Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC Clearing Participant Default Management Procedures and ICC Risk Management Framework, 47019-47023 [2019-19212]

Download as PDF Federal Register / Vol. 84, No. 173 / Friday, September 6, 2019 / Notices 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–EMERALD–2019–31 and should be submitted on or before September 27, 2019. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.44 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–19215 Filed 9–5–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–86838; File No. SR–ICC– 2019–008] Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC Clearing Participant Default Management Procedures and ICC Risk Management Framework August 30, 2019. I. Introduction On June 28, 2019, ICE Clear Credit LLC (‘‘ICC’’) filed with the Securities and Exchange Commission pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change (SR–ICC–2019–008) to formalize and enhance the ICC Clearing Participant (‘‘CP’’) Default Management Procedures (‘‘Default Management Procedures’’) and enhance its Risk Management Framework.3 The proposed rule change was published in the Federal Register on July 16, 2019.4 The Commission did not receive comments on the proposed rule change. For the reasons discussed below, the Commission is approving the proposed rule change. 44 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Capitalized terms used herein but not otherwise defined have the meaning set forth in the Default Management Procedures, the Risk Management Framework and ICE Clear Credit rulebook, which is available at https://www.theice.com/clear-credit/ regulation. 4 Securities Exchange Act Release No. 34–86341 (July 10, 2019), 84 FR 34021 (July 16, 2019) (SR– ICC–2019–008) (‘‘Notice’’). jspears on DSK3GMQ082PROD with NOTICES 1 15 VerDate Sep<11>2014 16:53 Sep 05, 2019 Jkt 247001 II. Description of the Proposed Rule Change Currently, ICC’s default management rules and procedures are set forth throughout several documents, including the ICC Rules, the Default Auction Procedures—Initial Default Auctions, and the Secondary Auction Procedures.5 In addition, Appendix 3 to the Risk Management Framework (‘‘Appendix 3’’) includes a high-level, general description of ICC’s overall default management procedures, with citations and cross-references throughout to the documents described above. The proposed rule change would (i) formalize and enhance ICC’s existing Default Management Procedures by creating a stand-alone document that replaces, restates, and substantially expands existing Appendix 3; (ii) within the new Default Management Procedures, provide additional detail and description with respect to ICC’s existing rules and procedures; and (iii) make related enhancements to the Risk Management Framework by incorporating appropriate references to the proposed stand-alone Default Management Procedures and making targeted changes clarifying guarantee fund replenishment and assessment contributions. The proposed Default Management Procedures would identify, describe, and provide additional detail with respect to ICC’s existing default management rules and procedures, but would not make substantive changes to any of those existing default management rules and procedures, which would still reside in the ICC Rules and other locations. A. Default Management Procedures The proposed Default Management Procedures would identify and describe ICC’s overall default management process, including (i) the actions that ICC will take to determine if a CP is in default and (ii) the actions ICC will take in connection with such a default and to close-out the defaulting CP’s positions. In describing ICC’s overall default management process, the Default Management Procedures would restate and substantially expand Appendix 3, but would not substantively change or otherwise replace ICC’s existing default management rules and procedures. Where appropriate, the proposed new stand-alone Default Management Procedures would cross-reference and cite to ICC’s existing default management rules and procedures to avoid duplication, and as discussed below, in some instances clarify and enhance them by, for example, providing additional detail, such as assigning responsibility for default management actions and adding instructions on how to perform default management actions.6 In describing the actions ICC will take to determine if a CP is in default and, subsequently, in connection with such a default, the Default Management Procedures document includes a list of defined terms that are key for default management and an overview of ICC’s default management process. In describing and providing an overview of ICC’s default management process, the proposed Default Management Procedures include descriptions of subprocesses such as identifying those clearing members that are at risk of defaulting or are in default, declaring a default, transferring a defaulter’s client portfolios to non-defaulting Futures Commission Merchants (‘‘FCM’’), consulting with the CDS Default Committee, performing Standard Default Management Actions and Secondary Default Management Actions to facilitate Close-Out, and managing default resources.7 Further, the Default Management Procedures describe how ICC and its CPs maintain operational readiness to execute the default management process, including administering the CDS Default Committee rotation process, working with customers of CPs who want to directly participate in auctions, maintaining up-to-date contact information, and testing the default management process.8 The Default Management Procedures would also describe the sub-process of monitoring CPs. As part of a counterparty monitoring program, ICC performs daily, weekly, and quarterly monitoring designed, in part, to identify Default Risk CPs.9 Additionally, the Default Management Procedures establish procedures that are specific to certain types of defaults and circumstances, including where a CP fails to meet payment obligations to ICC; a CP has filed for bankruptcy or is likely to fail to meet obligations due to dissolution, insolvency, or bankruptcy related events; a CP has not complied, or is likely not to comply, with certain limitations, conditions, or restrictions imposed on it by ICC; and a CP or its guarantor has failed, or is likely to fail, 6 Id. 7 Notice, 8 Notice, 5 Notice, PO 00000 84 FR at 34021. Frm 00088 Fmt 4703 84 FR at 34021–34023. 84 FR at 34022. 9 Id. Sfmt 4703 47019 E:\FR\FM\06SEN1.SGM 06SEN1 47020 Federal Register / Vol. 84, No. 173 / Friday, September 6, 2019 / Notices jspears on DSK3GMQ082PROD with NOTICES to meet obligations of ICC membership.10 The actions taken after the identification of a potential default are the default declaration sub-process and the Default Management Procedures list actions that the Close-Out Team performs after activation but before a default declaration, such as initial meetings to discuss circumstances surrounding the default risk, strategy for the close-out, and plans for ICC to meet upcoming payment obligations.11 The Default Management Procedures also contain procedures taken after declaration of default to prepare for a close-out.12 The Default Management Procedures also discuss the CDS Default Committee consultation sub-process. Certain matters are subject to consultation with the CDS Default Committee, including the unwinding of the defaulter’s remaining portfolio and the structure and characteristics of an auction.13 The Default Management Procedures establish procedures for convening and adjourning a CDS Default Committee meeting in addition to the actions taken at the initial CDS Default Committee meeting, which include reviewing the defaulter’s cleared portfolio, the CloseOut strategy, the plan for transferring the Porting Portfolios to Potential Receiving FCMs, and a schedule for reconvening the CDS Default Committee over the period required to complete the Close-Out.14 The ICC Risk Department and CloseOut Team work together, in consultation with the CDS Default Committee, to implement the Close-Out strategy through Standard Default Management Actions.15 Specifically, the Default Management Procedures incorporate instructions on executing Initial Cover Transactions by auction and bilaterally, conducting Initial Default