Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change Relating to the ICE Clear Europe CDS Default Management Framework, 46575-46578 [2019-18998]

Download as PDF Federal Register / Vol. 84, No. 171 / Wednesday, September 4, 2019 / Notices designed policies and procedures to provide for governance arrangements that are clear and transparent and specify clear and direct lines of responsibility. To facilitate compliance with this requirement, the proposed amendments to the Back-Testing Policy more clearly define the roles and responsibilities of the CDS Risk Committee and Model Oversight Committee to receive back-testing results. (B) Clearing Agency’s Statement on Burden on Competition ICE Clear Europe does not believe the proposed rule changes would have any impact, or impose any burden, on competition not necessary or appropriate in furtherance of the purpose of the Act. The amendments to the Back-Testing Policy apply to all CDS Contracts and are intended to strengthen risk management relating to these products. ICE Clear Europe does not believe the amendments will have any direct effect on Clearing Members, other market participants or the market for cleared products generally. As a result, ICE Clear Europe does not believe the amendments will materially affect the cost of, or access to, clearing. To the extent the amendments may have any impact on margin levels, ICE Clear Europe believes such changes will be appropriate in furtherance of the risk management of the Clearing House. Therefore, ICE Clear Europe does not believe the proposed rule changes impose any burden on competition that is inappropriate in furtherance of the purposes of the Act. jbell on DSK3GLQ082PROD with NOTICES (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments relating to the proposed amendments have not been solicited or received by ICE Clear Europe. ICE Clear Europe will notify the and procedures reasonably designed to, as applicable: (2) Provide for governance arrangements that: (i) Are clear and transparent; (ii) Clearly prioritize the safety and efficiency of the covered clearing agency; (iii) Support the public interest requirements in Section 17A of the Act (15 U.S.C. 78q–1) applicable to clearing agencies, and the objectives of owners and participants; (iv) Establish that the board of directors and senior management have appropriate experience and skills to discharge their duties and responsibilities; (v) Specify clear and direct lines of responsibility; and (vi) Consider the interests of participants’ customers, securities issuers and holders, and other relevant stakeholders of the covered clearing agency.’’ VerDate Sep<11>2014 19:08 Sep 03, 2019 Jkt 247001 Commission of any written comments received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 rule-comments@ sec.gov. Please include File Number SR– ICEEU–2019–017 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–ICEEU–2019–017. 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 that are filed with the Commission, and all written communications relating to the proposed rule change 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 PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 46575 business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filings will also be available for inspection and copying at the principal office of ICE Clear Europe and on ICE Clear Europe’s website at https:// www.theice.com/clear-europe/ regulation. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–ICEEU– 2019–017 and should be submitted on or before September 25, 2019. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–18997 Filed 9–3–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–86783; File No. SR–ICEEU– 2019–014] Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change Relating to the ICE Clear Europe CDS Default Management Framework August 28, 2019. I. Introduction On June 25, 2019, ICE Clear Europe Limited (‘‘ICE Clear Europe,’’ the ‘‘Clearing House’’ or ‘‘ICEEU’’) 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 revise its CDS Default Management Framework (the ‘‘Framework’’). The proposed rule change was published for comment in the Federal Register on July 16, 2019.3 The Commission did not receive comments on the proposed rule change. For the reasons discussed below, the Commission is approving the proposed rule change. 16 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Securities Exchange Act Release No. 86340 (July 10, 2019), 84 FR 33996 (July 16, 2019) (SR–ICEEU– 2019–014) (‘‘Notice’’). 1 15 E:\FR\FM\04SEN1.SGM 04SEN1 46576 Federal Register / Vol. 84, No. 171 / Wednesday, September 4, 2019 / Notices II. Description of the Proposed Rule Change ICE Clear Europe’s proposed rule change would amend its Framework to be consistent with amendments to the ICE Clear Europe Clearing Rules (the ‘‘Rules’’) to address default management, recovery and wind-down for the CDS Contract Category (‘‘Recovery Rule Amendments’’).4 The proposed changes to the Framework relate primarily to auction procedures, reduced gains distribution, partial tearup, Clearing Member withdrawal and termination, clearing service termination, and governance during a default. The changes would incorporate, summarize, and reflect these aspects of the Recovery Rule Amendments. The proposed changes would also make various clarifying changes and corrections to typographical errors.5 jbell on DSK3GLQ082PROD with NOTICES A. Auction Procedures In light of the Recovery Rule Amendments referenced above, the proposed rule change would revise several aspects of the Framework to adopt a set of new initial and secondary auction procedures. Specifically, the Framework amendments would do the following: • Clarify that in determining the auction portfolios, the Clearing House would consider wrong-way risk to nondefaulting Clearing Members, among other listed factors; • clarify that upon completion of the auction, submission of resulting trade to the Trade Information Warehouse would be done under normal Clearing House practices; • Clearing Members would no longer be required to confirm to the Default Management Committee their intention to bid in a particular auction; • no longer provide that the last bid submitted by the Clearing Member is the only bid considered once the bidding window is closed; • set a range for the minimum bid requirement for Clearing Members. The Framework provides examples of the calculation of the minimum bid requirement for Clearing Members, based on their respective CDS Guaranty Fund contributions as compared to the total CDS Guaranty Fund size; • provide several examples of the modified Dutch auction methodology used under the Proposed Auction Procedures; 4 File No. SR–ICEEU–2019–003. terms used but not defined herein have the meanings specified in the ICE Clear Europe Clearing Rules or the Framework. The following description of the proposed rule change is excerpted from the Notice, 84 FR 33996. 