Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change, Security-Based Swap Submission, or Advance Notice Relating to the ICC Exercise Procedures and ICC Clearing Rules, 37483-37486 [2020-13308]

Download as PDF Federal Register / Vol. 85, No. 120 / Monday, June 22, 2020 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.22 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–13311 Filed 6–19–20; 8:45 am] (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change, Security-Based Swap Submission, or Advance Notice BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–89072; File No. SR–ICC– 2020–008] Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change, SecurityBased Swap Submission, or Advance Notice Relating to the ICC Exercise Procedures and ICC Clearing Rules June 16, 2020. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934,1 and Rule 19b–4,2 notice is hereby given that on June 3, 2020, ICE Clear Credit LLC (‘‘ICC’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change, security-based swap submission, or advance notice as described in Items I, II and III below, which Items have been prepared by ICC. The Commission is publishing this notice to solicit comments on the proposed rule change, security-based swap submission, or advance notice from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change, Security-Based Swap Submission, or Advance Notice The principal purpose of the proposed rule change is to formalize the ICC Exercise Procedures in connection with the clearing of credit default index swaptions. ICC also proposes a related update to the ICC Clearing Rules (the ‘‘Rules’’).3 II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change, Security-Based Swap Submission, or Advance Notice In its filing with the Commission, ICC included statements concerning the purpose of and basis for the proposed rule change, security-based swap submission, or advance notice and discussed any comments it received on the proposed rule change, securitybased swap submission, or advance notice. The text of these statements may 22 17 CFR 200.30–3(a)(12). 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. 1 15 VerDate Sep<11>2014 18:08 Jun 19, 2020 Jkt 250001 be examined at the places specified in Item IV below. ICC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements. (a) Purpose ICC proposes to formalize the Exercise Procedures and to make a related change to the Rules in connection with its proposed launch of the clearing of credit default index swaptions (‘‘Index Swaptions’’). ICC has previously filed with the Commission changes to certain other policies and procedures related to the clearing of Index Swaptions on June 28, 2019 4 and January 14, 2020 5 (the ‘‘Swaption Rule Filings’’). As set out in the Swaption Rule Filings, ICC intends to adopt certain related policies and procedures in preparation for the launch of clearing of Index Swaptions, including those set out in this filing, and does not intend to commence clearing of Index Swaptions until all such policies and procedures have been approved by the Commission or otherwise become effective. As such, ICC proposes to formalize the Exercise Procedures and make the related changes to the Rules effective following the approval of all such policies and procedures and the completion of the ICC governance process surrounding the Index Swaptions product expansion. As discussed in the Swaption Rule Filings, pursuant to an Index Swaption, one party (the ‘‘Swaption Buyer’’) has the right (but not the obligation) to cause the other party (the ‘‘Swaption Seller’’) to enter into an index credit default swap transaction at a predetermined strike price on a specified expiration date on specified terms. In the case of Index Swaptions that would be cleared by ICC, the underlying index credit default swap would be limited to certain CDX and iTraxx Europe index credit default swaps that are accepted for clearing by ICC, and which would be automatically cleared by ICC upon exercise of the Index Swaption by the Swaption Buyer in accordance with its terms. I. Exercise Procedures The Exercise Procedures are intended to supplement the provisions of 4 SEC Release No. 34–87297; File No. SR–ICC– 2019–007 (Oct. 15, 2019) (approval), 84 FR 56270 (Oct. 21, 2019). 5 SEC Release No. 34–88047; File No. SR–ICC– 2020–002 (Jan. 27, 2020) (notice), 85 FR 5756 (Jan. 31, 2020). PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 37483 Subchapter 26R of the Rules 6 with respect to Index Swaptions and provide further detail as to the manner in which Index Swaptions may be exercised by Swaption Buyers, the manner in which ICC will assign such exercises to Swaption Sellers, and certain actions that ICC may take in the event of technical issues. In paragraph 1 of the Exercise Procedures, ICC proposes to set out key definitions used for the exercise of Index Swaptions. Key defined terms would include the Exercise Period, which would be the period on the expiration date of an Index Swaption during which the Swaption Buyer may deliver an exercise notice to ICC to exercise all or part of such Index Swaption. The document would define the circumstances that constitute the failure of the Exercise System (‘‘Exercise System Failure’’) which is the electronic system established by ICC for exercise. The Exercising Party would mean (i) with respect to an Index Swaption carried in the house account of a Participant as Swaption Buyer, such Participant, and (ii) with respect to an Index Swaption carried in the client origin account of a Participant for a Non-Participant Party as Swaption Buyer, such Non-Participant Party. ICC proposes to describe the exercise and assignment process in paragraph 2 of the Exercise Procedures. In paragraph 2.1, ICC states that exercise notices would be delivered in accordance with the ICC Rules and the Exercise Procedures and specifically references Subchapter 26R of the Rules related to Index Swaptions. Paragraph 2.2 of the proposed Exercise Procedures would address the procedures for exercise and assignment of Index Swaptions. The document sets forth ICC’s process of netting all open positions in such expiring Index Swaption, which takes place on the business day prior to the expiration date of an Index Swaption and applies to house and client origin accounts. To exercise an Index Swaption, the Exercising Party would deliver an exercise notice to ICC during the Exercise Period specifying the notional amount being exercised (‘‘Exercised Notional Amount’’). ICC may also establish a Pre-Exercise Notification