Auctions, and executing bilateral direct liquidation transactions in the market to liquidate positions.16 The document further assigns responsibility for tracking the position changes that result from the movement of positions or the creation of new positions.17 In addition to Standard Default Management Actions, ICC may take Secondary Default Management Actions to facilitate the Close-Out where default resources are significantly depleted or no default resources remain.18 ICC may call for assessment contributions and the Default Management Procedures discuss the procedures for calling for assessment contributions and initiating a Cooling-Off Period.19 During the Cooling-Off Period, the Risk Department and Close-Out Team, in consultation with the CDS Default Committee, continue to try to liquidate the defaulter’s remaining portfolio through Secondary Auctions.20 If available default resources are exhausted and ICC has not returned to a matched book, the Close-Out Team uses reasonable efforts to consult with the Risk Committee and then seeks the Board’s decision on whether to enter a Loss Distribution Period, execute a partial tear-up, or terminate clearing services, which are detailed in the Default Management Procedures.21 Further, the Default Management Procedures provide an overview of the post-default porting sub-process.22 The Risk Department, in consultation with the CDS Default Committee, determine which Porting Portfolios to try to transfer to Potential Receiving FCMs.23 The Default Management Procedures also discuss specific procedures for post-default porting in the case of a bankruptcy-related default, which require ICC to communicate and coordinate with the defaulter’s trustee in bankruptcy.24 The Default Management Procedures set forth the default resource management sub-process.25 The document includes procedures for the identification and execution of collateral management activities that are necessary for ICC to meet upcoming payment obligations.26 The Close-Out Team meets daily during the Close-Out Period to review the available liquid resources and determine how to meet upcoming payment obligations.27 The Chief Operating Officer and Head of Treasury coordinate the execution of collateral management activities, including liquidating non-cash collateral in the defaulter’s house and/ or client accounts or utilizing ICC’s committed FX or committed repo facilities.28 Further, the Default Management Procedures describe the maintenance of a Default Management Ledger, which serves as a record to facilitate decision making and implement ICC’s default waterfall; the discussion points during the Close-Out Team’s daily meeting during the CloseOut Period; and the application of any special payments during the Close-Out Period.29 B. Risk Management Framework ICC is proposing related default management enhancements to the Risk Management Framework. Specifically, ICC proposes to incorporate a reference to the Default Management Procedures in the ‘Governance and Organization’ section of the Risk Management Framework to specify that the Default Management Procedures contain details regarding default management roles and responsibilities of the Board, ICC management, and relevant committees.30 Additionally, ICC proposes changes to the ‘Waterfall Level 6: GF Replenishment’ sub-section to more clearly describe CPs’ obligations with respect to replenishment and assessment contributions to the Guarantee Fund (‘‘GF’’). The proposed edits provide additional detail regarding the aggregate liability of CPs for replenishment and assessment contributions. Specifically, the edits clarify that if the cap on the additional GF contributions is reached, ICC may apply additional Initial Margin (‘‘IM’’) requirements if necessary to maintain compliance with regulatory financial resources requirements.31 The proposed changes further discuss how the additional IM requirements are computed and communicated to CPs.32 ICC also proposes to clarify the maximum contribution of a retiring CP that has given notice of its intent to terminate its CP status.33 Finally, because the proposed Default Management Procedures would restate and substantially expand existing Appendix 3 of the Risk Management Framework, ICC proposes to remove Appendix 3 and replace a reference to it in the Risk Management Framework with a reference to the Default Management Procedures instead.34 III. Discussion and Commission Findings Section 19(b)(2)(C) of the Act directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that such 18 Id. 19 Id. 20 Id. 10 Id. 21 Id. 11 Id. 22 Notice, 12 Id. 23 Id. 29 Id. 13 Id. 24 Id. 30 Id. 14 Id. 25 Id. 31 Id. 15 Id. 26 Id. 32 Id. 16 Id. 27 Id. 33 Id. 17 Id. 28 Id. 34 Id. VerDate Sep<11>2014 16:53 Sep 05, 2019 Jkt 247001 PO 00000 84 FR at 34023. Frm 00089 Fmt 4703 Sfmt 4703 E:\FR\FM\06SEN1.SGM 06SEN1 Federal Register / Vol. 84, No. 173 / Friday, September 6, 2019 / Notices proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization.35 For the reasons given below, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act 36 and Rules 17Ad–22(b)(3),37 17Ad–22(d)(4),38 17Ad–22(d)(8),39 and 17Ad–22(d)(11) 40 thereunder. jspears on DSK3GMQ082PROD with NOTICES A. Consistency With Section 17A(b)(3)(F) of the Act Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of ICC be designed to promote the prompt and accurate clearance and settlement of securities transactions and, to the extent applicable, derivative agreements, contracts, and transactions, as well as to assure the safeguarding of securities and funds which are in the custody or control of ICC or for which it is responsible, and, in general, to protect investors and the public interest.41 The Commission believes that by creating a stand-alone document that (i) formalizes and enhances ICC’s existing default management procedures; (ii) identifies and cross-references the existing default management rules and procedures that currently are located in several other ICC documents; and (iii) describes the sub-processes involved in, and parties responsible for, those default management procedures, the proposed rule change would provide additional clarity, transparency, and detail with respect to ICC’s default management procedures, which in turn would help promote prompt and accurate clearance settlement and the safeguarding of securities and funds in ICC’s control. Specifically, the Default Management Procedures describe several default management subprocesses and the parties responsible. As described above, ICC consults with the CDS Default Committee, whose membership consists of experienced trading personnel at CDS clearing participants, prior to taking default actions. Further, the Default Management Procedures describe that the ICC President may activate the team responsible for overseeing the default management process, the Close-Out Team, as well as the various processes for managing default such as the 35 15 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 37 17 CFR 240.17Ad–22(b)(3). 38 17 CFR 240.17Ad–22(d)(4). 39 17 CFR 240.17Ad–22(d)(8). 40 17 CFR 240.17Ad–22(d)(11). 41 15 U.S.C. 78q–1(b)(3)(F). 