Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC Clearing Rules To Reflect the ISDA NTCE Supplement, 3724-3727 [2020-00915]
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Federal Register / Vol. 85, No. 14 / Wednesday, January 22, 2020 / Notices
• Evaluate whether the proposed
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for the proper performance of the
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whether the information will have
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• Evaluate the accuracy of the
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• Enhance the quality, utility, and
clarity of the information to be
collected; and
• Minimize the burden of the
collection of information on those who
are to respond, including through the
use of appropriate automated,
electronic, mechanical, or other
technological collection techniques or
other forms of information technology,
e.g., permitting electronic submission of
responses.
Agency: DOL–MSHA.
Title of Collection: Safety Standards
for Underground Coal Mine
Ventilation—Belt Entry Used as an
Intake Air Course to Ventilate Working
Sections and Areas Where Mechanized
Mining Equipment is Being Installed or
Removed.
OMB Control Number: 1219–0138.
Affected Public: Private Sector:
Businesses or other for-profits.
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Total Estimated Number of
Responses: 161.
Total Estimated Annual Time Burden:
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Total Estimated Annual Other Costs
Burden: $38,640.
Authority: 44 U.S.C. 3507(a)(1)(D).
Dated: January 15, 2020.
Frederick Licari,
Departmental Clearance Officer.
[FR Doc. 2020–00990 Filed 1–21–20; 8:45 am]
BILLING CODE 4510–FN–P
David A. Trissell, General Counsel, at
202–789–6820.
SUPPLEMENTARY INFORMATION:
Table of Contents
The Commission is noticing a
recent Postal Service filing concerning
the calculation of the assumed Federal
income tax on competitive products
income for Fiscal Year 2019. This notice
informs the public of the filing, invites
public comment, and takes other
administrative steps.
DATES: Comments are due: March 4,
2020.
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BILLING CODE 7710–FW–P
POSTAL SERVICE
Board of Governors; Sunshine Act
Meeting
I. Introduction
STATUS:
In accordance with 39 U.S.C. 3634
and 39 CFR 3060.40 et seq., the Postal
Service filed its calculation of the
assumed Federal income tax on
competitive products income for fiscal
year (FY) 2019.1 The calculation details
the FY 2019 competitive product
revenue and expenses, the competitive
products net income before tax, and the
assumed Federal income tax on that net
income.
MATTERS TO BE CONSIDERED:
January 17, 2020, at 9:00
a.m.
PLACE:
II. Notice of Commission Action
In accordance with 39 CFR 3060.42,
the Commission establishes Docket No.
T2020–1 to review the calculation of the
assumed Federal income tax and
supporting documentation.
The Commission invites comments on
whether the Postal Service’s filing in
this docket is consistent with the
policies of 39 U.S.C. 3634 and 39 CFR
3060.40 et seq. Comments are due no
later than March 4, 2020. The Postal
Service’s filing can be accessed via the
Commission’s website (https://
www.prc.gov).
The Commission appoints Jennaca D.
Upperman to serve as Public
Representative in this docket.
It is ordered:
1. The Commission establishes Docket
No. T2020–1 to consider the calculation
of the assumed Federal income tax on
competitive products for FY 2019.
2. Pursuant to 39 U.S.C. 505, Jennaca
D. Upperman is appointed to serve as an
officer of the Commission to represent
the interests of the general public in this
proceeding (Public Representative).
3. Comments are due no later than
March 4, 2020.
SUMMARY:
[FR Doc. 2020–00932 Filed 1–21–20; 8:45 am]
TIME AND DATE:
[Docket No. T2020–1; Order No. 5406]
Postal Regulatory Commission.
ACTION: Notice.
By the Commission.
Ruth Ann Abrams,
Acting Secretary.
I. Introduction
II. Notice of Commission Action
III. Ordering Paragraphs
III. Ordering Paragraphs
AGENCY:
4. The Secretary shall arrange for
publication of this order in the Federal
Register.
FOR FURTHER INFORMATION CONTACT:
POSTAL REGULATORY COMMISSION
Income Tax Review
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Submit comments
electronically via the Commission’s
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alternatives.
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Closed.
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On January 17, 2020, a majority of the
members of the Board of Governors of
the United States Postal Service voted
unanimously to hold and to close to
public observation a special meeting in
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Postal Service has certified that the
meeting may be closed under the
Government in the Sunshine Act.
CONTACT PERSON FOR MORE INFORMATION:
Michael J. Elston, Acting Secretary of
the Board, U.S. Postal Service, 475
L’Enfant Plaza SW, Washington, DC
20260–1000. Telephone: (202) 268–
4800.