5 Capitalized VerDate Sep<11>2014 19:08 Sep 03, 2019 Jkt 247001 • reflect the two means by which Customers would be able to participate in auctions under the Proposed Auction Procedures: (i) Via Clearing Member following mutual agreement on participation terms; and (ii) via direct participation following (subject to Customer contribution of Ö7.5 million to default resources (in the case of initial auctions) and certain other requirements); • summarize key distinctions between initial auctions and secondary auctions under the Proposed Auction Procedures; • delete the existing Clearing House approach to non-competitive bids, in light of the three tier methodology approach to juniorization of the Guaranty Fund contribution provided for in the Recovery Rule Amendments; • remove the existing auction schedule in the Framework, as it would be superseded by the Proposed Auction Procedures; and • remove the provisions in the existing Framework for forced portfolio allocation for positions for which ICE Clear Europe does not receive a formal bid from any Non-Defaulting Clearing Members, consistent with the Recovery Rule Amendments. B. Reduced Gains Distribution The amendments would also add a new section to the framework that describes the use of reduced gains distribution (‘‘RGD’’) as a recovery tool. The Framework would incorporate and summarize key aspects of the Recovery Rule Amendments relating to the use of RGD, including the methodology for applying RGD to both the house and customer accounts and the five consecutive business day limitation on the use of RGD (following which partial tear-up may be conducted). The Framework would also provide examples of the use of RGD. C. Partial Tear-Up The amended Framework would reflect the Recovery Rule Amendments that permit the Clearing House to proceed to partial tear-up as a final default tool where the Clearing House is unable to close out all of the defaulter’s remaining positions through auctions within the Clearing House’s remaining resources. In a partial tear-up, the Clearing House would terminate positions of non-defaulting Clearing Members that exactly offset those in the defaulting Clearing Member’s remaining portfolio. The Framework would also describe procedures for the timing of partial tear-up and determination of the relevant termination price, in PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 accordance with the Recovery Rule Amendments. D. Clearing Member Withdrawal The proposed amendments to the Framework would reflect the procedures for Clearing Member withdrawal as set out in the Recovery Rule Amendments, including both an ordinary course of business termination outside of a default and termination during a cooling off period. E. Clearing Service Termination The amended Framework would also reflect the Clearing House’s ability, under Rule 916 as proposed to be modified by the Recovery Rule Amendments, to terminate the CDS clearing service under specified circumstances. F. Governance Pursuant to the proposed amendments, the CDS Risk Committee would be consulted on establishing the terms of initial and secondary auctions (including defining different auction lots) and holding additional auctions and/or accepting a partial fill of an auction during the initial auction phase. The CDS Risk Committee would be consulted, with the ultimate decision to be made by the ICE Clear Europe Board (or their delegate), with respect to a number of matters, including: • Whether to use CDS Guaranty Fund contributions of non-defaulting Clearing Members to cover the cost of a direct liquidation outside of a default auction; • Whether to determine that an initial default auction has failed due to insufficient default resources; • Whether to invoke and/or continue RGD; • Whether to hold a secondary auction, whether that auction has failed and in the event of failure, whether to hold additional secondary auctions; • In a secondary auction, whether to reallocate default resources to a particular lot to permit a successful auction of that lot; • In a final secondary auction, whether to accept a ‘‘partial fill’’ to the extent of available default resources for the relevant lot; • Whether to implement a partial tear-up; • Whether to terminate the clearing service in full; and • Whether to bypass an initial default auction or bypass secondary default management action(s). G. Clarifying and Conforming Amendments The Framework would also make clarifications and fix typographical E:\FR\FM\04SEN1.SGM 04SEN1 Federal Register / Vol. 84, No. 171 / Wednesday, September 4, 2019 / Notices errors. For example, the amendments would remove an unnecessary provision that hedging traders are responsible for ensuring all hedge trades are correctly reflected in the trade capture system by end of day (as the Clearing House is responsible for such matters in accordance with its current practices); remove unnecessary details about computer support for CDS Default Committee; remove an outdated trade workflow chart; clarify, consistent with current practice, that the Head of Clearing Risk may postpone the collateral sale with respect to liquidation of a defaulting Clearing Member’s collateral without seeking advice of the CDS Default Committee; clarify that the risk team also consults with the CDS Default Committee with respect to establishing hedging positions with the non-defaulting Clearing Members, in addition to the Head of Clearing Risk; and removing certain parts of Appendix A such as an itemized example of auction position data and a standard bidding template. jbell on DSK3GLQ082PROD with NOTICES III. 