36 15 VerDate Sep<11>2014 16:53 Sep 05, 2019 counterparty monitoring process, default declaration process, and the standard and secondary default management actions. The Commission believes that these processes provide ICC the ability to regularly (daily, weekly, and quarterly) monitor those clearing participants at risk of default, develop default management strategies (standard or secondary), and execute default management actions (i.e., auctions, tear-ups). The Commission believes that this formalized process for dealing with defaults before and after their declaration prepares ICC with assigned personnel and requisite strategies for effectively managing defaults. This level of detail in turn could help enhance ICC’s ability to manage losses and thus maintain adequate financial resources necessary to promptly and accurately clear securities transactions and safeguarding of securities and funds in its custody and control. Similarly, the Commission believes that the proposed changes to the Risk Management Framework support ICC’s ability to maintain adequate financial resources. As described above, the changes to the Risk Management Framework more clearly describe CPs’ obligations with respect to replenishment and assessment contributions to the guarantee fund, and provide additional detail regarding the aggregate liability of CPs for replenishment and assessment contributions. Further, the proposed changes clarify that if the cap on the additional GF contributions is reached, ICC may apply additional IM requirements if necessary to maintain compliance with regulatory financial resources requirements, and further discuss how the additional IM requirements are computed and communicated to CPs. ICC also proposes to clarify the maximum contribution of a retiring CP that has given notice of its intent to terminate its CP status. The Commission believes that by revising the Risk Management Framework with this additional detail, ICC will ensure that it has the procedures in place to obtain additional resources when necessary, thereby strengthening its financial position and ability to promptly and accurately clear securities transactions and safeguard funds and securities in its custody or control. Therefore, the Commission believes that the proposed rule changes are consistent with Section 17A(b)(3)(F) of the Act. B. Consistency With Rule 17Ad–22(b)(3) Rule 17Ad–22(b)(3) requires that ICC establish, implement, maintain and Jkt 247001 PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 47021 enforce written policies and procedures reasonably designed to maintain sufficient financial resources to withstand, at a minimum, a default by the two participant families to which it has the largest exposures in extreme but plausible market conditions, in its capacity as a central counterparty for security-based swaps.42 As described above, the proposed rule change would provide detailed instructions for managing defaults. Specifically, the Default Management Procedures discuss the responsible parties and actions taken prior and in response to a default. The proposed rule change describes ICC’s counterparty monitoring program in which it performs daily, weekly, and quarterly monitoring designed, in part, to identify Default Risk CPs. The Commission believes that by formalizing procedures in this way ICC strengthens its ongoing system for detecting and coping with financial stress brought on by CP defaults and enhances its ability to manage its financial resources to cope with events such as a default by the two participant families to which it has the largest exposures in extreme but plausible market conditions. Additionally, as stated above, ICC’s Default Management Procedures would describe a variety of tools for dealing with defaults, for example, unwinding a defaulter’s position and structuring an auction or executing bilateral direct liquidation transactions in the market; calling for assessment contributions from CPs to the guarantee fund; implementing reduced gains distributions; or executing a partial tearup when available default resources are exhausted. Further, the Default Management Procedures set forth the process for default resource management, which involves the identification and execution of collateral management necessary for meeting upcoming payment obligations. As mentioned above, liquid resources are reviewed and decisions are made as to whether to liquidate non-cash collateral in the defaulter’s house and/ or client accounts or to use ICC’s committed FX and repo facilities. The Commission believes that these procedures offer tools to strengthen ICC’s ability to manage its financial resources and withstand the pressures of defaults. Consequently, the Commission believes that the proposed rule change as relates to the Default Management Procedures is consistent with the obligations of Rule 17Ad– 22(b)(3). 42 17 E:\FR\FM\06SEN1.SGM CFR 240.17Ad–22(b)(3). 06SEN1 47022 Federal Register / Vol. 84, No. 173 / Friday, September 6, 2019 / Notices jspears on DSK3GMQ082PROD with NOTICES Similarly, the Commission believes that the proposed enhancements to the Risk Management Framework will strengthen ICC’s ability to maintain sufficient financial resources to withstand a default by the two participant families to which it has the largest exposures in extreme but plausible market conditions. In particular, as described above, ICC proposes to more clearly describe a CP’s obligations with respect to replenishment and assessment contributions to the GF. The proposed edits provide additional detail regarding the aggregate liability of CPs for replenishment and assessment contributions. If the cap on the additional GF contributions is reached, ICC may apply additional IM requirements if necessary to maintain compliance with regulatory financial resources requirements. The proposed changes further discuss how the additional IM requirements are computed and communicated to CPs. ICC also proposes to clarify the maximum contribution of a retiring CP that has given notice of its intent to terminate its CP status. The Commission believes that these clarifications will enhance ICC’s ability to obtain additional financial resources by making parties aware of their financial liabilities and will in turn help it withstand a default by the two participant families to which it has the largest exposures in extreme but plausible market conditions. The Commission believes, therefore, that the changes to the Risk Management Framework are consistent with Rule 17Ad–22(b)(3). C. Consistency With Rule 17Ad–22(d)(4) Rule 17Ad–22(d)(4) requires ICC to establish, implement, maintain and enforce written policies and procedures reasonably designed to identify sources of operational risk and minimize them through the development of appropriate systems, controls, and procedures; implement systems that are reliable, resilient and secure, and have adequate scalable capacity; and have business continuity plans that allow for timely recovery of operations and fulfillment of a clearing agency’s obligations.43 As discussed above, the Default Management Procedures describe how ICC conducts monitoring of CPs on a daily, weekly, and quarterly basis. The Commission believes that the activities, as well as others set forth in the Default Management Procedures, help ICC and its CPs maintain operational readiness to execute the default management process. For example, the document sets forth ICC’s processes for carrying out an annual Default Test, reviewing the results of the annual Default Test, and maintaining up-to-date contact information for default contacts. Such testing and preparation allow ICC to identify sources of operational risk and minimize them through the development of appropriate systems, controls, and procedures and implement systems that are reliable, resilient and secure, and have adequate scalable capacity. Consequently, the Commission believes that the proposed rule change is consistent with Rule 17Ad–22(d)(4). D. Consistency With Rule 17Ad–22(d)(8) Rule 17Ad–22(d)(8) requires, in relevant part, that 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 to support the objectives of owners and participants, and to promote the effectiveness of the clearing agency’s risk management procedures.44 As described above, the Default Management Procedures discuss the role of various parties, including ICC’s President, Risk Committee, CDS Default Committee, and Board. In particular, upon identifying default risk CPs, the ICC President may take no action or activate the team responsible for overseeing the default management process, which is composed of ICC management, the ICC Risk Oversight Officer, and the most senior member of the Treasury Department and which comprise the Close-Out Team, to move forward with the process of declaring a default. Further, if available default resources are exhausted and ICC has not returned to a matched book, the CloseOut Team uses reasonable efforts to consult with the Risk Committee and then seeks the Board’s decision on whether to engage in secondary default management actions such as entering a Loss Distribution Period, executing a partial tear-up, or terminating clearing services. The Default Management Procedures also provide an overview of the post-default porting sub-process in which the Risk Department, in consultation with the CDS Default Committee, determines which Porting Portfolios to try to transfer. The Commission believes that these procedures represent