Michael J. Elston,
Acting Secretary.
[FR Doc. 2020–01116 Filed 1–17–20; 4:15 pm]
BILLING CODE 7710–12–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87971; File No. SR–ICC–
2019–013]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change Relating to the
ICC Clearing Rules To Reflect the ISDA
NTCE Supplement
January 15, 2020.
I. Introduction
1 See
Notice of the United States Postal Service
of Submission of the Calculation of the FY 2019
Assumed Federal Income Tax on Competitive
Products, January 10, 2020.
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On November 15, 2019, ICE Clear
Credit LLC (‘‘ICE Clear Credit’’ or
‘‘ICC’’) filed with the Securities and
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Federal Register / Vol. 85, No. 14 / Wednesday, January 22, 2020 / Notices
Exchange Commission pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 1 and Rule 19b–
4thereunder,2 a proposed rule change to
make certain changes to the ICC
Clearing Rules (the ‘‘Rules’’) 3 to
implement the 2019 Narrowly Tailored
Credit Event Supplement to the 2014
ISDA Credit Derivatives Definitions (the
‘‘NTCE Supplement’’) that are being
adopted in the broader credit default
swap (‘‘CDS’’) market to address socalled narrowly tailored credit events
and related matters. The proposed rule
change was published for comment in
the Federal Register on December 2,
2019.4 The Commission did not receive
comments on the proposed rule change.
II. Description of the Proposed Rule
Change
A. Background
Following certain events in the CDS 5
market, the International Swaps and
Derivatives Association, Inc. (‘‘ISDA’’),
in consultation with market
participants, developed and published
the NTCE Supplement.6 The NTCE
Supplement reflects an effort by ISDA to
address so-called narrowly-tailored
credit events. According to ISDA, a
narrowly-tailored credit event is an
arrangement between a participant in
the CDS marketplace and a corporation,
through which the corporation triggers a
credit event on CDS covering the
corporation, thereby increasing payment
to the buyers of CDS protection on the
corporation while minimizing the
impact on the corporation.7
The NTCE Supplement, if applied to
a CDS transaction, would make two
principal changes to the 2014 ISDA
Credit Derivatives Definitions to address
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Capitalized terms used but not defined herein
have the meanings specified in the Rules.
4 Securities Exchange Act Release No. 87612
(November 25, 2019), 84 FR 66036 (Dec. 2, 2019)
(SR–ICC–2019–013) (‘‘Notice’’).
5 The following description is substantially
excerpted from the Notice. See Notice, FR at 66036.
6 See ISDA Board Statement on Narrowly
Tailored Credit Events available at https://
www.isda.org/2018/04/11/isda-board-statement-onnarrowly-tailored-credit-events/; see also Joint
Statement on Opportunistic Strategies in the Credit
Derivatives Market (‘‘The continued pursuit of
various opportunistic strategies in the credit
derivatives markets, including but not limited to
those that have been referred to as ‘manufactured
credit events,’ may adversely affect the integrity,
confidence and reputation of the credit derivatives
markets, as well as markets more generally.’’)
available at https://www.sec.gov/news/pressrelease/2019-106.
7 See ISDA Board Statement on Narrowly
Tailored Credit Events, available at https://
www.isda.org/2018/04/11/isda-board-statement-onnarrowly-tailored-credit-events/.
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narrowly-tailored credit events.8 First,
the NTCE Supplement would change
the definition of the ‘‘Failure to Pay’’
credit event to exclude certain narrowly
tailored credit events through a new
Credit Deterioration Requirement. The
Credit Deterioration Requirement would
provide that a failure of a corporation to
make a payment on an obligation would
not constitute a Failure to Pay Credit
Event triggering CDS on that corporation
if the failure does not directly or
indirectly either result from, or result in,
a deterioration in the creditworthiness
or financial condition of the
corporation.9 Thus, a narrowly tailored
or manufactured failure to pay that does
not reflect or result in a credit
deterioration by a corporation would
not constitute a Credit Event for CDS
Contracts that incorporate the NTCE
Supplement and thus would not
necessarily trigger payment to buyers of
CDS protection. The NTCE Supplement
would also provide guidance related to
the factors that would be relevant to
determining whether the Credit
Deterioration Requirement had been
met, which determination would, under
the 2014 Definitions, in the ordinary
course be made by the relevant Credit
Derivatives Determinations Committee.
Second, the NTCE Supplement would
reduce the amount of payout a CDS
protection buyer could claim in certain
circumstances by imposing a new
provision for Fallback Discounting.