Period during which an Exercising Party may submit, modify, and/or withdraw preliminary exercise notices. The submission of an exercise notice during the Exercise Period will be irrevocable 6 Subchapter 26R of the Rules was proposed in the Swaption Rule Filings. SEC Release No. 34– 87297; File No. SR–ICC–2019–007 (Oct. 15, 2019) (approval), 84 FR 56270 (Oct. 21, 2019). E:\FR\FM\22JNN1.SGM 22JNN1 37484 Federal Register / Vol. 85, No. 120 / Monday, June 22, 2020 / Notices and binding on the Exercising Party and, once validated by ICC, will be accepted by ICC and binding on ICC and the Exercising Party (and, in the case of a Non-Participant Party, its Participant). If ICC rejects an exercise notice as not valid, as described in the Exercise Procedures, it will inform the submitting party, who may resubmit a corrected notice within the Exercise Period. For informational purposes only, within the Exercise Period, ICC may estimate and provide the notional amount that it will assign to each open position in an Index Swaption of a Swaption Seller. Moreover, if an Exercising Party did not submit an exercise notice but submitted a preliminary exercise notice in respect of such Index Swaption that was not withdrawn, the Exercising Party will be deemed to have submitted an exercise notice with the Exercised Notional Amount specified under such preliminary notice. After the Exercise Period ends, ICC will determine final assignments to open positions in Index Swaptions of Swaption Sellers and notify Participants as described in the Exercise Procedures. The proposed Exercise Procedures would address limitations and clarifications regarding the exercise process. Paragraph 2.3 sets out certain limitations, including limitations that ICC may impose during the Exercise Period and limitations as to the responsibility for any failure to exercise an Index Swaption. Paragraph 2.4 further clarifies the party that is entitled to exercise. A Participant is not entitled to provide a preliminary exercise notice or exercise notice on behalf of NonParticipant Parties for which it carries Index Swaptions. A Non-Participant Party will only be permitted to exercise an Index Swaption in a portfolio belonging to the Non-Participant Party. Additionally, under paragraph 2.4, a Participant may make certain elections as a result of a default or termination event with respect to a Non-Participant Party for which it carries an Index Swaption, and is required to obtain the agreement of each Non-Participant Party for which it carries an open position in Index Swaptions to the provisions of the Rules and Exercise Procedures applicable to Index Swaptions. The proposed Exercise Procedures would describe the Exercise System and provide the steps that ICC would follow in case of technical issues. Paragraph 2.5 explains the Electronic Notice Process which is the process for the electronic delivery and assignment of exercise notices or preliminary exercise notices through the Exercise System. Exercise notices would only be VerDate Sep<11>2014 18:08 Jun 19, 2020 Jkt 250001 submitted through the Exercise System pursuant to the Electronic Notice Process, unless otherwise determined by ICC pursuant to paragraph 2.6. Namely, in the event of an Exercise System Failure affecting an Exercise Period, paragraph 2.6 provides ICC with the following options: (i) Cancel and reschedule the Exercise Period, (ii) determine that automatic exercise will apply; and/or (iii) take such other action as ICC determines appropriate to permit Exercising Parties to submit exercise notices and to permit ICC to assign such notices. Paragraph 2.7 would address the situation where an Exercising Party is affected by a significant communications or information technology failure making it impossible or impractical to deliver all, or substantially all, of its exercise notices in accordance with the Electronic Notice Process during the Exercise Period (‘‘Party Communication Failure’’). Paragraph 2.8 would address the situation where Index Swaptions will be automatically exercised on the expiration date due to an Exercise System Failure. II. Rule Amendments ICC proposes to amend ICC Rule 304 related to offsets to incorporate a reference to the Exercise Procedures. Specifically, ICC proposes a change to ICC Rule 304(a) to clarify that netting of applicable offsetting positions in Index Swaptions would be subject to any provisions in the Exercise Procedures. (b) Statutory Basis ICC believes that the proposed rule change is consistent with the requirements of Section 17A of the Act 7 and the regulations thereunder applicable to it, including the applicable standards under Rule 17Ad–22.8 In particular, Section 17A(b)(3)(F) of the Act 9 requires that the rule change be consistent with the prompt and accurate clearance and settlement of securities transactions and derivative agreements, contracts and transactions cleared by ICC, the safeguarding of securities and funds in the custody or control of ICC or for which it is responsible, and the protection of investors and the public interest. The proposed rule change would formalize the Exercise Procedures, which describe the exercise and assignment process and are intended to supplement the provisions of Subchapter 26R of the Rules, to support the clearing of Index Swaptions. ICC sets out procedures in the document 7 15 U.S.C. 78q–1. CFR 240.17Ad–22. 9 15 U.S.C. 78q–1(b)(3)(F). 8 17 PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 that are designed to protect users in the event of technical issues or technology failures, including circumstances where there is an Exercise System Failure and Party Communication Failure. The procedures allow firms to submit preliminary exercise notices such that the preliminary instructions can be used as the final exercise instructions in the event of a communications failure during the exercise window. The proposed rule change also proposes a related update to Rule 304(a) to clarify that netting of applicable offsetting positions in Index Swaptions would be subject to any provisions in the Exercise Procedures. Accordingly, in ICC’s view, the proposed rule change will further ensure that ICC’s Rules and policies and procedures clearly reflect the terms and conditions applicable to Index Swaptions and is thus consistent with the prompt and accurate clearing and settlement of the contracts cleared by ICC, including Index Swaptions, the safeguarding of securities and funds in the custody or control of ICC or for which it is responsible, and the protection of investors and the