comprehensive governance arrangements that are clear and transparent and promote the effectiveness of the clearing agency’s risk management procedures by laying out various responsibilities throughout the default management process. Therefore, the Commission believes that the rule proposal is consistent with Rule 17Ad–22(d)(8). E. Consistency With Rule 17Ad– 22(d)(11) Rule 17Ad–22(d)(11) requires ICC to establish, implement, maintain and enforce written policies and procedures reasonably designed to make key aspects of the clearing agency’s default procedures publicly available and establish default procedures that ensure that the clearing agency can take timely action to contain losses and liquidity pressures and to continue meeting its obligations in the event of a participant default.45 The Commission believes that because ICC’s default management rules and procedures contained in the ICC Rules, the Default Auction Procedures— Initial Default Auctions, and the Secondary Auction Procedures are publically available on ICC’s website and because the proposed Default Management Procedures clarify and augment ICC’s existing rules and procedures relating to default management, the proposed rule change is consistent with the requirement to make key aspects of the clearing agency’s default procedures publicly available. Additionally, because of the monitoring and governance procedures prior to and directly after a default described above, the Commission believes that the proposed rule changes are consistent with the requirement to establish default procedures that ensure that the clearing agency can take timely action to contain losses and liquidity pressures and to continue meeting its obligations in the event of a participant default. The Commission believes that the frequency of the monitoring system enhances ICC’s ability to timely respond to default risk. Consequently, the Commission believes that the proposed rule change is consistent with Rule 17Ad–22(d)(11). 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’’ 46 and Rules 17Ad–22(b)(3), 17Ad–22(d)(4), 45 17 43 17 CFR 240.17Ad–22(d)(4). VerDate Sep<11>2014 17:46 Sep 05, 2019 44 17 Jkt 247001 PO 00000 CFR 240.17Ad–22(d)(8). Frm 00091 Fmt 4703 Sfmt 4703 46 15 E:\FR\FM\06SEN1.SGM CFR 240.17Ad–22(d)(11). U.S.C. 78q–1(b)(3)(F). 06SEN1 Federal Register / Vol. 84, No. 173 / Friday, September 6, 2019 / Notices https://nasdaqphlx.cchwallstreet.com/, at the principal office of the Exchange, and at the Commission’s Public Reference Room. 17Ad–22(d)(8), and 17Ad–22(d)(11) thereunder.47 It is therefore ordered pursuant to Section 19(b)(2) of the Act 48 that the proposed rule change (SR–ICC–2019– 008) be, and hereby is, approved.49 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.50 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–19212 Filed 9–5–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–86844; File No. SR–Phlx– 2019–31] Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify the Manner in Which It Calculates Volume, Liquidity and Quoting Thresholds Applicable To Billing on the Exchange in Relation to a Systems Issue Experienced by SIAC on August 12, 2019 August 30, 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 28, 2019, Nasdaq PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. jspears on DSK3GMQ082PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to modify the manner in which it calculates volume, liquidity and quoting thresholds applicable to billing on the Exchange in relation to a systems issue experienced by SIAC on August 12, 2019, which impacted trade and quote dissemination across all markets. The text of the proposed rule change is available on the Exchange’s website at 47 17 CFR 240.17Ad–22(b)(3), 17 CFR 240.17Ad– 22(d)(4), (8), and (11). 48 15 U.S.C. 78s(b)(2). 49 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). 50 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. VerDate Sep<11>2014 16:53 Sep 05, 2019 Jkt 247001 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to modify the manner in which it calculates volume, liquidity and quoting thresholds applicable to billing on the Exchange in relation to the August 12, 2019 systems issue, which impacted trade and quote dissemination across all markets.3 Specifically, on August 12, 2019, SIAC 4 determined to fail over to back up servers after receiving indications that its primary systems had become unstable, causing connectivity disruptions. The fail over to secondary systems failed to cure the problem, resulting in market-wide issues with the Consolidated Quote System and the Consolidated Tape System, including gaps in the intra-day trades, quotes, and other messages that were attempted to be sent to it. Consequently, the accuracy of the transaction and quotation data for August 12, 2019 is unknown. As a result, the Exchange is unable to accurately calculate member transaction fees and credits, including calculations for the Exchange’s incentive programs, since several of the Exchange’s transaction fees and credits are based on trading, quoting and liquidity thresholds that members must satisfy in order to qualify for the particular rates (e.g., percentage of Consolidated Volume, Average Daily Volume, and time at the NBBO). The Exchange 3 See https://www.ctaplan.com/ alerts#110000144324. 4 SIAC is the operator of the Consolidated Quote System and Consolidated Tape System, which disseminate real-time trade and quote information in New York Stock Exchange LLC (Network A) and Bats, NYSE Arca, NYSE American and other regional exchange (Network B) listed securities. PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 47023 therefore proposes to exclude August 12, 2019 from all tier calculations described in Equity 7 5 under the heading Order Execution and Routing in order to reasonably ensure that a member that would otherwise qualify for a particular threshold during August 2019, and the corresponding transaction rate and/or incentive, would not be negatively impacted by the August 12, 2019 systems issue. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act,6 in general, and furthers the objectives of Sections 6(b)(4) and (5) of the Act,7 in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest. In this regard, because the accuracy of the transaction and quotation data disseminated by SIAC for August 12, 2019 is unknown, the Exchange believes that it is reasonable to exclude August 12, 2019 from all tier calculations described in Equity 7, which would reasonably ensure that a member’s qualification for various pricing programs would be based on the data that the Exchange believes is accurate. The Exchange also believes that the proposed rule change is reasonable because the SIAC systems issue that caused inaccurate transaction data was not within the Exchange’s control nor can the Exchange correct or otherwise remediate the issue. Including August 12, 2019 transaction and quotation data for purposes of tier calculations described in Equity 7 under the heading Order Execution and Routing could result in inaccurate determinations for member rates based on the extent to which their transactions and quotations were impacted by the August 12, 2019 event in comparison to the overall inaccuracies in the data provided by SIAC for that date. Consequently, the Exchange believes that the proposed change is equitable and not unfairly discriminatory because it would result in all market participants on the Exchange being treated equally by excluding August 12, 2019 from all tier calculations described in the Order Execution and Routing section under Equity 7. Last, excluding August 12, 2019 from all tier calculations described 5 The Order Execution and Routing section under Equity 7 provides the schedule of fees and credits applicable to the PSX’s order execution and routing services. 6 15 U.S.C. 78f(b). 7 15 U.S.C. 78f(b)(4) and (5). E:\FR\FM\06SEN1.SGM 06SEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 173 (Friday, September 6, 2019)]
[Notices]
[Pages 47019-47023]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19212]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86838; File No. SR-ICC-2019-008]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC Clearing Participant 
Default Management Procedures and ICC Risk Management Framework