Fallback Discounting would discount a
CDS protection buyer’s claim for payout
under a CDS contract where that claim
for payout is based on an obligation
issued by a corporation at a discount.10
This would address the potential
scenario where a corporation agrees to
issue a bond at a substantial discount to
its principal amount and the bond is
delivered in settlement of a CDS at its
full principal amount. In this scenario,
Fallback Discounting would prevent a
buyer of CDS protection from using the
full principal amount of the bond issued
at a discount as a basis for payout under
the CDS contract.
B. Changes to the ICC Clearing Rules
Because ICC will clear and settle CDS
contracts to which the NTCE
Supplement will apply, it must ensure
that its relevant Rules accurately reflect
the changes described above that will be
8 See ISDA 2019 NTCE Protocol FAQ, available
at https://www.isda.org/protocol/isda-2019-ntceprotocol.
9 See ISDA 2019 Narrowly Tailored Credit Event
Supplement to the 2014 ISDA Credit Derivatives
Definitions (Published on July 15, 2019), available
at https://www.isda.org/a/KDqME/Final-NTCESupplement.pdf.
10 Id.
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3725
implemented by the NTCE Supplement.
Accordingly, the proposed rule change
would ensure that the changes being
implemented by the NTCE Supplement
are accurately reflected in its relevant
Rules for both new and existing cleared
transactions that incorporate the 2014
ISDA Credit Derivatives Definitions.11
For this purpose, the proposed ICC
amendments will apply to all cleared
CDS contracts with corporate (i.e., nonsovereign) reference entities.12
Specifically, ICC would amend Rule
20–102 to include new definitions for (i)
the ‘‘NTCE Supplement,’’ which would
be the Narrowly Tailored Credit Event
Supplement to the 2014 ISDA Credit
Derivatives Definitions published by
ISDA on July 15, 2019, (ii) ‘‘NTCE
Amending Contracts,’’ which would be
those Contracts being amended to
incorporate the NTCE Supplement as
specified in a list to be maintained by
ICC, and (iii) the ‘‘NTCE Effective Date,’’
which will be January 27, 2020 (the date
of implementation of the amendment),
or such later date as designated by ICC
by Circular.13
In addition, ICC would amend each
relevant subchapter of Chapter 26 of the
Rules to implement the NTCE
Supplement and ensure that relevant
contracts already being cleared and
settled by ICE Clear Credit but that do
not reference the new standard terms
supplement are fungible with new
contracts cleared and settled by ICE
Clear Credit that do reference the new
standard terms supplement.14 One set of
amendments would apply to index CDS
transactions and a separate but
substantially similar set of amendments
would apply to single-name CDS
transactions.15
In the case of index CDS, for CDX.NA
Index CDS transactions, the definition
of CDX.NA Untranched Terms
Supplement in Rule 26A–102 in
subchapter 26A would be amended to
include the new 2020 standard terms
supplement for such transactions, as
published by ISDA, which incorporates
the NTCE Supplement, along with
conforming changes to crossreferences.16 Rule 26A–316 would be
amended by adding a new paragraph (e),
which provides that open positions in
CDX.NA Untranched Contracts that are
NTCE Amending Contracts would be
amended, effective as of the NTCE
Effective Date, to reference the updated
2020 standard terms supplement in lieu
11 Notice,
84 FR at 66037.
12 Id.
13 Id.
14 Id.
15 Id.
16 Id.
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of the standard terms supplement
previously in effect.17 This will have the
effect of converting all existing CDX.NA
Untranched Contracts to reference the
new standard terms supplement, such
that they will be fungible with new
CDX.NA Untranched Contracts, which
will also reference the new standard
terms supplement.18 New paragraph (e)
would also provide that the
amendments will be effective regardless
of whether any transaction record in the
Deriv/SERV warehouse is updated to
reflect the change.19
Substantially similar changes for
other categories of index CDS would
also be made in subchapters 26F (for
iTraxx Europe Untranched Contracts)