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 the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the organization presenting it.6 For the reasons given below, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act 7 and Rules 17Ad–22(e)(2) and (e)(13) thereunder.8 A. Consistency With Section 17A(b)(3)(F) of the Act Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of ICE Clear Europe be designed to promote the prompt and accurate clearance and settlement of securities transactions and, to the extent applicable, derivative agreements, contracts, and transactions, to assure the safeguarding of securities and funds which are in the custody or control of ICE Clear Europe or for which it is responsible, and, in general, to protect investors and the public interest.9 As discussed above, the proposed rule change would revise the Framework in order to conform it with recent changes to the Recovery Rule Amendments. Specifically, the proposed amendments would revise the Framework to include 6 15 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 8 17 CFR 240.17Ad–22(e)(2) and (e)(13). 9 15 U.S.C. 78q–1(b)(3)(F). 7 15 VerDate Sep<11>2014 19:08 Sep 03, 2019 Jkt 247001 procedures for utilizing the default rules made available by the Recovery Rule Amendments. The Commission believes that by adding default procedures such as default auctions, RGDs, Clearing Member termination, and partial tearup, ICEEU has included in its Framework multiple methods for managing losses and preserving resources in the default context. The Commission believes that this in turn will enhance ICEEU’s ability to restore a matched book and limit its exposure to potential losses from clearing member defaults. For instance, the Commission believes that by amending the Framework to clarify that in determining auction portfolios, ICEEU will consider wrong-way risk to nondefaulting clearing members, ICEEU enables its auction procedures to cope with such risk. Additionally, by providing examples of a modified Dutch auction methodology, reflecting the two means by which customers would be able to participate in an auction, and summarizing the key distinctions between initial auctions and secondary auctions, the Commission believes that the Framework is enhanced by providing customers with enhanced detail and certainty regarding the auction procedures ICEEU would utilize under the Framework. The Commission also believes that by adding detail about RGD in the Framework, ICEEU strengthens the Framework with a tool that could limit losses in the event of a default. For instance, RGD can be utilized to obtain financial resources from non-defaulting clearing members in the event default resources are insufficient, thereby forestalling the deterioration of the clearing house’s financial condition. Likewise, revising the Framework to reflect the partial tear-up tool provides ICEEU a final recovery tool in the event that it is unable to clear out a defaulter’s remaining positions through auctions, which the Commission believes could reduce further utilization of clearing house resources. Further, the Commission believes that by including updated procedures reflecting the ability of clearing members to withdraw in both ordinary course and default situations, clearing members will be better informed regarding withdrawal procedures and ICEEU will be better prepared to manage this eventuality. Likewise, the Commission believes that, by including procedures related to clearing service termination in its Framework, ICEEU will be more prepared to address general business risk and operational risk in an orderly fashion. PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 46577 Taken together, the Commission believes that the proposed rule changes will enhance ICEEU’s ability to preserve financial resources during default and address business and operational risk in an orderly manner, which in turn is consistent with Section 17A(b)(3)(F) of the Act’s requirement for prompt and accurate settlement and safeguarding of securities and funds. For these same reasons, the Commission also believes that the proposed rule change is, in general, consistent with the protection of investors and the public interest. B. Consistency With Rule 17Ad–22(e)(2) Rule 17Ad–22(e)(2) requires, in relevant part, that ICE Clear Europe establish, implement, maintain, and enforce written policies and procedures reasonably designed to provide for governance arrangements that are clear and transparent and that specify clear and direct lines of responsibility.10 The Commission believes that the proposed rule change’s description of the CDS Risk Committee and Board roles during a default event provide for governance arrangements that are clear and transparent and that specify clear and direct lines of responsibility. Specifically, the proposed rule change would revise the Framework to provide that the CDS Risk Committee would be consulted on establishing the terms of initial and secondary auctions, holding additional auctions, and/or accepting a partial fill of an auction during the initial auction phase. Further, the CDS Risk Committee would be consulted (with final decision residing with the Board) with respect to a variety of default matters described above, including whether to use the Guaranty Fund contributions of non-defaulting clearing members to cover the liquidation costs outside of a default auction, to determine that an initial default has failed, to invoke or continue RGD, to hold a secondary auction, to reallocate default resources to a particular lot, to accept partial fills, to permit partial tear-ups, to terminate clearing services in full, or to bypass an initial or secondary auction management actions. Accordingly, the Commission believes that the proposed revisions to the Framework are reasonably designed to provide for governance arrangements that are clear and transparent and that specify clear and direct lines of responsibility. 