August 30, 2019.

I. Introduction

    On June 28, 2019, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change (SR-ICC-2019-008) to formalize 
and enhance the ICC Clearing Participant (``CP'') Default Management 
Procedures (``Default Management Procedures'') and enhance its Risk 
Management Framework.\3\ The proposed rule change was published in the 
Federal Register on July 16, 2019.\4\ The Commission did not receive 
comments on the proposed rule change. For the reasons discussed below, 
the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Capitalized terms used herein but not otherwise defined have 
the meaning set forth in the Default Management Procedures, the Risk 
Management Framework and ICE Clear Credit rulebook, which is 
available at https://www.theice.com/clear-credit/regulation.
    \4\ Securities Exchange Act Release No. 34-86341 (July 10, 
2019), 84 FR 34021 (July 16, 2019) (SR-ICC-2019-008) (``Notice'').
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II. Description of the Proposed Rule Change

    Currently, ICC's default management rules and procedures are set 
forth throughout several documents, including the ICC Rules, the 
Default Auction Procedures--Initial Default Auctions, and the Secondary 
Auction Procedures.\5\ In addition, Appendix 3 to the Risk Management 
Framework (``Appendix 3'') includes a high-level, general description 
of ICC's overall default management procedures, with citations and 
cross-references throughout to the documents described above. The 
proposed rule change would (i) formalize and enhance ICC's existing 
Default Management Procedures by creating a stand-alone document that 
replaces, restates, and substantially expands existing Appendix 3; (ii) 
within the new Default Management Procedures, provide additional detail 
and description with respect to ICC's existing rules and procedures; 
and (iii) make related enhancements to the Risk Management Framework by 
incorporating appropriate references to the proposed stand-alone 
Default Management Procedures and making targeted changes clarifying 
guarantee fund replenishment and assessment contributions. The proposed 
Default Management Procedures would identify, describe, and provide 
additional detail with respect to ICC's existing default management 
rules and procedures, but would not make substantive changes to any of 
those existing default management rules and procedures, which would 
still reside in the ICC Rules and other locations.
---------------------------------------------------------------------------

    \5\ Notice, 84 FR at 34021.
---------------------------------------------------------------------------

A. Default Management Procedures

    The proposed Default Management Procedures would identify and 
describe ICC's overall default management process, including (i) the 
actions that ICC will take to determine if a CP is in default and (ii) 
the actions ICC will take in connection with such a default and to 
close-out the defaulting CP's positions. In describing ICC's overall 
default management process, the Default Management Procedures would 
restate and substantially expand Appendix 3, but would not 
substantively change or otherwise replace ICC's existing default 
management rules and procedures. Where appropriate, the proposed new 
stand-alone Default Management Procedures would cross-reference and 
cite to ICC's existing default management rules and procedures to avoid 
duplication, and as discussed below, in some instances clarify and 
enhance them by, for example, providing additional detail, such as 
assigning responsibility for default management actions and adding 
instructions on how to perform default management actions.\6\ In 
describing the actions ICC will take to determine if a CP is in default 
and, subsequently, in connection with such a default, the Default 
Management Procedures document includes a list of defined terms that 
are key for default management and an overview of ICC's default 
management process. In describing and providing an overview of ICC's 
default management process, the proposed Default Management Procedures 
include descriptions of sub-processes such as identifying those 
clearing members that are at risk of defaulting or are in default, 
declaring a default, transferring a defaulter's client portfolios to 
non-defaulting Futures Commission Merchants (``FCM''), consulting with 
the CDS Default Committee, performing Standard Default Management 
Actions and Secondary Default Management Actions to facilitate Close-
Out, and managing default resources.\7\ Further, the Default Management 
Procedures describe how ICC and its CPs maintain operational readiness 
to execute the default management process, including administering the 
CDS Default Committee rotation process, working with customers of CPs 
who want to directly participate in auctions, maintaining up-to-date 
contact information, and testing the default management process.\8\
---------------------------------------------------------------------------

    \6\ Id.
    \7\ Notice, 84 FR at 34021-34023.
    \8\ Notice, 84 FR at 34022.
---------------------------------------------------------------------------