and 26J (for iTraxx Asia/Pacific
Untranched Contracts).20
In the case of single-name CDS, for
Standard North American Corporate
(SNAC) Contracts, in subchapter 26B,
Rule 26B–616 would be amended by
adding a new paragraph (c), which
provides that open positions in SNAC
Contracts that are NTCE Amending
Contracts would be amended, effective
as of the NTCE Effective Date, to
incorporate the NTCE Supplement and
specify that the Fallback Discounting
and Credit Deterioration Requirement
provisions will be applicable.21 The
contracts would also be amended to
reference the new ISDA physical
settlement matrix, to be published as of
the NTCE Effective Date (or other
relevant implementation date as
determined by ICC).22 The amendments
will have the effect of converting
existing SNAC Contracts to reference
the updated physical settlement matrix,
such that they will be fungible with new
SNAC Contracts, which will also
reference that matrix.23 New paragraph
(c) would also provide that the
amendments will be effective regardless
of whether any transaction record in the
Deriv/SERV warehouse is updated to
reflect the change.24
Substantially similar changes for
other categories of single-name CDS
would also be made in subchapters 26G
(for Standard European Corporate
Contracts), 26H (for Standard European
Financial Corporate Contracts), 26M (for
Standard Australian Corporate
Contracts), 26N (for Standard Australia
Financial Corporate Contracts), 26O (for
Standard Asia Corporate Contracts), 26P
17 Id.
18 Id.
(for Standard Asia Financial Corporate
Contracts) and 26Q (for Standard
Emerging Market Corporate
Contracts).25
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.26 For the reasons given
below, the Commission finds that the
proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act 27 and
Rule 17Ad–22(d)(1) thereunder.28
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,
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.29
As described above, the NTCE
Supplement would amend the
underlying legal terms applicable to
CDS contracts to which it applies by,
among other things, limiting Credit
Events to those that reflect a
deterioration in the creditworthiness or
financial condition of the relevant
company. It also would reduce the
amount of payout a CDS protection
buyer could claim in certain
circumstances where the claim for
payout is based on an obligation issued
by a company at a discount. Further,
because ISDA has set an
implementation date of January 27,
2020, the NTCE Supplement will apply
to all single-name CDS contracts and
components of index CDS contracts that
incorporate the 2014 ISDA Credit
Derivatives Definitions entered into on
or after that date.
As noted above, because ICC will
clear and settle CDS contracts that are
subject to the changes being made by
the NTCE Supplement, the proposed
rule change would amend the ICC
Clearing Rules to incorporate the
amendments resulting from the NTCE
Supplement, thereby ensuring that ICC’s
19 Id.
20 Id.
25 Notice,
21 Id.
26 15
84 FR at 66037–66038.
U.S.C. 78s(b)(2)(C).
27 15 U.S.C. 78q–1(b)(3)(F).
28 17 CFR 240.17Ad–22(d)(1).
29 15 U.S.C. 78q–1(b)(3)(F).
22 Id.
23 Id.
24 Id.
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Rules accurately reflect and
appropriately apply the legal terms and
conditions applicable to such CDS
contracts, and that existing contracts
that do not reference the new standard
terms supplement will be fungible with
new contract that do.
In the Commission’s view, a lack of
clarity in the underlying legal terms and
conditions applicable to the transactions
that ICC clears and settles could hinder
ICC’s ability to promptly and accurately
clear and settle such transactions.
Likewise, disputes regarding the
applicable legal terms and conditions of
such transactions could lead to disputes
or confusion regarding the necessary
and appropriate margin submitted in
connection with such transactions,
thereby threatening ICC’s ability to
safeguard such margin. Accordingly, by
making the changes described above,
and in particular by ensuring the ICC’s
Rules accurately reflect and
appropriately apply the legal terms and
conditions applicable to the CDS
contracts that are cleared and settled by
ICC and that existing contracts that do
not reference the new standard terms
supplement will be fungible with new
contract that do, the Commission
believes that the proposed rule change
would help ensure that ICC’s Rules
continue to promote the prompt and
accurate clearance and settlement of
such the CDS contracts and assure the
safeguarding of securities and funds in
ICC’s custody and control. For these
same reasons the Commission also finds
that the proposed rule change would, in
general, protect investors and the public
interest.
Therefore, the Commission finds that
the proposed rule change is consistent
with Section 17A(b)(3)(F) of the Act.30
B. Consistency With Rule 17Ad–22(d)(1)
Rule 17Ad–22(d)(1) requires a
clearing agency to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
provide for a well-founded, transparent
and enforceable legal framework for
each aspect of its activities in all
relevant jurisdictions.31
As discussed above, the proposed rule
change would help to clarify and ensure
that ICC’s Rules accurately reflect and
appropriately apply the legal terms and
conditions applicable to the CDS
contracts that are cleared and settled by
ICC and that existing contracts that do
not reference the new standard terms
supplement will be fungible with new
contract that do. The Commission
believes that this, in turn, would help
30 15
31 17
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U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(d)(1).