10 17 E:\FR\FM\04SEN1.SGM CFR 240.17Ad–22(e)(2). 04SEN1 46578 Federal Register / Vol. 84, No. 171 / Wednesday, September 4, 2019 / Notices C. Consistency With Rule 17Ad– 22(e)(13) Rule 17Ad–22(e)(13) requires ICE Clear Europe to, in relevant part, establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure that it has the authority and operational capacity to take timely action to contain losses and liquidity demands and continue to meet its obligations. By amending the Framework to include the new default management and recovery tools in the Recovery Rule Amendments, the Commission believes that the proposal is consistent with Rule 17Ad–22(e)(13) because the various recovery tools give ICEEU the authority and capacity to timely contain losses and liquidity demands. In particular, by adding to the Framework a new section that authorizes the use of RGD as a recovery tool applied to customer and house accounts in the event that its remaining default resources are insufficient to ensure solvency, ICEEU would strengthen its ability to meet obligations in the event of a default by preserving its resources and limiting its obligations to clearing members. Similarly, the proposed amendments that permit ICEEU to proceed with a partial tear-up as a default tool when it is unable to close out all of a defaulter’s remaining positions through auctions would also enhance ICEEU’s ability to manage defaults by terminating positions of non-defaulters that exactly offset those in the defaulting clearing member’s remaining portfolio and restore a matched book. The Commission believes that these tools, along with the Framework amendments discussed above, would promote ICEEU’s ability to preserve its resources and timely meet its obligations in extreme default events and are therefore consistent with Rule 17Ad–22(e)(13). jbell on DSK3GLQ082PROD with NOTICES IV. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act, and in particular, with the requirements of Section 17A(b)(3)(F) of the Act 11 and Rules 17Ad–22(e)(2) and (e)(13) thereunder.12 It is therefore ordered pursuant to Section 19(b)(2) of the Act 13 that the proposed rule change (SR–ICEEU–2019– 014) be, and hereby is, approved.14 11 15 U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(2) and (e)(13). 13 15 U.S.C. 78s(b)(2). 14 In approving the proposed rule change, the Commission considered the proposal’s impact on 12 17 VerDate Sep<11>2014 19:08 Sep 03, 2019 Jkt 247001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.15 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–18998 Filed 9–3–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–86795; File No. SR–Phlx– 2019–30] Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Phlx Pricing at Options 7, Section 9, Titled Other Member Fees August 28, 2019. 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 August 22, 2019, Nasdaq PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Phlx pricing at Options 7, Section 9 titled ‘‘Other Member Fees.’’ The amendment will describe the pricing with respect to an upcoming technology infrastructure migration. While the changes proposed herein are effective upon filing, the Exchange has designated the amendments become operative on September 3, 2019. The text of the proposed rule change is available on the Exchange’s website at https://nasdaqphlx.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 efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 15 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 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 a. Purpose The Exchange proposes to amend Phlx pricing at Options 7, Section 9 titled ‘‘Other Member Fees.’’ During the month of September 2019, Phlx members will be required to transition from current FIX Ports 3 and CTI Ports 4 to new FIX Ports and CTI Ports in connection with an upcoming technology infrastructure migration. Description of Migration and Pricing Impact In connection with this migration, members will request new FIX Ports and CTI Ports during the month of September 2019, which are duplicative of the type and quantity of their current ports, at no additional cost to allow for testing of the new ports and allow for continuous connection to the match engine during the transition period.5 For example, a a Phlx member with 3 FIX Ports and 1 CTI Port on September 3, 2019 could request 3 new FIX Ports and 1 new CTI Port for the month of September 2019 at no additional cost. The Phlx member would be assessed only for the legacy market ports, in this case 3 FIX Ports and 1 CTI Port for the month of September 2019 and would not be assessed for the new ports, which 3 Financial Information eXchange or ‘‘FIX’’ is an interface that allows members and their Sponsored Customers to connect, send, and receive messages related to orders and auction orders and responses to and from the Exchange. Features include the following: (1) Execution messages; (2) order messages; and (3) risk protection triggers and cancel notifications. See Rule 1080(a)(i)(A). 4 Clearing Trade Interface or ‘‘CTI’’ is a real-time clearing trade update message that is sent to a member after an execution has occurred and contains trade details specific to that member. The information includes, among other things, the following: (i) The Clearing Member Trade Agreement or ‘‘CMTA’’ or ‘‘OCC’’ number; (ii) Exchange badge or house number; (iii) the Exchange internal firm identifier; (iv) an indicator which will distinguish electronic and non-electronically delivered orders; (v) liquidity indicators and transaction type for billing purposes; and (vi) capacity. See Rule 1070(b)(1). 5 Members would contact Market Operations to acquire new duplicative FIX Ports and CTI Ports. See Options Technical Update #2019–3. E:\FR\FM\04SEN1.SGM 04SEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 171 (Wednesday, September 4, 2019)]
[Notices]
[Pages 46575-46578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18998]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86783; File No. SR-ICEEU-2019-014]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to the ICE Clear Europe CDS 
Default Management Framework