    The Default Management Procedures would also describe the sub-
process of monitoring CPs. As part of a counterparty monitoring 
program, ICC performs daily, weekly, and quarterly monitoring designed, 
in part, to identify Default Risk CPs.\9\ Additionally, the Default 
Management Procedures establish procedures that are specific to certain 
types of defaults and circumstances, including where a CP fails to meet 
payment obligations to ICC; a CP has filed for bankruptcy or is likely 
to fail to meet obligations due to dissolution, insolvency, or 
bankruptcy related events; a CP has not complied, or is likely not to 
comply, with certain limitations, conditions, or restrictions imposed 
on it by ICC; and a CP or its guarantor has failed, or is likely to 
fail,

[[Page 47020]]

to meet obligations of ICC membership.\10\
---------------------------------------------------------------------------

    \9\ Id.
    \10\ Id.
---------------------------------------------------------------------------

    The actions taken after the identification of a potential default 
are the default declaration sub-process and the Default Management 
Procedures list actions that the Close-Out Team performs after 
activation but before a default declaration, such as initial meetings 
to discuss circumstances surrounding the default risk, strategy for the 
close-out, and plans for ICC to meet upcoming payment obligations.\11\ 
The Default Management Procedures also contain procedures taken after 
declaration of default to prepare for a close-out.\12\
---------------------------------------------------------------------------

    \11\ Id.
    \12\ Id.
---------------------------------------------------------------------------

    The Default Management Procedures also discuss the CDS Default 
Committee consultation sub-process. Certain matters are subject to 
consultation with the CDS Default Committee, including the unwinding of 
the defaulter's remaining portfolio and the structure and 
characteristics of an auction.\13\ The Default Management Procedures 
establish procedures for convening and adjourning a CDS Default 
Committee meeting in addition to the actions taken at the initial CDS 
Default Committee meeting, which include reviewing the defaulter's 
cleared portfolio, the Close-Out strategy, the plan for transferring 
the Porting Portfolios to Potential Receiving FCMs, and a schedule for 
re-convening the CDS Default Committee over the period required to 
complete the Close-Out.\14\
---------------------------------------------------------------------------

    \13\ Id.
    \14\ Id.
---------------------------------------------------------------------------

    The ICC Risk Department and Close-Out Team work together, in 
consultation with the CDS Default Committee, to implement the Close-Out 
strategy through Standard Default Management Actions.\15\ Specifically, 
the Default Management Procedures incorporate instructions on executing 
Initial Cover Transactions by auction and bilaterally, conducting 
Initial Default Auctions, and executing bilateral direct liquidation 
transactions in the market to liquidate positions.\16\ The document 
further assigns responsibility for tracking the position changes that 
result from the movement of positions or the creation of new 
positions.\17\
---------------------------------------------------------------------------

    \15\ Id.
    \16\ Id.
    \17\ Id.
---------------------------------------------------------------------------

    In addition to Standard Default Management Actions, ICC may take 
Secondary Default Management Actions to facilitate the Close-Out where 
default resources are significantly depleted or no default resources 
remain.\18\ ICC may call for assessment contributions and the Default 
Management Procedures discuss the procedures for calling for assessment 
contributions and initiating a Cooling-Off Period.\19\ During the 
Cooling-Off Period, the Risk Department and Close-Out Team, in 
consultation with the CDS Default Committee, continue to try to 
liquidate the defaulter's remaining portfolio through Secondary 
Auctions.\20\ If available default resources are exhausted and ICC has 
not returned to a matched book, the Close-Out Team uses reasonable 
efforts to consult with the Risk Committee and then seeks the Board's 
decision on whether to enter a Loss Distribution Period, execute a 
partial tear-up, or terminate clearing services, which are detailed in 
the Default Management Procedures.\21\
---------------------------------------------------------------------------

    \18\ Id.
    \19\ Id.
    \20\ Id.
    \21\ Id.
---------------------------------------------------------------------------

    Further, the Default Management Procedures provide an overview of 
the post-default porting sub-process.\22\ The Risk Department, in 
consultation with the CDS Default Committee, determine which Porting 
Portfolios to try to transfer to Potential Receiving FCMs.\23\ The 
Default Management Procedures also discuss specific procedures for 
post-default porting in the case of a bankruptcy-related default, which 
require ICC to communicate and coordinate with the defaulter's trustee 
in bankruptcy.\24\
---------------------------------------------------------------------------

    \22\ Notice, 84 FR at 34023.
    \23\ Id.
    \24\ Id.
---------------------------------------------------------------------------

    The Default Management Procedures set forth the default resource 
management sub-process.\25\ The document includes procedures for the 
identification and execution of collateral management activities that 
are necessary for ICC to meet upcoming payment obligations.\26\ The 
Close-Out Team meets daily during the Close-Out Period to review the 
available liquid resources and determine how to meet upcoming payment 
obligations.\27\ The Chief Operating Officer and Head of Treasury 
coordinate the execution of collateral management activities, including 
liquidating non-cash collateral in the defaulter's house and/or client 
accounts or utilizing ICC's committed FX or committed repo 
facilities.\28\ Further, the Default Management Procedures describe the 
maintenance of a Default Management Ledger, which serves as a record to 
facilitate decision making and implement ICC's default waterfall; the 
discussion points during the Close-Out Team's daily meeting during the 
Close-Out Period; and the application of any special payments during 
the Close-Out Period.\29\
---------------------------------------------------------------------------

    \25\ Id.
    \26\ Id.
    \27\ Id.
    \28\ Id.
    \29\ Id.
---------------------------------------------------------------------------

B. Risk Management Framework

    ICC is proposing related default management enhancements to the 
Risk Management Framework. Specifically, ICC proposes to incorporate a 
reference to the Default Management Procedures in the `Governance and 
Organization' section of the Risk Management Framework to specify that 
the Default Management Procedures contain details regarding default 
management roles and responsibilities of the Board, ICC management, and 
relevant committees.\30\ Additionally, ICC proposes changes to the 
`Waterfall Level 6: GF Replenishment' sub-section to more clearly 
describe CPs' obligations with respect to replenishment and assessment 
contributions to the Guarantee Fund (``GF''). The proposed edits 
provide additional detail regarding the aggregate liability of CPs for 
replenishment and assessment contributions. Specifically, the edits 
clarify that if the cap on the additional GF contributions is reached, 
ICC may apply additional Initial Margin (``IM'') requirements if 
necessary to maintain compliance with regulatory financial resources 
requirements.\31\ The proposed changes further discuss how the 
additional IM requirements are computed and communicated to CPs.\32\ 
ICC also proposes to clarify the maximum contribution of a retiring CP 
that has given notice of its intent to terminate its CP status.\33\ 
Finally, because the proposed Default Management Procedures would 
restate and substantially expand existing Appendix 3 of the Risk 
Management Framework, ICC proposes to remove Appendix 3 and replace a 
reference to it in the Risk Management Framework with a reference to 
the Default Management Procedures instead.\34\
---------------------------------------------------------------------------

