
Resources to be borne by its Participants. Absent an ability to
allocate such losses to Participants, an extreme Investment Loss event,
beyond the resources of the clearing house, could result in clearing
house failure or interference with the clearing house's ability to
continue operations. Additionally, for Custodial Losses, ICC's existing
policies are intended to mitigate the risk of custodial failure through
appropriate selection and ongoing monitoring of Custodians and use of
central bank custody where practical. These procedures are designed to
permit the clearing house to hold assets in a manner that minimizes the
risk of loss or delay in the access of ICC to such assets. A Custodial
Loss from a custodial failure is ultimately outside the control of ICC.
ICC is not itself a depository but is rather an intermediary. ICC is
ultimately not in a position to backstop or guarantee performance by
third-party Custodians. If ICC were responsible for all Custodial
Losses in excess of the defined resources, a custodial failure could
lead to a clearing house failure or other interference with clearing
operations. As a result, ICC believes it is appropriate for the
Participants to share in Custodial Losses that exceed ICC's Custodial
Loss Resources as set out in the proposed Rules. With respect to
Custodial Losses arising from a central bank custodial failure, ICC
believes that such a scenario is extremely remote, and entirely outside
of its control. ICC also notes the preference among regulators and
Participants for the use of central bank custody. As a result, ICC
believes it is appropriate in that case that Participants fully bear
any such Custodial Losses.
For Non-Default Losses, ICC would be solely responsible for
covering such losses through ICC capital and other ICC resources. In
light of the remote and unpredictable nature of such Non-Default
Losses, ICC does not believe allocation of such Non-Default Losses to
Participants is appropriate. ICC believes that its capital and other
resources at the clearing house are sufficient to permit it to cover
its expected operating expenses, consistent with regulatory
requirements.
Under the amendments, losses in excess of the amount of Investment
Loss Resources or Custodial Loss Resources would be shared among
Participants, proportionally based on their respective aggregate
initial margin and guaranty fund contributions. ICC has determined that
the allocation of Investment Losses or Custodial Losses, as the case
may be, to Participants should be made proportionately based on the
relative Participant IM/GF Contributions. The approach mutualizes both
Investment Losses and Custodial Losses across all Participants, in
these remote loss scenarios where such losses exceed applicable ICC
resources allocated to such losses. Participants may be required to
make Loss Contributions that are independent of the particular mix of
cash and securities provided by the Participant as margin or guaranty
fund assets, or any investment elections made by the Participant with
respect to its customer origin account. Nonetheless, ICC believes that
the approach is appropriate in light of the remote nature of the
potential losses, the fact that Participant margin and guaranty fund
assets are invested and custodied collectively, and the practical and
operational considerations that would be required for an approach that
attempted to allocate losses based on a Participant's particular assets
and elections. In this regard, in ICC's view, individual elections by a
Participant with respect to its customer origin account are unlikely to
affect the overall risk of Investment Loss and Custodial Loss (and
indeed, investment elections by Participants will generally only shift
the balances between investment assets (subject to Investment Losses)
and custodial assets (subject to Custodial Losses)). Regardless of any
elections, the balance of investments, and the particular investments
made, may change on a daily (or more frequent) basis, as may the
balance of assets (and types of assets) held with any individual
Custodian, meaning that any attempt to allocate based on specific
Participant positions would have to be done on a real-time basis.
Furthermore, all Participant assets are held and invested on an
aggregate basis (such that investments cannot be allocated to
particular Participants), and all Participants receive a blended rate
of return from aggregate clearing house investment activity. As a
result, ICC does not believe it would be operationally feasible, or
beneficial to Participants, to attempt to allocate Investment or
Custodial Losses based on particular investment elections made or
assets maintained by individual Participants with the clearing house on
a real time basis. Instead, ICC believes it is more appropriate, in
light of these operational and other considerations, to allocate
Investment Losses and Custodial Losses, if any, to Participants based
on their respective aggregate amount of Margin and General Guaranty
Fund assets at the clearing house.