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Federal Register / Vol. 85, No. 14 / Wednesday, January 22, 2020 / Notices
ensure that the ICC Clearing Rules
provide a consistent and enforceable
legal basis for clearing and settling CDS
contracts to which the NTCE
Supplement applies in light of the
amendments made by the NTCE
Supplement.
Therefore, the Commission finds that
the proposed rule change is consistent
with Rule 17Ad–22(d)(1).
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 32 and
Rule 17Ad–22(d)(1) thereunder.33
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 34 that the
proposed rule change (SR–ICC–2019–
013), be, and hereby is, approved.35
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–00915 Filed 1–21–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87978; File No. SR–
NYSEArca–2020–03]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend the NYSE Arca
Equities Fees and Charges To
Introduce a New Lead Market Maker
Credit
January 15, 2020.
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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 January 2,
2020, NYSE Arca, Inc. (‘‘NYSE Arca’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
32 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(d)(1).
34 15 U.S.C. 78s(b)(2).
35 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).
36 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
33 17
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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 the
NYSE Arca Equities Fees and Charges
(‘‘Fee Schedule’’) to (1) introduce a new
Lead Market Maker (‘‘LMM’’) credit, (2)
introduce a new LMM rebate, and (3)
replace the rebate applicable to ETP
Holders and Market Makers with a
monthly rebate payable on a persecurity basis that is tied to quoting
requirements in NYSE Arca-listed
securities. The Exchange proposes to
implement the fee changes effective
January 2, 2020. The proposed rule
change is available on the Exchange’s
website at www.nyse.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
self-regulatory organization 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 those 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 parts 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 amend the
Fee Schedule to (1) introduce a new
LMM 3 credit, (2) introduce a new LMM
rebate, and (3) replace the rebate
applicable to ETP Holders 4 with a
monthly rebate payable on a persecurity basis that is tied to quoting
requirements in NYSE Arca-listed
securities.
The proposed changes respond to the
current competitive environment where
order flow providers have a choice of
where to direct liquidity-providing
orders by offering further incentives for
ETP Holders and LMMs to send
3 The term ‘‘Lead Market Maker’’ is defined in
Rule 1.1(w) to mean a registered Market Maker that
is the exclusive Designated Market Maker in listings
for which the Exchange is the primary market.
4 All references to ETP Holders in connection
with this proposed fee change include Market
Makers.
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3727
additional displayed liquidity to the
Exchange.
The Exchange proposes to implement
the fee changes effective January 2,
2020.
Background
The Commission has repeatedly
expressed its preference for competition
over regulatory intervention in
determining prices, products, and
services in the securities markets. In
Regulation NMS, the Commission
highlighted the importance of market
forces in determining prices and SRO
revenues and, also, recognized that
current regulation of the market system
‘‘has been remarkably successful in
promoting market competition in its
broader forms that are most important to
investors and listed companies.’’ 5
As the Commission itself recognized,
the market for trading services in NMS
stocks has become ‘‘more fragmented
and competitive.’’ 6 Indeed, equity
trading is currently dispersed across 13
exchanges,7 31 alternative trading
systems,8 and numerous broker-dealer
internalizers and wholesalers, all
competing for order flow. Based on
publicly-available information for
November 2019, no single exchange has
more than 18% market share (whether
including or excluding auction
volume).9 Therefore, no exchange
possesses significant pricing power in
the execution of equity order flow. More
specifically, in November 2019, the
Exchange had 7.6% market share of
executed volume of equity trades
(excluding auction volume).10
The Exchange believes that the evershifting market share among the
exchanges from month to month
demonstrates that market participants
can move order flow, or discontinue or
reduce use of certain categories of
products. While it is not possible to
know a firm’s reason for shifting order
flow, the Exchange believes that one
such reason is because of fee changes at
any of the registered exchanges or non5 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005).
6 See Securities Exchange Act Release No. 51808,
84 FR 5202, 5253 (February 20, 2019) (File No. S7–
05–18) (Final Rule).
7 See Cboe U.S Equities Market Volume
Summary, available at https://markets.cboe.com/us/
equities/market_share. See generally https://
www.sec.gov/fast-answers/divisionsmarketregmr
exchangesshtml.html.
8 See FINRA ATS Transparency Data, available at
https://otctransparency.finra.org/otctransparency/
AtsIssueData. A list of alternative trading systems
registered with the Commission is available at
https://www.sec.gov/foia/docs/atslist.htm.
9 See Cboe Global Markets U.S. Equities Market
Volume Summary, available at https://
markets.cboe.com/us/equities/market_share/.