public interest, within the meaning of Section 17A(b)(3)(F) of the Act.10 The amendments would also satisfy relevant requirements of Rule 17Ad– 22.11 Rule 17Ad–22(e)(1) 12 requires each covered clearing agency 13 to establish, implement, maintain, and enforce written policies and procedures reasonably designed to provide for a well-founded, clear, transparent, and enforceable legal basis for each aspect of its activities in all relevant jurisdictions. The Exercise Procedures are intended to supplement the provisions of Subchapter 26R of the Rules with respect to Index Swaptions and would further ensure that ICC’s Rules clearly reflect the terms and conditions applicable to Index Swaptions. The proposed rule change would support the legal basis for the operation of the exercise and assignment process, including by defining key terms; describing the validation and rejection of exercise notices, including the party that is entitled to submit such notices; and addressing situations where there are technical issues. As such, the proposed rule change would satisfy the requirements of the Rule 17Ad– 22(e)(1).14 10 Id. 11 17 CFR 240.17Ad–22. CFR 240.17Ad–22(e)(1). 13 ICC will be a covered clearing agency subject to Rule 17ad–22(e) as of the effective date (July 13, 2020) as a result of the amended definition. 17 CFR 240.17Ad–22; Release No. 34–88616; File No. S7– 23–16 (April 9, 2020), 85 FR 28853 (May 14, 2020). 14 17 CFR 240.17Ad–22(e)(1). 12 17 E:\FR\FM\22JNN1.SGM 22JNN1 Federal Register / Vol. 85, No. 120 / Monday, June 22, 2020 / Notices Rule 17Ad–22(e)(17) 15 requires, in relevant part, each covered clearing agency to establish, implement, maintain, and enforce written policies and procedures reasonably designed to manage its operational risks by (i) identifying the plausible sources of operational risk, both internal and external, and mitigating their impact through the use of appropriate systems, policies, procedures, and controls; and (ii) ensuring that systems have a high degree of security, resiliency, operational reliability, and adequate, scalable capacity. The proposed rule change would allow ICC to manage the operational risks associated with the exercise and assignment process by establishing procedures for the exercise and assignment of Index Swaptions, which would allow ICC to identify plausible sources of operational risks in clearing Index Swaptions and minimize their impact through appropriate systems, policies, procedures, and controls. To reduce operational risk, the document includes procedures for validating and rejecting exercise notices and procedures for exercise in the event of technical issues or technology failures, including an Exercise System Failure and a Party Communication Failure. Such procedures are designed to provide sound alternatives in the case of technical issues and help mitigate the impact from technical issues to ensure that the system has a high degree of security, resiliency, operational reliability, and adequate, scalable capacity. The proposed rule change is therefore reasonably designed to meet the requirements of Rule 17Ad– 22(e)(17).16 Rule 17Ad–22(e)(18) 17 requires each covered clearing agency to establish, implement, maintain, and enforce written policies and procedures reasonably designed to establish objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access by direct and, where relevant, indirect participants and other financial market utilities, require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the clearing agency, and monitor compliance with such participation requirements on an ongoing basis. The publically available Rules and the Exercise Procedures, which would be publically available, would establish objective, risk-based, and publicly disclosed criteria for participation in ICC’s exercise and 15 17 CFR 240.17Ad–22(e)(17)(i)–(ii). assignment process. As discussed above, the Exercise Procedures would provide further detail as to the manner in which Index Swaptions may be exercised by Swaption Buyers and the manner in which ICC will assign such exercises to Swaption Sellers. The document would also specify the party entitled to exercise, stating that a Non-Participant Party will only be permitted to exercise an Index Swaption in a portfolio belonging to the Non-Participant Party. The amendments to the Rules further incorporate reference to the Exercise Procedures into Rule 304(a). Additionally, the proposed rule change would require a Participant to obtain the agreement of each Non-Participant Party for which it carries an open position in Index Swaptions to the provisions of the Rules and Exercise Procedures applicable to Index Swaptions, which are intended to ensure that participants have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the clearing agency. Thus, the proposed rule change would satisfy the requirements of Rule 17Ad–22(e)(18).18 (B) Clearing Agency’s Statement on Burden on Competition ICC does not believe the proposed rule change would have any impact, or impose any burden, on competition not necessary or appropriate in furtherance of the purpose of the Act. The proposed rule change would support the clearing of Index Swaptions, including by formalizing the Exercise Procedures and making a related Rule change necessary to support the clearing of Index Swaptions. The proposed rule change will apply uniformly across all market participants. ICC does not believe acceptance of Index Swaptions for clearing would adversely affect the trading markets for such contracts, and in fact acceptance of such contracts by ICC would provide market participants with the additional flexibility to have their Index Swaptions cleared. Acceptance of Index Swaptions for clearing will not, in ICC’s view, adversely affect clearing of any other currently cleared product. ICC does not believe the amendments would adversely affect the ability of Participants, their customers or other market participants to continue to clear contracts, including CDS Contracts. ICC also does not believe the enhancements would adversely affect the cost of clearing or otherwise limit market participants’ choices for selecting clearing services in Index Swaptions, credit default swaps or other products. 