August 28, 2019.

I. Introduction

    On June 25, 2019, ICE Clear Europe Limited (``ICE Clear Europe,'' 
the ``Clearing House'' or ``ICEEU'') 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 revise its CDS Default 
Management Framework (the ``Framework''). The proposed rule change was 
published for comment in the Federal Register on July 16, 2019.\3\ The 
Commission did not receive 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\ Securities Exchange Act Release No. 86340 (July 10, 2019), 
84 FR 33996 (July 16, 2019) (SR-ICEEU-2019-014) (``Notice'').

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[[Page 46576]]

II. Description of the Proposed Rule Change

    ICE Clear Europe's proposed rule change would amend its Framework 
to be consistent with amendments to the ICE Clear Europe Clearing Rules 
(the ``Rules'') to address default management, recovery and wind-down 
for the CDS Contract Category (``Recovery Rule Amendments'').\4\ The 
proposed changes to the Framework relate primarily to auction 
procedures, reduced gains distribution, partial tear-up, Clearing 
Member withdrawal and termination, clearing service termination, and 
governance during a default. The changes would incorporate, summarize, 
and reflect these aspects of the Recovery Rule Amendments. The proposed 
changes would also make various clarifying changes and corrections to 
typographical errors.\5\
---------------------------------------------------------------------------