10 See id.
E:\FR\FM\22JAN1.SGM
22JAN1
]]>Agencies
[Federal Register Volume 85, Number 14 (Wednesday, January 22, 2020)]
[Notices]
[Pages 3724-3727]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00915]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87971; File No. SR-ICC-2019-013]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Clearing Rules To
Reflect the ISDA NTCE Supplement
January 15, 2020.
I. Introduction
On November 15, 2019, ICE Clear Credit LLC (``ICE Clear Credit'' or
``ICC'') filed with the Securities and
[[Page 3725]]
Exchange Commission pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 \1\ and Rule 19b-4thereunder,\2\ a proposed rule
change to make certain changes to the ICC Clearing Rules (the
``Rules'') \3\ to implement the 2019 Narrowly Tailored Credit Event
Supplement to the 2014 ISDA Credit Derivatives Definitions (the ``NTCE
Supplement'') that are being adopted in the broader credit default swap
(``CDS'') market to address so-called narrowly tailored credit events
and related matters. The proposed rule change was published for comment
in the Federal Register on December 2, 2019.\4\ The Commission did not
receive comments on 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 but not defined herein have the
meanings specified in the Rules.
\4\ Securities Exchange Act Release No. 87612 (November 25,
2019), 84 FR 66036 (Dec. 2, 2019) (SR-ICC-2019-013) (``Notice'').
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II. Description of the Proposed Rule Change
A. Background
Following certain events in the CDS \5\ market, the International
Swaps and Derivatives Association, Inc. (``ISDA''), in consultation
with market participants, developed and published the NTCE
Supplement.\6\ The NTCE Supplement reflects an effort by ISDA to
address so-called narrowly-tailored credit events. According to ISDA, a
narrowly-tailored credit event is an arrangement between a participant
in the CDS marketplace and a corporation, through which the corporation
triggers a credit event on CDS covering the corporation, thereby
increasing payment to the buyers of CDS protection on the corporation
while minimizing the impact on the corporation.\7\
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\5\ The following description is substantially excerpted from
the Notice. See Notice, FR at 66036.
\6\ See ISDA Board Statement on Narrowly Tailored Credit Events
available at https://www.isda.org/2018/04/11/isda-board-statement-on-narrowly-tailored-credit-events/; see also Joint Statement on
Opportunistic Strategies in the Credit Derivatives Market (``The
continued pursuit of various opportunistic strategies in the credit
derivatives markets, including but not limited to those that have
been referred to as `manufactured credit events,' may adversely
affect the integrity, confidence and reputation of the credit
derivatives markets, as well as markets more generally.'') available
at https://www.sec.gov/news/press-release/2019-106.
\7\ See ISDA Board Statement on Narrowly Tailored Credit Events,
available at https://www.isda.org/2018/04/11/isda-board-statement-on-narrowly-tailored-credit-events/.
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The NTCE Supplement, if applied to a CDS transaction, would make
two principal changes to the 2014 ISDA Credit Derivatives Definitions
to address narrowly-tailored credit events.\8\ First, the NTCE
Supplement would change the definition of the ``Failure to Pay'' credit
event to exclude certain narrowly tailored credit events through a new
Credit Deterioration Requirement. The Credit Deterioration Requirement
would provide that a failure of a corporation to make a payment on an
obligation would not constitute a Failure to Pay Credit Event
triggering CDS on that corporation if the failure does not directly or
indirectly either result from, or result in, a deterioration in the
creditworthiness or financial condition of the corporation.\9\ Thus, a
narrowly tailored or manufactured failure to pay that does not reflect
or result in a credit deterioration by a corporation would not
constitute a Credit Event for CDS Contracts that incorporate the NTCE
Supplement and thus would not necessarily trigger payment to buyers of
CDS protection. The NTCE Supplement would also provide guidance related
to the factors that would be relevant to determining whether the Credit
Deterioration Requirement had been met, which determination would,
under the 2014 Definitions, in the ordinary course be made by the
relevant Credit Derivatives Determinations Committee.
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\8\ See ISDA 2019 NTCE Protocol FAQ, available at https://www.isda.org/protocol/isda-2019-ntce-protocol.
\9\ See ISDA 2019 Narrowly Tailored Credit Event Supplement to
the 2014 ISDA Credit Derivatives Definitions (Published on July 15,
2019), available at https://www.isda.org/a/KDqME/Final-NTCE-Supplement.pdf.