16 Id. 17 17 CFR 240.17Ad–22(e)(18). VerDate Sep<11>2014 18:08 Jun 19, 2020 18 Id. Jkt 250001 PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 37485 Accordingly, ICC does not believe the amendments would impose any burden on competition not necessary or appropriate in furtherance of the purpose of the Act. (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change, Security-Based Swap Submission, or Advance Notice Received From Members, Participants or Others Written comments relating to the proposed rule change have not been solicited or received. ICC will notify the Commission of any written comments received by ICC. III. Date of Effectiveness of the Proposed Rule Change, Security-Based Swap Submission, or Advance Notice and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, security-based swap submission, or advance notice is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– ICC–2020–008 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. All submissions should refer to File Number SR–ICC–2020–008. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s E:\FR\FM\22JNN1.SGM 22JNN1 37486 Federal Register / Vol. 85, No. 120 / Monday, June 22, 2020 / Notices internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change, security-based swap submission, or advance notice that are filed with the Commission, and all written communications relating to the proposed rule change, security-based swap submission, or advance notice between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filings will also be available for inspection and copying at the principal office of ICE Clear Credit and on ICE Clear Credit’s website at https:// www.theice.com/clear-credit/regulation. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–ICC–2020–008 and should be submitted on or before July 13, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–13308 Filed 6–19–20; 8:45 am] SECURITIES AND EXCHANGE COMMISSION [Release No. 34–89077; File No. SR– NASDAQ–2020–031] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Delay the Protocol ‘‘Ouch To Trade Options’’ or ‘‘OTTO’’ June 16, 2020. 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 June 11, 2020, The Nasdaq Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 18:08 Jun 19, 2020 Jkt 250001 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to delay the protocol ‘‘Ouch to Trade Options’’ or ‘‘OTTO’’ on The Nasdaq Options Market LLC (‘‘NOM’’). The text of the proposed rule change is available on the Exchange’s website at https://nasdaq.cchwallstreet.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Nasdaq filed a rule change 3 which adopted a new protocol ‘‘Ouch to Trade Options’’ or ‘‘OTTO’’ 4 and proposed to rename and modify the current OTTO protocol as ‘‘Quote Using Orders’’ or BILLING CODE 8011–01–P 19 17 Securities and Exchange Commission (‘‘SEC’’ or ‘‘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. 3 See Securities Exchange Act Release No. 83888 (August 20, 2018), 83 FR 42954 (August 24, 2018) (SR–NASDAQ–2018–069) (‘‘Prior Rule Change’’). In the Prior Rule Change the Exchange stated that it would issue an Options Trader Alert introducing the new OTTO protocol in Q4 of 2018. The rule numbers were amended in 2019 when the Rulebook was relocated. See Securities Exchange Act Release No. 87778 (December 17, 2019), 84 FR 70590 (December 23, 2019) (SR–NASDAQ–2019–098). 4 As modified by the Prior Rule Change, OTTO is an interface that allows Participants and their Sponsored Customers to connect, send, and receive messages related to orders to and from the Exchange. Features include the following: (1) Options symbol directory messages (e.g., underlying); (2) system event messages (e.g., start of trading hours messages and start of opening); (3) trading action messages (e.g., halts and resumes); (4) execution messages; (5) order messages; and (6) risk protection triggers and cancel notifications. See NOM Rules at Options 3, Section 7(d)(1)(C). PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 ‘‘QUO.’’ 5 The Exchange subsequently filed a rule change to amend Options 3, Section 18, titled ‘‘Detection of Loss of Communication’’ which describes the impact to NOM protocols in the event of a loss of a communication. The Exchange accounted for both the new OTTO and renamed and modified QUO within this rule. Similarly, the Exchange amended Options 3, Section 8, ‘‘Nasdaq Opening and Halt Cross’’ to account for the new OTTO and renamed and modified QUO within this rule. Finally, the Exchange amended Options 3, Section 23, ‘‘Data Feeds and Trade Information’’ to amend ‘‘OTTO DROP’’ to ‘‘QUO DROP’’ and noted within Options 3, Section 15(a)(1) related to Order Price Protection rule or ‘‘OPP’’ that OPP shall not apply to orders entered through QUO.6 Both the Prior Rule Change and the Subsequent Rule Change indicated the aforementioned rule changes would be implemented for QUO and OTTO in Q4 of 2018 with the date announced via an Options Traders Alert. The Exchange filed a rule change implementing QUO and delaying the introduction of the OTTO functionality until Q3 2019 by announcing the date of implementation via an Options Traders Alert.7 The Exchange further delayed the implementation of OTTO functionality until Q3 2019 and then Q2 2020, respectively.8 At this time, the Exchange proposes to further delay the implementation of OTTO functionality until Q2 2021. The Exchange will issue an Options Trader Alert notifying Participants when this functionality will be available. 5 QUO is an interface that allows NOM Market Makers to connect, send, and receive messages related to single-sided orders to and from the Exchange. Order Features include the following: (1) Options symbol directory messages (e.g., underlying); (2) system event messages (e.g., start of trading hours messages and start of opening); (3) trading action messages (e.g., halts and resumes); (4) execution messages; (5) order messages; and (6) risk protection triggers and cancel notifications. Orders submitted by NOM Market Makers over this interface are treated as quotes. See Options 3, Section 7(d)(1)(D). 6 See Securities Exchange Act Release No. 84559 (November 9, 2019), 83 FR 57774 (November 16, 2018) (SR–NASDAQ–2018–085) (‘‘Subsequent Rule Change’’). 7 See Securities Exchange Act Release No. 84723 (December 4, 2018), 83 FR 63692 (December 11, 2018) (SR–NASDAQ–2018–097). The Exchange proposed to immediately implement QUO as of the effectiveness of SR–NASDAQ–2018–097 and delay the implementation of OTTO by issuing an Options Trader Alert announcing the implementation date in Q1 2019. The QUO implementation became effective upon filing on November 26, 2018. 8 See Securities Exchange Act Release Nos. 85386 (March 21, 2019), 84 FR 11597 (March 27, 2019) (SR–NASDAQ–2019–016); and 87160 (September 30, 2019), 84 FR 53186 (October 4, 2019) (SR– NASDAQ–2019–078). E:\FR\FM\22JNN1.SGM 22JNN1