    \30\ Id.
    \31\ Id.
    \32\ Id.
    \33\ Id.
    \34\ Id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such

[[Page 47021]]

proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to such 
organization.\35\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \36\ and Rules 17Ad-22(b)(3),\37\ 17Ad-22(d)(4),\38\ 17Ad-
22(d)(8),\39\ and 17Ad-22(d)(11) \40\ thereunder.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78s(b)(2)(C).
    \36\ 15 U.S.C. 78q-1(b)(3)(F).
    \37\ 17 CFR 240.17Ad-22(b)(3).
    \38\ 17 CFR 240.17Ad-22(d)(4).
    \39\ 17 CFR 240.17Ad-22(d)(8).
    \40\ 17 CFR 240.17Ad-22(d)(11).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of ICC be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions, as well 
as to assure the safeguarding of securities and funds which are in the 
custody or control of ICC or for which it is responsible, and, in 
general, to protect investors and the public interest.\41\
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes that by creating a stand-alone document 
that (i) formalizes and enhances ICC's existing default management 
procedures; (ii) identifies and cross-references the existing default 
management rules and procedures that currently are located in several 
other ICC documents; and (iii) describes the sub-processes involved in, 
and parties responsible for, those default management procedures, the 
proposed rule change would provide additional clarity, transparency, 
and detail with respect to ICC's default management procedures, which 
in turn would help promote prompt and accurate clearance settlement and 
the safeguarding of securities and funds in ICC's control. 
Specifically, the Default Management Procedures describe several 
default management sub-processes and the parties responsible. As 
described above, ICC consults with the CDS Default Committee, whose 
membership consists of experienced trading personnel at CDS clearing 
participants, prior to taking default actions. Further, the Default 
Management Procedures describe that the ICC President may activate the 
team responsible for overseeing the default management process, the 
Close-Out Team, as well as the various processes for managing default 
such as the counterparty monitoring process, default declaration 
process, and the standard and secondary default management actions. The 
Commission believes that these processes provide ICC the ability to 
regularly (daily, weekly, and quarterly) monitor those clearing 
participants at risk of default, develop default management strategies 
(standard or secondary), and execute default management actions (i.e., 
auctions, tear-ups). The Commission believes that this formalized 
process for dealing with defaults before and after their declaration 
prepares ICC with assigned personnel and requisite strategies for 
effectively managing defaults. This level of detail in turn could help 
enhance ICC's ability to manage losses and thus maintain adequate 
financial resources necessary to promptly and accurately clear 
securities transactions and safeguarding of securities and funds in its 
custody and control.
    Similarly, the Commission believes that the proposed changes to the 
Risk Management Framework support ICC's ability to maintain adequate 
financial resources. As described above, the changes to the Risk 
Management Framework more clearly describe CPs' obligations with 
respect to replenishment and assessment contributions to the guarantee 
fund, and provide additional detail regarding the aggregate liability 
of CPs for replenishment and assessment contributions. Further, the 
proposed changes clarify that if the cap on the additional GF 
contributions is reached, ICC may apply additional IM requirements if 
necessary to maintain compliance with regulatory financial resources 
requirements, and further discuss how the additional IM requirements 
are computed and communicated to CPs. ICC also proposes to clarify the 
maximum contribution of a retiring CP that has given notice of its 
intent to terminate its CP status. The Commission believes that by 
revising the Risk Management Framework with this additional detail, ICC 
will ensure that it has the procedures in place to obtain additional 
resources when necessary, thereby strengthening its financial position 
and ability to promptly and accurately clear securities transactions 
and safeguard funds and securities in its custody or control. 
Therefore, the Commission believes that the proposed rule changes are 
consistent with Section 17A(b)(3)(F) of the Act.

B. Consistency With Rule 17Ad-22(b)(3)

    Rule 17Ad-22(b)(3) requires that ICC 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 participant families to which it has the largest 
exposures in extreme but plausible market conditions, in its capacity 
as a central counterparty for security-based swaps.\42\
---------------------------------------------------------------------------

    \42\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------

    As described above, the proposed rule change would provide detailed 
instructions for managing defaults. Specifically, the Default 
Management Procedures discuss the responsible parties and actions taken 
prior and in response to a default. The proposed rule change describes 
ICC's counterparty monitoring program in which it performs daily, 
weekly, and quarterly monitoring designed, in part, to identify Default 
Risk CPs. The Commission believes that by formalizing procedures in 
this way ICC strengthens its ongoing system for detecting and coping 
with financial stress brought on by CP defaults and enhances its 
ability to manage its financial resources to cope with events such as a 
default by the two participant families to which it has the largest 
exposures in extreme but plausible market conditions.
    Additionally, as stated above, ICC's Default Management Procedures 
would describe a variety of tools for dealing with defaults, for 
example, unwinding a defaulter's position and structuring an auction or 
executing bilateral direct liquidation transactions in the market; 
calling for assessment contributions from CPs to the guarantee fund; 
implementing reduced gains distributions; or executing a partial tear-
up when available default resources are exhausted. Further, the Default 
Management Procedures set forth the process for default resource 
management, which involves the identification and execution of 
collateral management necessary for meeting upcoming payment 
obligations. As mentioned above, liquid resources are reviewed and 
decisions are made as to whether to liquidate non-cash collateral in 
the defaulter's house and/or client accounts or to use ICC's committed 
FX and repo facilities. The Commission believes that these procedures 
offer tools to strengthen ICC's ability to manage its financial 
resources and withstand the pressures of defaults. Consequently, the 
Commission believes that the proposed rule change as relates to the 
Default Management Procedures is consistent with the obligations of 
Rule 17Ad-22(b)(3).