    \4\ File No. SR-ICEEU-2019-003.
    \5\ Capitalized terms used but not defined herein have the 
meanings specified in the ICE Clear Europe Clearing Rules or the 
Framework. The following description of the proposed rule change is 
excerpted from the Notice, 84 FR 33996.
---------------------------------------------------------------------------

A. Auction Procedures

    In light of the Recovery Rule Amendments referenced above, the 
proposed rule change would revise several aspects of the Framework to 
adopt a set of new initial and secondary auction procedures. 
Specifically, the Framework amendments would do the following:
     Clarify that in determining the auction portfolios, the 
Clearing House would consider wrong-way risk to non-defaulting Clearing 
Members, among other listed factors;
     clarify that upon completion of the auction, submission of 
resulting trade to the Trade Information Warehouse would be done under 
normal Clearing House practices;
     Clearing Members would no longer be required to confirm to 
the Default Management Committee their intention to bid in a particular 
auction;
     no longer provide that the last bid submitted by the 
Clearing Member is the only bid considered once the bidding window is 
closed;
     set a range for the minimum bid requirement for Clearing 
Members. The Framework provides examples of the calculation of the 
minimum bid requirement for Clearing Members, based on their respective 
CDS Guaranty Fund contributions as compared to the total CDS Guaranty 
Fund size;
     provide several examples of the modified Dutch auction 
methodology used under the Proposed Auction Procedures;
     reflect the two means by which Customers would be able to 
participate in auctions under the Proposed Auction Procedures: (i) Via 
Clearing Member following mutual agreement on participation terms; and 
(ii) via direct participation following (subject to Customer 
contribution of [euro]7.5 million to default resources (in the case of 
initial auctions) and certain other requirements);
     summarize key distinctions between initial auctions and 
secondary auctions under the Proposed Auction Procedures;
     delete the existing Clearing House approach to non-
competitive bids, in light of the three tier methodology approach to 
juniorization of the Guaranty Fund contribution provided for in the 
Recovery Rule Amendments;
     remove the existing auction schedule in the Framework, as 
it would be superseded by the Proposed Auction Procedures; and
     remove the provisions in the existing Framework for forced 
portfolio allocation for positions for which ICE Clear Europe does not 
receive a formal bid from any Non-Defaulting Clearing Members, 
consistent with the Recovery Rule Amendments.

B. Reduced Gains Distribution

    The amendments would also add a new section to the framework that 
describes the use of reduced gains distribution (``RGD'') as a recovery 
tool. The Framework would incorporate and summarize key aspects of the 
Recovery Rule Amendments relating to the use of RGD, including the 
methodology for applying RGD to both the house and customer accounts 
and the five consecutive business day limitation on the use of RGD 
(following which partial tear-up may be conducted). The Framework would 
also provide examples of the use of RGD.

C. Partial Tear-Up

    The amended Framework would reflect the Recovery Rule Amendments 
that permit the Clearing House to proceed to partial tear-up as a final 
default tool where the Clearing House is unable to close out all of the 
defaulter's remaining positions through auctions within the Clearing 
House's remaining resources. In a partial tear-up, the Clearing House 
would terminate positions of non-defaulting Clearing Members that 
exactly offset those in the defaulting Clearing Member's remaining 
portfolio. The Framework would also describe procedures for the timing 
of partial tear-up and determination of the relevant termination price, 
in accordance with the Recovery Rule Amendments.

D. Clearing Member Withdrawal

    The proposed amendments to the Framework would reflect the 
procedures for Clearing Member withdrawal as set out in the Recovery 
Rule Amendments, including both an ordinary course of business 
termination outside of a default and termination during a cooling off 
period.

E. Clearing Service Termination

    The amended Framework would also reflect the Clearing House's 
ability, under Rule 916 as proposed to be modified by the Recovery Rule 
Amendments, to terminate the CDS clearing service under specified 
circumstances.