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Second, the NTCE Supplement would reduce the amount of payout a CDS
protection buyer could claim in certain circumstances by imposing a new
provision for Fallback Discounting. Fallback Discounting would discount
a CDS protection buyer's claim for payout under a CDS contract where
that claim for payout is based on an obligation issued by a corporation
at a discount.\10\ This would address the potential scenario where a
corporation agrees to issue a bond at a substantial discount to its
principal amount and the bond is delivered in settlement of a CDS at
its full principal amount. In this scenario, Fallback Discounting would
prevent a buyer of CDS protection from using the full principal amount
of the bond issued at a discount as a basis for payout under the CDS
contract.
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\10\ Id.
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B. Changes to the ICC Clearing Rules
Because ICC will clear and settle CDS contracts to which the NTCE
Supplement will apply, it must ensure that its relevant Rules
accurately reflect the changes described above that will be implemented
by the NTCE Supplement. Accordingly, the proposed rule change would
ensure that the changes being implemented by the NTCE Supplement are
accurately reflected in its relevant Rules for both new and existing
cleared transactions that incorporate the 2014 ISDA Credit Derivatives
Definitions.\11\ For this purpose, the proposed ICC amendments will
apply to all cleared CDS contracts with corporate (i.e., non-sovereign)
reference entities.\12\
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\11\ Notice, 84 FR at 66037.
\12\ Id.
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Specifically, ICC would amend Rule 20-102 to include new
definitions for (i) the ``NTCE Supplement,'' which would be the
Narrowly Tailored Credit Event Supplement to the 2014 ISDA Credit
Derivatives Definitions published by ISDA on July 15, 2019, (ii) ``NTCE
Amending Contracts,'' which would be those Contracts being amended to
incorporate the NTCE Supplement as specified in a list to be maintained
by ICC, and (iii) the ``NTCE Effective Date,'' which will be January
27, 2020 (the date of implementation of the amendment), or such later
date as designated by ICC by Circular.\13\
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\13\ Id.
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In addition, ICC would amend each relevant subchapter of Chapter 26
of the Rules to implement the NTCE Supplement and ensure that relevant
contracts already being cleared and settled by ICE Clear Credit but
that do not reference the new standard terms supplement are fungible
with new contracts cleared and settled by ICE Clear Credit that do
reference the new standard terms supplement.\14\ One set of amendments
would apply to index CDS transactions and a separate but substantially
similar set of amendments would apply to single-name CDS
transactions.\15\
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\14\ Id.
\15\ Id.
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In the case of index CDS, for CDX.NA Index CDS transactions, the
definition of CDX.NA Untranched Terms Supplement in Rule 26A-102 in
subchapter 26A would be amended to include the new 2020 standard terms
supplement for such transactions, as published by ISDA, which
incorporates the NTCE Supplement, along with conforming changes to
cross-references.\16\ Rule 26A-316 would be amended by adding a new
paragraph (e), which provides that open positions in CDX.NA Untranched
Contracts that are NTCE Amending Contracts would be amended, effective
as of the NTCE Effective Date, to reference the updated 2020 standard
terms supplement in lieu
[[Page 3726]]
of the standard terms supplement previously in effect.\17\ This will
have the effect of converting all existing CDX.NA Untranched Contracts
to reference the new standard terms supplement, such that they will be
fungible with new CDX.NA Untranched Contracts, which will also
reference the new standard terms supplement.\18\ New paragraph (e)
would also provide that the amendments will be effective regardless of
whether any transaction record in the Deriv/SERV warehouse is updated
to reflect the change.\19\
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\16\ Id.
\17\ Id.
\18\ Id.
\19\ Id.
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Substantially similar changes for other categories of index CDS
would also be made in subchapters 26F (for iTraxx Europe Untranched
Contracts) and 26J (for iTraxx Asia/Pacific Untranched Contracts).\20\
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\20\ Id.
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In the case of single-name CDS, for Standard North American
Corporate (SNAC) Contracts, in subchapter 26B, Rule 26B-616 would be
amended by adding a new paragraph (c), which provides that open
positions in SNAC Contracts that are NTCE Amending Contracts would be
amended, effective as of the NTCE Effective Date, to incorporate the
NTCE Supplement and specify that the Fallback Discounting and Credit
Deterioration Requirement provisions will be applicable.\21\ The
contracts would also be amended to reference the new ISDA physical
settlement matrix, to be published as of the NTCE Effective Date (or
other relevant implementation date as determined by ICC).\22\ The
amendments will have the effect of converting existing SNAC Contracts
to reference the updated physical settlement matrix, such that they
will be fungible with new SNAC Contracts, which will also reference
that matrix.\23\ New paragraph (c) would also provide that the
amendments will be effective regardless of whether any transaction
record in the Deriv/SERV warehouse is updated to reflect the
change.\24\
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\21\ Id.