Agencies

[Federal Register Volume 85, Number 120 (Monday, June 22, 2020)]
[Notices]
[Pages 37483-37486]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13308]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89072; File No. SR-ICC-2020-008]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change, Security-Based Swap Submission, or 
Advance Notice Relating to the ICC Exercise Procedures and ICC Clearing 
Rules

June 16, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ and Rule 19b-4,\2\ notice is hereby given that on June 3, 
2020, ICE Clear Credit LLC (``ICC'') filed with the Securities and 
Exchange Commission (the ``Commission'') the proposed rule change, 
security-based swap submission, or advance notice as described in Items 
I, II and III below, which Items have been prepared by ICC. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, security-based swap submission, or advance notice 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change, Security-Based Swap Submission, or Advance Notice

    The principal purpose of the proposed rule change is to formalize 
the ICC Exercise Procedures in connection with the clearing of credit 
default index swaptions. ICC also proposes a related update to the ICC 
Clearing Rules (the ``Rules'').\3\
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    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change, Security-Based Swap Submission, or 
Advance Notice

    In its filing with the Commission, ICC included statements 
concerning the purpose of and basis for the proposed rule change, 
security-based swap submission, or advance notice and discussed any 
comments it received on the proposed rule change, security-based swap 
submission, or advance notice. The text of these statements may be 
examined at the places specified in Item IV below. ICC has prepared 
summaries, set forth in sections (A), (B), and (C) below, of the most 
significant aspects of these statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change, Security-Based Swap Submission, or 
Advance Notice