As a result, the amendments clarify the resources available to
address Investment Losses, Custodial Losses and other losses not
resulting from Participant default. The provisions relating to
Investment and Custodial Losses also, in effect, provide protection
against the loss of the financial resources provided by Participants to
support the default waterfall. The amendments thus enhance the ability
of ICC to manage the risk of certain losses that do not arise from
Participant default or defaults, thereby ensuring that ICC continues to
maintain sufficient financial resources to withstand, at a minimum, a
default by the two CP families to which it has the largest exposures in
extreme but plausible market conditions, consistent with the
requirements of Rule 17Ad-22(b)(3).\12\
---------------------------------------------------------------------------
\12\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------
Rule 17Ad-22(d)(3) \13\ requires ICC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to hold assets in a manner that minimizes risk of loss or of
delay in its access to them and invest assets in instruments with
minimal credit, market, and liquidity risks. ICC's existing investment
policies and procedures provide for the investment of cash provided by
Participants as Margin or General Guaranty Fund contributions in
investments with minimal credit, market and liquidity risks. Similarly,
the policies provide for the use by ICC of custodians to hold cash and
securities in a manner designed to minimize the risk of loss or delay
in access to such assets. ICC does not propose to change such policies
and procedures. The amendments address the remote scenario where,
despite the protections under such procedures, there is a failure by an
investment issuer or counterparty or custodian. Such a circumstance
would be remote in ICC's view, and in any event, outside the control of
ICC. In such circumstances, the amendments would allocate the loss as
between ICC and Participants, with
[[Page 45196]]
ICC being responsible for a first loss position up to the amount of
defined resources (except in certain cases of a central bank failure)
and with Participants being responsible for the remaining loss, in
proportion to their margin and guaranty fund contributions. The
amendments would thus enhance the protection of funds and assets
provided to ICC as margin or guaranty fund contributions and are
therefore reasonably designed to meet the requirements of Rule 17Ad-
22(d)(3).\14\
---------------------------------------------------------------------------
\13\ 17 CFR 240.17Ad-22(d)(3).
\14\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(d)(8) \15\ requires ICC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to have governance arrangements that are clear and transparent
to fulfill the public interest requirements in Section 17A of the Act
\16\ applicable to clearing agencies, to support the objectives of
owners and participants, and to promote the effectiveness of the
clearing agency's risk management procedures. ICE Clear Credit believes
the amendments discussed herein satisfy these requirements. The
amendments are designed to address extreme loss scenarios other than
those resulting from Participant default, and provide an orderly means
for recovery from such scenarios if necessary. The amendments set out
the responsibilities of the ICE Clear Credit Board in connection with
establishing the appropriate level of Investment Loss Resources and
Custodial Loss Resources provided by ICC. In taking such decisions, the
Rules, the ICC mission statement, and the relevant governance committee
charters will require the Board to take into consideration both the
interests of Participants, customers and other stakeholders and the
broader goal of providing safe and sound central counterparty services
to reduce systemic risk in an efficient and compliant manner,
consistent with the requirements of Rule 17Ad-22(d)(8).\17\
---------------------------------------------------------------------------
\15\ 17 CFR 240.17Ad-22(d)(8).
\16\ 15 U.S.C. 78q-1.
\17\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------
For the foregoing reasons, ICE Clear Credit believes that the
proposed rule change is consistent with the requirements of Section 17A
of the Act \18\ and the regulations thereunder applicable to it,
including the standards under Rule 17Ad-22.\19\
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78q-1.
\19\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
ICC does not believe the proposed rule change would have any
impact, or impose any burden, on competition. The proposed changes to
the ICC Rules will apply uniformly across all market participants.
Therefore, ICC does not believe the proposed rule change imposes any
burden on competition that is inappropriate in furtherance of the
purposes of the Act.
(C) Clearing Agency's Statement on Comments on the Proposed Rule
Change, Security-Based Swap Submission, or Advance Notice Received From
Members, Participants or Others
Written comments relating to the proposed rule change have not been
solicited or received. ICC will notify the Commission of any written
comments received by ICC.
III. Date of Effectiveness of the Proposed Rule Change, Security-Based
Swap Submission, or Advance Notice and Timing for Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, security-based swap submission, or advance notice is consistent
with the Act. Comments may be submitted by any of the following
methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-ICC-2019-010 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-ICC-2019-010. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change, security-based
swap submission, or advance notice that are filed with the Commission,
and all written communications relating to the proposed rule change,
security-based swap submission, or advance notice between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Copies of such
filings will also be available for inspection and copying at the
principal office of ICE Clear Credit and on ICE Clear Credit's website
at https://www.theice.com/clear-credit/regulation.
All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-ICC-2019-010 and should be
submitted on or before September 18, 2019.
---------------------------------------------------------------------------
\20\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18480 Filed 8-27-19; 8:45 am]
BILLING CODE 8011-01-P