\22\ Id.
\23\ Id.
\24\ Id.
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Substantially similar changes for other categories of single-name
CDS would also be made in subchapters 26G (for Standard European
Corporate Contracts), 26H (for Standard European Financial Corporate
Contracts), 26M (for Standard Australian Corporate Contracts), 26N (for
Standard Australia Financial Corporate Contracts), 26O (for Standard
Asia Corporate Contracts), 26P (for Standard Asia Financial Corporate
Contracts) and 26Q (for Standard Emerging Market Corporate
Contracts).\25\
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\25\ Notice, 84 FR at 66037-66038.
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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.\26\ For the reasons given below, the Commission finds
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \27\ and Rule 17Ad-22(d)(1) thereunder.\28\
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\26\ 15 U.S.C. 78s(b)(2)(C).
\27\ 15 U.S.C. 78q-1(b)(3)(F).
\28\ 17 CFR 240.17Ad-22(d)(1).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, 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.\29\
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\29\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above, the NTCE Supplement would amend the underlying
legal terms applicable to CDS contracts to which it applies by, among
other things, limiting Credit Events to those that reflect a
deterioration in the creditworthiness or financial condition of the
relevant company. It also would reduce the amount of payout a CDS
protection buyer could claim in certain circumstances where the claim
for payout is based on an obligation issued by a company at a discount.
Further, because ISDA has set an implementation date of January 27,
2020, the NTCE Supplement will apply to all single-name CDS contracts
and components of index CDS contracts that incorporate the 2014 ISDA
Credit Derivatives Definitions entered into on or after that date.
As noted above, because ICC will clear and settle CDS contracts
that are subject to the changes being made by the NTCE Supplement, the
proposed rule change would amend the ICC Clearing Rules to incorporate
the amendments resulting from the NTCE Supplement, thereby ensuring
that ICC's Rules accurately reflect and appropriately apply the legal
terms and conditions applicable to such CDS contracts, and that
existing contracts that do not reference the new standard terms
supplement will be fungible with new contract that do.
In the Commission's view, a lack of clarity in the underlying legal
terms and conditions applicable to the transactions that ICC clears and
settles could hinder ICC's ability to promptly and accurately clear and
settle such transactions. Likewise, disputes regarding the applicable
legal terms and conditions of such transactions could lead to disputes
or confusion regarding the necessary and appropriate margin submitted
in connection with such transactions, thereby threatening ICC's ability
to safeguard such margin. Accordingly, by making the changes described
above, and in particular by ensuring the ICC's Rules accurately reflect
and appropriately apply the legal terms and conditions applicable to
the CDS contracts that are cleared and settled by ICC and that existing
contracts that do not reference the new standard terms supplement will
be fungible with new contract that do, the Commission believes that the
proposed rule change would help ensure that ICC's Rules continue to
promote the prompt and accurate clearance and settlement of such the
CDS contracts and assure the safeguarding of securities and funds in
ICC's custody and control. For these same reasons the Commission also
finds that the proposed rule change would, in general, protect
investors and the public interest.
Therefore, the Commission finds that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act.\30\
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\30\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(d)(1)
Rule 17Ad-22(d)(1) requires a clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for a well-founded, transparent and
enforceable legal framework for each aspect of its activities in all
relevant jurisdictions.\31\
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\31\ 17 CFR 240.17Ad-22(d)(1).
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As discussed above, the proposed rule change would help to clarify
and ensure that ICC's Rules accurately reflect and appropriately apply
the legal terms and conditions applicable to the CDS contracts that are
cleared and settled by ICC and that existing contracts that do not
reference the new standard terms supplement will be fungible with new
contract that do. The Commission believes that this, in turn, would
help
[[Page 3727]]
ensure that the ICC Clearing Rules provide a consistent and enforceable
legal basis for clearing and settling CDS contracts to which the NTCE
Supplement applies in light of the amendments made by the NTCE
Supplement.
Therefore, the Commission finds that the proposed rule change is
consistent with Rule 17Ad-22(d)(1).
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 \32\ and Rule 17Ad-22(d)(1) thereunder.\33\
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\32\ 15 U.S.C. 78q-1(b)(3)(F).
\33\ 17 CFR 240.17Ad-22(d)(1).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\34\ that the proposed rule change (SR-ICC-2019-013), be, and hereby
is, approved.\35\
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\34\ 15 U.S.C. 78s(b)(2).
\35\ 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).
\36\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-00915 Filed 1-21-20; 8:45 am]
BILLING CODE 8011-01-P