(a) Purpose
    ICC proposes to formalize the Exercise Procedures and to make a 
related change to the Rules in connection with its proposed launch of 
the clearing of credit default index swaptions (``Index Swaptions''). 
ICC has previously filed with the Commission changes to certain other 
policies and procedures related to the clearing of Index Swaptions on 
June 28, 2019 \4\ and January 14, 2020 \5\ (the ``Swaption Rule 
Filings''). As set out in the Swaption Rule Filings, ICC intends to 
adopt certain related policies and procedures in preparation for the 
launch of clearing of Index Swaptions, including those set out in this 
filing, and does not intend to commence clearing of Index Swaptions 
until all such policies and procedures have been approved by the 
Commission or otherwise become effective. As such, ICC proposes to 
formalize the Exercise Procedures and make the related changes to the 
Rules effective following the approval of all such policies and 
procedures and the completion of the ICC governance process surrounding 
the Index Swaptions product expansion.
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    \4\ SEC Release No. 34-87297; File No. SR-ICC-2019-007 (Oct. 15, 
2019) (approval), 84 FR 56270 (Oct. 21, 2019).
    \5\ SEC Release No. 34-88047; File No. SR-ICC-2020-002 (Jan. 27, 
2020) (notice), 85 FR 5756 (Jan. 31, 2020).
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    As discussed in the Swaption Rule Filings, pursuant to an Index 
Swaption, one party (the ``Swaption Buyer'') has the right (but not the 
obligation) to cause the other party (the ``Swaption Seller'') to enter 
into an index credit default swap transaction at a pre-determined 
strike price on a specified expiration date on specified terms. In the 
case of Index Swaptions that would be cleared by ICC, the underlying 
index credit default swap would be limited to certain CDX and iTraxx 
Europe index credit default swaps that are accepted for clearing by 
ICC, and which would be automatically cleared by ICC upon exercise of 
the Index Swaption by the Swaption Buyer in accordance with its terms.
I. Exercise Procedures
    The Exercise Procedures are intended to supplement the provisions 
of Subchapter 26R of the Rules \6\ with respect to Index Swaptions and 
provide further detail as to the manner in which Index Swaptions may be 
exercised by Swaption Buyers, the manner in which ICC will assign such 
exercises to Swaption Sellers, and certain actions that ICC may take in 
the event of technical issues.
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    \6\ Subchapter 26R of the Rules was proposed in the Swaption 
Rule Filings. SEC Release No. 34-87297; File No. SR-ICC-2019-007 
(Oct. 15, 2019) (approval), 84 FR 56270 (Oct. 21, 2019).
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    In paragraph 1 of the Exercise Procedures, ICC proposes to set out 
key definitions used for the exercise of Index Swaptions. Key defined 
terms would include the Exercise Period, which would be the period on 
the expiration date of an Index Swaption during which the Swaption 
Buyer may deliver an exercise notice to ICC to exercise all or part of 
such Index Swaption. The document would define the circumstances that 
constitute the failure of the Exercise System (``Exercise System 
Failure'') which is the electronic system established by ICC for 
exercise. The Exercising Party would mean (i) with respect to an Index 
Swaption carried in the house account of a Participant as Swaption 
Buyer, such Participant, and (ii) with respect to an Index Swaption 
carried in the client origin account of a Participant for a Non-
Participant Party as Swaption Buyer, such Non-Participant Party.
    ICC proposes to describe the exercise and assignment process in 
paragraph 2 of the Exercise Procedures. In paragraph 2.1, ICC states 
that exercise notices would be delivered in accordance with the ICC 
Rules and the Exercise Procedures and specifically references 
Subchapter 26R of the Rules related to Index Swaptions.
    Paragraph 2.2 of the proposed Exercise Procedures would address the 
procedures for exercise and assignment of Index Swaptions. The document 
sets forth ICC's process of netting all open positions in such expiring 
Index Swaption, which takes place on the business day prior to the 
expiration date of an Index Swaption and applies to house and client 
origin accounts. To exercise an Index Swaption, the Exercising Party 
would deliver an exercise notice to ICC during the Exercise Period 
specifying the notional amount being exercised (``Exercised Notional 
Amount''). ICC may also establish a Pre-Exercise Notification Period 
during which an Exercising Party may submit, modify, and/or withdraw 
preliminary exercise notices. The submission of an exercise notice 
during the Exercise Period will be irrevocable

[[Page 37484]]