F. Governance

    Pursuant to the proposed amendments, the CDS Risk Committee would 
be consulted on establishing the terms of initial and secondary 
auctions (including defining different auction lots) and holding 
additional auctions and/or accepting a partial fill of an auction 
during the initial auction phase. The CDS Risk Committee would be 
consulted, with the ultimate decision to be made by the ICE Clear 
Europe Board (or their delegate), with respect to a number of matters, 
including:
     Whether to use CDS Guaranty Fund contributions of non-
defaulting Clearing Members to cover the cost of a direct liquidation 
outside of a default auction;
     Whether to determine that an initial default auction has 
failed due to insufficient default resources;
     Whether to invoke and/or continue RGD;
     Whether to hold a secondary auction, whether that auction 
has failed and in the event of failure, whether to hold additional 
secondary auctions;
     In a secondary auction, whether to reallocate default 
resources to a particular lot to permit a successful auction of that 
lot;
     In a final secondary auction, whether to accept a 
``partial fill'' to the extent of available default resources for the 
relevant lot;
     Whether to implement a partial tear-up;
     Whether to terminate the clearing service in full; and
     Whether to bypass an initial default auction or bypass 
secondary default management action(s).

G. Clarifying and Conforming Amendments

    The Framework would also make clarifications and fix typographical

[[Page 46577]]

errors. For example, the amendments would remove an unnecessary 
provision that hedging traders are responsible for ensuring all hedge 
trades are correctly reflected in the trade capture system by end of 
day (as the Clearing House is responsible for such matters in 
accordance with its current practices); remove unnecessary details 
about computer support for CDS Default Committee; remove an outdated 
trade workflow chart; clarify, consistent with current practice, that 
the Head of Clearing Risk may postpone the collateral sale with respect 
to liquidation of a defaulting Clearing Member's collateral without 
seeking advice of the CDS Default Committee; clarify that the risk team 
also consults with the CDS Default Committee with respect to 
establishing hedging positions with the non-defaulting Clearing 
Members, in addition to the Head of Clearing Risk; and removing certain 
parts of Appendix A such as an itemized example of auction position 
data and a standard bidding template.

III. 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 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the organization 
presenting it.\6\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \7\ and Rules 17Ad-22(e)(2) and (e)(13) thereunder.\8\
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    \6\ 15 U.S.C. 78s(b)(2)(C).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 17 CFR 240.17Ad-22(e)(2) and (e)(13).
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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 ICE Clear Europe be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and, to 
the extent applicable, derivative agreements, contracts, and 
transactions, to assure the safeguarding of securities and funds which 
are in the custody or control of ICE Clear Europe or for which it is 
responsible, and, in general, to protect investors and the public 
interest.\9\
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, the proposed rule change would revise the 
Framework in order to conform it with recent changes to the Recovery 
Rule Amendments. Specifically, the proposed amendments would revise the 
Framework to include procedures for utilizing the default rules made 
available by the Recovery Rule Amendments. The Commission believes that 
by adding default procedures such as default auctions, RGDs, Clearing 
Member termination, and partial tear-up, ICEEU has included in its 
Framework multiple methods for managing losses and preserving resources 
in the default context. The Commission believes that this in turn will 
enhance ICEEU's ability to restore a matched book and limit its 
exposure to potential losses from clearing member defaults. For 
instance, the Commission believes that by amending the Framework to 
clarify that in determining auction portfolios, ICEEU will consider 
wrong-way risk to non-defaulting clearing members, ICEEU enables its 
auction procedures to cope with such risk. Additionally, by providing 
examples of a modified Dutch auction methodology, reflecting the two 
means by which customers would be able to participate in an auction, 
and summarizing the key distinctions between initial auctions and 
secondary auctions, the Commission believes that the Framework is 
enhanced by providing customers with enhanced detail and certainty 
regarding the auction procedures ICEEU would utilize under the 
Framework.
    The Commission also believes that by adding detail about RGD in the 
Framework, ICEEU strengthens the Framework with a tool that could limit 
losses in the event of a default. For instance, RGD can be utilized to 
obtain financial resources from non-defaulting clearing members in the 
event default resources are insufficient, thereby forestalling the 
deterioration of the clearing house's financial condition. Likewise, 
revising the Framework to reflect the partial tear-up tool provides 
ICEEU a final recovery tool in the event that it is unable to clear out 
a defaulter's remaining positions through auctions, which the 
Commission believes could reduce further utilization of clearing house 
resources.
    Further, the Commission believes that by including updated 
procedures reflecting the ability of clearing members to withdraw in 
both ordinary course and default situations, clearing members will be 
better informed regarding withdrawal procedures and ICEEU will be 
better prepared to manage this eventuality. Likewise, the Commission 
believes that, by including procedures related to clearing service 
termination in its Framework, ICEEU will be more prepared to address 
general business risk and operational risk in an orderly fashion.
    Taken together, the Commission believes that the proposed rule 
changes will enhance ICEEU's ability to preserve financial resources 
during default and address business and operational risk in an orderly 
manner, which in turn is consistent with Section 17A(b)(3)(F) of the 
Act's requirement for prompt and accurate settlement and safeguarding 
of securities and funds.
    For these same reasons, the Commission also believes that the 
proposed rule change is, in general, consistent with the protection of 
investors and the public interest.