[[Page 47022]]

    Similarly, the Commission believes that the proposed enhancements 
to the Risk Management Framework will strengthen ICC's ability to 
maintain sufficient financial resources to withstand a default by the 
two participant families to which it has the largest exposures in 
extreme but plausible market conditions. In particular, as described 
above, ICC proposes to more clearly describe a CP's obligations with 
respect to replenishment and assessment contributions to the GF. The 
proposed edits provide additional detail regarding the aggregate 
liability of CPs for replenishment and assessment contributions. If the 
cap on the additional GF contributions is reached, ICC may apply 
additional IM requirements if necessary to maintain compliance with 
regulatory financial resources requirements. The proposed changes 
further discuss how the additional IM requirements are computed and 
communicated to CPs. ICC also proposes to clarify the maximum 
contribution of a retiring CP that has given notice of its intent to 
terminate its CP status. The Commission believes that these 
clarifications will enhance ICC's ability to obtain additional 
financial resources by making parties aware of their financial 
liabilities and will in turn help it withstand a default by the two 
participant families to which it has the largest exposures in extreme 
but plausible market conditions. The Commission believes, therefore, 
that the changes to the Risk Management Framework are consistent with 
Rule 17Ad-22(b)(3).

C. Consistency With Rule 17Ad-22(d)(4)

    Rule 17Ad-22(d)(4) requires ICC to establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
identify sources of operational risk and minimize them through the 
development of appropriate systems, controls, and procedures; implement 
systems that are reliable, resilient and secure, and have adequate 
scalable capacity; and have business continuity plans that allow for 
timely recovery of operations and fulfillment of a clearing agency's 
obligations.\43\
---------------------------------------------------------------------------

    \43\ 17 CFR 240.17Ad-22(d)(4).
---------------------------------------------------------------------------

    As discussed above, the Default Management Procedures describe how 
ICC conducts monitoring of CPs on a daily, weekly, and quarterly basis. 
The Commission believes that the activities, as well as others set 
forth in the Default Management Procedures, help ICC and its CPs 
maintain operational readiness to execute the default management 
process. For example, the document sets forth ICC's processes for 
carrying out an annual Default Test, reviewing the results of the 
annual Default Test, and maintaining up-to-date contact information for 
default contacts. Such testing and preparation allow ICC to identify 
sources of operational risk and minimize them through the development 
of appropriate systems, controls, and procedures and implement systems 
that are reliable, resilient and secure, and have adequate scalable 
capacity. Consequently, the Commission believes that the proposed rule 
change is consistent with Rule 17Ad-22(d)(4).

D. Consistency With Rule 17Ad-22(d)(8)

    Rule 17Ad-22(d)(8) requires, in relevant part, that 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 to support the objectives of owners and 
participants, and to promote the effectiveness of the clearing agency's 
risk management procedures.\44\
---------------------------------------------------------------------------

    \44\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    As described above, the Default Management Procedures discuss the 
role of various parties, including ICC's President, Risk Committee, CDS 
Default Committee, and Board. In particular, upon identifying default 
risk CPs, the ICC President may take no action or activate the team 
responsible for overseeing the default management process, which is 
composed of ICC management, the ICC Risk Oversight Officer, and the 
most senior member of the Treasury Department and which comprise the 
Close-Out Team, to move forward with the process of declaring a 
default. Further, if available default resources are exhausted and ICC 
has not returned to a matched book, the Close-Out Team uses reasonable 
efforts to consult with the Risk Committee and then seeks the Board's 
decision on whether to engage in secondary default management actions 
such as entering a Loss Distribution Period, executing a partial tear-
up, or terminating clearing services. The Default Management Procedures 
also provide an overview of the post-default porting sub-process in 
which the Risk Department, in consultation with the CDS Default 
Committee, determines which Porting Portfolios to try to transfer. The 
Commission believes that these procedures represent comprehensive 
governance arrangements that are clear and transparent and promote the 
effectiveness of the clearing agency's risk management procedures by 
laying out various responsibilities throughout the default management 
process. Therefore, the Commission believes that the rule proposal is 
consistent with Rule 17Ad-22(d)(8).

E. Consistency With Rule 17Ad-22(d)(11)

    Rule 17Ad-22(d)(11) requires ICC to establish, implement, maintain 
and enforce written policies and procedures reasonably designed to make 
key aspects of the clearing agency's default procedures publicly 
available and establish default procedures that ensure that the 
clearing agency can take timely action to contain losses and liquidity 
pressures and to continue meeting its obligations in the event of a 
participant default.\45\
---------------------------------------------------------------------------

    \45\ 17 CFR 240.17Ad-22(d)(11).
---------------------------------------------------------------------------

    The Commission believes that because ICC's default management rules 
and procedures contained in the ICC Rules, the Default Auction 
Procedures--Initial Default Auctions, and the Secondary Auction 
Procedures are publically available on ICC's website and because the 
proposed Default Management Procedures clarify and augment ICC's 
existing rules and procedures relating to default management, the 
proposed rule change is consistent with the requirement to make key 
aspects of the clearing agency's default procedures publicly available.
    Additionally, because of the monitoring and governance procedures 
prior to and directly after a default described above, the Commission 
believes that the proposed rule changes are consistent with the 
requirement to establish default procedures that ensure that the 
clearing agency can take timely action to contain losses and liquidity 
pressures and to continue meeting its obligations in the event of a 
participant default. The Commission believes that the frequency of the 
monitoring system enhances ICC's ability to timely respond to default 
risk. Consequently, the Commission believes that the proposed rule 
change is consistent with Rule 17Ad-22(d)(11).

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'' \46\ and Rules 17Ad-22(b)(3), 17Ad-22(d)(4),

[[Page 47023]]

17Ad-22(d)(8), and 17Ad-22(d)(11) thereunder.\47\
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    \46\ 15 U.S.C. 78q-1(b)(3)(F).
    \47\ 17 CFR 240.17Ad-22(b)(3), 17 CFR 240.17Ad-22(d)(4), (8), 
and (11).
---------------------------------------------------------------------------

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\48\ that the proposed rule change (SR-ICC-2019-008) be, and hereby is, 
approved.\49\
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78s(b)(2).
    \49\ 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.\50\
---------------------------------------------------------------------------

    \50\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-19212 Filed 9-5-19; 8:45 am]
BILLING CODE 8011-01-P

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