and binding on the Exercising Party and, once validated by ICC, will be 
accepted by ICC and binding on ICC and the Exercising Party (and, in 
the case of a Non-Participant Party, its Participant). If ICC rejects 
an exercise notice as not valid, as described in the Exercise 
Procedures, it will inform the submitting party, who may resubmit a 
corrected notice within the Exercise Period. For informational purposes 
only, within the Exercise Period, ICC may estimate and provide the 
notional amount that it will assign to each open position in an Index 
Swaption of a Swaption Seller. Moreover, if an Exercising Party did not 
submit an exercise notice but submitted a preliminary exercise notice 
in respect of such Index Swaption that was not withdrawn, the 
Exercising Party will be deemed to have submitted an exercise notice 
with the Exercised Notional Amount specified under such preliminary 
notice. After the Exercise Period ends, ICC will determine final 
assignments to open positions in Index Swaptions of Swaption Sellers 
and notify Participants as described in the Exercise Procedures.
    The proposed Exercise Procedures would address limitations and 
clarifications regarding the exercise process. Paragraph 2.3 sets out 
certain limitations, including limitations that ICC may impose during 
the Exercise Period and limitations as to the responsibility for any 
failure to exercise an Index Swaption. Paragraph 2.4 further clarifies 
the party that is entitled to exercise. A Participant is not entitled 
to provide a preliminary exercise notice or exercise notice on behalf 
of Non-Participant Parties for which it carries Index Swaptions. A Non-
Participant Party will only be permitted to exercise an Index Swaption 
in a portfolio belonging to the Non-Participant Party. Additionally, 
under paragraph 2.4, a Participant may make certain elections as a 
result of a default or termination event with respect to a Non-
Participant Party for which it carries an Index Swaption, and is 
required to obtain the agreement of each Non-Participant Party for 
which it carries an open position in Index Swaptions to the provisions 
of the Rules and Exercise Procedures applicable to Index Swaptions.
    The proposed Exercise Procedures would describe the Exercise System 
and provide the steps that ICC would follow in case of technical 
issues. Paragraph 2.5 explains the Electronic Notice Process which is 
the process for the electronic delivery and assignment of exercise 
notices or preliminary exercise notices through the Exercise System. 
Exercise notices would only be submitted through the Exercise System 
pursuant to the Electronic Notice Process, unless otherwise determined 
by ICC pursuant to paragraph 2.6. Namely, in the event of an Exercise 
System Failure affecting an Exercise Period, paragraph 2.6 provides ICC 
with the following options: (i) Cancel and reschedule the Exercise 
Period, (ii) determine that automatic exercise will apply; and/or (iii) 
take such other action as ICC determines appropriate to permit 
Exercising Parties to submit exercise notices and to permit ICC to 
assign such notices. Paragraph 2.7 would address the situation where an 
Exercising Party is affected by a significant communications or 
information technology failure making it impossible or impractical to 
deliver all, or substantially all, of its exercise notices in 
accordance with the Electronic Notice Process during the Exercise 
Period (``Party Communication Failure''). Paragraph 2.8 would address 
the situation where Index Swaptions will be automatically exercised on 
the expiration date due to an Exercise System Failure.
II. Rule Amendments
    ICC proposes to amend ICC Rule 304 related to offsets to 
incorporate a reference to the Exercise Procedures. Specifically, ICC 
proposes a change to ICC Rule 304(a) to clarify that netting of 
applicable offsetting positions in Index Swaptions would be subject to 
any provisions in the Exercise Procedures.
(b) Statutory Basis
    ICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \7\ and the regulations 
thereunder applicable to it, including the applicable standards under 
Rule 17Ad-22.\8\ In particular, Section 17A(b)(3)(F) of the Act \9\ 
requires that the rule change be consistent with the prompt and 
accurate clearance and settlement of securities transactions and 
derivative agreements, contracts and transactions cleared by ICC, the 
safeguarding of securities and funds in the custody or control of ICC 
or for which it is responsible, and the protection of investors and the 
public interest. The proposed rule change would formalize the Exercise 
Procedures, which describe the exercise and assignment process and are 
intended to supplement the provisions of Subchapter 26R of the Rules, 
to support the clearing of Index Swaptions. ICC sets out procedures in 
the document that are designed to protect users in the event of 
technical issues or technology failures, including circumstances where 
there is an Exercise System Failure and Party Communication Failure. 
The procedures allow firms to submit preliminary exercise notices such 
that the preliminary instructions can be used as the final exercise 
instructions in the event of a communications failure during the 
exercise window. The proposed rule change also proposes a related 
update to Rule 304(a) to clarify that netting of applicable offsetting 
positions in Index Swaptions would be subject to any provisions in the 
Exercise Procedures. Accordingly, in ICC's view, the proposed rule 
change will further ensure that ICC's Rules and policies and procedures 
clearly reflect the terms and conditions applicable to Index Swaptions 
and is thus consistent with the prompt and accurate clearing and 
settlement of the contracts cleared by ICC, including Index Swaptions, 
the safeguarding of securities and funds in the custody or control of 
ICC or for which it is responsible, and the protection of investors and 
the public interest, within the meaning of Section 17A(b)(3)(F) of the 
Act.\10\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1.
    \8\ 17 CFR 240.17Ad-22.
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ Id.
---------------------------------------------------------------------------

    The amendments would also satisfy relevant requirements of Rule 
17Ad-22.\11\ Rule 17Ad-22(e)(1) \12\ requires each covered clearing 
agency \13\ to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to provide for a well-
founded, clear, transparent, and enforceable legal basis for each 
aspect of its activities in all relevant jurisdictions. The Exercise 
Procedures are intended to supplement the provisions of Subchapter 26R 
of the Rules with respect to Index Swaptions and would further ensure 
that ICC's Rules clearly reflect the terms and conditions applicable to 
Index Swaptions. The proposed rule change would support the legal basis 
for the operation of the exercise and assignment process, including by 
defining key terms; describing the validation and rejection of exercise 
notices, including the party that is entitled to submit such notices; 
and addressing situations where there are technical issues. As such, 
the proposed rule change would satisfy the requirements of the Rule 
17Ad-22(e)(1).\14\
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    \11\ 17 CFR 240.17Ad-22.
    \12\ 17 CFR 240.17Ad-22(e)(1).
    \13\ ICC will be a covered clearing agency subject to Rule 17ad-
22(e) as of the effective date (July 13, 2020) as a result of the 
amended definition. 17 CFR 240.17Ad-22; Release No. 34-88616; File 
No. S7-23-16 (April 9, 2020), 85 FR 28853 (May 14, 2020).
    \14\ 17 CFR 240.17Ad-22(e)(1).