B. Consistency With Rule 17Ad-22(e)(2)

    Rule 17Ad-22(e)(2) requires, in relevant part, that ICE Clear 
Europe establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to provide for governance arrangements 
that are clear and transparent and that specify clear and direct lines 
of responsibility.\10\
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    \10\ 17 CFR 240.17Ad-22(e)(2).
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    The Commission believes that the proposed rule change's description 
of the CDS Risk Committee and Board roles during a default event 
provide for governance arrangements that are clear and transparent and 
that specify clear and direct lines of responsibility. Specifically, 
the proposed rule change would revise the Framework to provide that the 
CDS Risk Committee would be consulted on establishing the terms of 
initial and secondary auctions, holding additional auctions, and/or 
accepting a partial fill of an auction during the initial auction 
phase. Further, the CDS Risk Committee would be consulted (with final 
decision residing with the Board) with respect to a variety of default 
matters described above, including whether to use the Guaranty Fund 
contributions of non-defaulting clearing members to cover the 
liquidation costs outside of a default auction, to determine that an 
initial default has failed, to invoke or continue RGD, to hold a 
secondary auction, to reallocate default resources to a particular lot, 
to accept partial fills, to permit partial tear-ups, to terminate 
clearing services in full, or to bypass an initial or secondary auction 
management actions. Accordingly, the Commission believes that the 
proposed revisions to the Framework are reasonably designed to provide 
for governance arrangements that are clear and transparent and that 
specify clear and direct lines of responsibility.

[[Page 46578]]

C. Consistency With Rule 17Ad-22(e)(13)

    Rule 17Ad-22(e)(13) requires ICE Clear Europe to, in relevant part, 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ensure that it has the authority and 
operational capacity to take timely action to contain losses and 
liquidity demands and continue to meet its obligations.
    By amending the Framework to include the new default management and 
recovery tools in the Recovery Rule Amendments, the Commission believes 
that the proposal is consistent with Rule 17Ad-22(e)(13) because the 
various recovery tools give ICEEU the authority and capacity to timely 
contain losses and liquidity demands. In particular, by adding to the 
Framework a new section that authorizes the use of RGD as a recovery 
tool applied to customer and house accounts in the event that its 
remaining default resources are insufficient to ensure solvency, ICEEU 
would strengthen its ability to meet obligations in the event of a 
default by preserving its resources and limiting its obligations to 
clearing members. Similarly, the proposed amendments that permit ICEEU 
to proceed with a partial tear-up as a default tool when it is unable 
to close out all of a defaulter's remaining positions through auctions 
would also enhance ICEEU's ability to manage defaults by terminating 
positions of non-defaulters that exactly offset those in the defaulting 
clearing member's remaining portfolio and restore a matched book. The 
Commission believes that these tools, along with the Framework 
amendments discussed above, would promote ICEEU's ability to preserve 
its resources and timely meet its obligations in extreme default events 
and are therefore consistent with Rule 17Ad-22(e)(13).

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and in particular, with the requirements of Section 17A(b)(3)(F) of the 
Act \11\ and Rules 17Ad-22(e)(2) and (e)(13) thereunder.\12\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ 17 CFR 240.17Ad-22(e)(2) and (e)(13).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\13\ that the proposed rule change (SR-ICEEU-2019-014) be, and hereby 
is, approved.\14\
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ 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.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18998 Filed 9-3-19; 8:45 am]
 BILLING CODE 8011-01-P

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