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[[Page 37485]]

    Rule 17Ad-22(e)(17) \15\ requires, in relevant part, each covered 
clearing agency to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to manage its operational 
risks by (i) identifying the plausible sources of operational risk, 
both internal and external, and mitigating their impact through the use 
of appropriate systems, policies, procedures, and controls; and (ii) 
ensuring that systems have a high degree of security, resiliency, 
operational reliability, and adequate, scalable capacity. The proposed 
rule change would allow ICC to manage the operational risks associated 
with the exercise and assignment process by establishing procedures for 
the exercise and assignment of Index Swaptions, which would allow ICC 
to identify plausible sources of operational risks in clearing Index 
Swaptions and minimize their impact through appropriate systems, 
policies, procedures, and controls. To reduce operational risk, the 
document includes procedures for validating and rejecting exercise 
notices and procedures for exercise in the event of technical issues or 
technology failures, including an Exercise System Failure and a Party 
Communication Failure. Such procedures are designed to provide sound 
alternatives in the case of technical issues and help mitigate the 
impact from technical issues to ensure that the system has a high 
degree of security, resiliency, operational reliability, and adequate, 
scalable capacity. The proposed rule change is therefore reasonably 
designed to meet the requirements of Rule 17Ad-22(e)(17).\16\
---------------------------------------------------------------------------

    \15\ 17 CFR 240.17Ad-22(e)(17)(i)-(ii).
    \16\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18) \17\ requires each covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to establish objective, risk-based, and 
publicly disclosed criteria for participation, which permit fair and 
open access by direct and, where relevant, indirect participants and 
other financial market utilities, require participants to have 
sufficient financial resources and robust operational capacity to meet 
obligations arising from participation in the clearing agency, and 
monitor compliance with such participation requirements on an ongoing 
basis. The publically available Rules and the Exercise Procedures, 
which would be publically available, would establish objective, risk-
based, and publicly disclosed criteria for participation in ICC's 
exercise and assignment process. As discussed above, the Exercise 
Procedures would provide further detail as to the manner in which Index 
Swaptions may be exercised by Swaption Buyers and the manner in which 
ICC will assign such exercises to Swaption Sellers. The document would 
also specify the party entitled to exercise, stating that a Non-
Participant Party will only be permitted to exercise an Index Swaption 
in a portfolio belonging to the Non-Participant Party. The amendments 
to the Rules further incorporate reference to the Exercise Procedures 
into Rule 304(a). Additionally, the proposed rule change would require 
a Participant to obtain the agreement of each Non-Participant Party for 
which it carries an open position in Index Swaptions to the provisions 
of the Rules and Exercise Procedures applicable to Index Swaptions, 
which are intended to ensure that participants have sufficient 
financial resources and robust operational capacity to meet obligations 
arising from participation in the clearing agency. Thus, the proposed 
rule change would satisfy the requirements of Rule 17Ad-22(e)(18).\18\
---------------------------------------------------------------------------

    \17\ 17 CFR 240.17Ad-22(e)(18).
    \18\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    ICC does not believe the proposed rule change would have any 
impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purpose of the Act. The proposed rule 
change would support the clearing of Index Swaptions, including by 
formalizing the Exercise Procedures and making a related Rule change 
necessary to support the clearing of Index Swaptions. The proposed rule 
change will apply uniformly across all market participants. ICC does 
not believe acceptance of Index Swaptions for clearing would adversely 
affect the trading markets for such contracts, and in fact acceptance 
of such contracts by ICC would provide market participants with the 
additional flexibility to have their Index Swaptions cleared. 
Acceptance of Index Swaptions for clearing will not, in ICC's view, 
adversely affect clearing of any other currently cleared product. ICC 
does not believe the amendments would adversely affect the ability of 
Participants, their customers or other market participants to continue 
to clear contracts, including CDS Contracts. ICC also does not believe 
the enhancements would adversely affect the cost of clearing or 
otherwise limit market participants' choices for selecting clearing 
services in Index Swaptions, credit default swaps or other products. 
Accordingly, ICC does not believe the amendments would impose any 
burden on competition not necessary or appropriate in furtherance of 
the purpose of the Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule 
Change, Security-Based Swap Submission, or Advance Notice Received From 
Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. ICC will notify the Commission of any written 
comments received by ICC.

III. Date of Effectiveness of the Proposed Rule Change, Security-Based 
Swap Submission, or Advance Notice and Timing for Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, security-based swap submission, or advance notice is consistent 
with the Act. Comments may be submitted by any of the following 
methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-ICC-2020-008 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-ICC-2020-008. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's

[[Page 37486]]

internet website (https://www.sec.gov/rules/sro.shtml). Copies of the 
submission, all subsequent amendments, all written statements with 
respect to the proposed rule change, security-based swap submission, or 
advance notice that are filed with the Commission, and all written 
communications relating to the proposed rule change, security-based 
swap submission, or advance notice between the Commission and any 
person, other than those that may be withheld from the public in 
accordance with the provisions of 5 U.S.C. 552, will be available for 
website viewing and printing in the Commission's Public Reference Room, 
100 F Street NE, Washington, DC 20549, on official business days 
between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filings 
will also be available for inspection and copying at the principal 
office of ICE Clear Credit and on ICE Clear Credit's website at https://www.theice.com/clear-credit/regulation. All comments received will be 
posted without change.
    Persons submitting comments are cautioned that we do not redact or 
edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-ICC-2020-008 
and should be submitted on or before July 13, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13308 Filed 6-19-20; 8:45 am]
BILLING CODE 8011-01-P
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