Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change, as Modified by Partial Amendment No. 1, Relating to the ICE Clear Europe Auction Terms for CDS Default Auctions and CDS Default Management Policy, 40369-40377 [2020-14389]
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Federal Register / Vol. 85, No. 129 / Monday, July 6, 2020 / Notices
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V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 3
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 3, prior to
the thirtieth day after the date of
publication of notice of the filing of
Amendment No. 3 in the Federal
Register. In Amendment No. 3, the
Exchange modified the description of
each Fund and conformed the
description of NYSE Arca Rule 8.601–E
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to the final rule approved in the Active
Proxy Portfolio Shares Order.57
Amendment No. 3 also provides other
clarifications and additional
information related to the Funds.58 The
changes and additional information in
Amendment No. 3 assist the
Commission in finding that the proposal
is consistent with the Exchange Act.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Exchange Act,59 to approve the
proposed rule change, as modified by
Amendment No. 3, on an accelerated
basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 60 that the
proposed rule change (SR–NYSEArca–
2019–92), as modified by Amendment
No. 3, be, and it hereby is, approved on
an accelerated basis.61
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–14489 Filed 7–2–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89186; File No. SR–ICEEU–
2020–007]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Order Approving
Proposed Rule Change, as Modified by
Partial Amendment No. 1, Relating to
the ICE Clear Europe Auction Terms
for CDS Default Auctions and CDS
Default Management Policy
June 29, 2020.
I. Introduction
On May 12, 2020, ICE Clear Europe
Limited (‘‘ICE Clear Europe’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ‘‘Act’’),1 and
Rule 19b–4,2 a proposed rule change to
amend its Auction Terms for CDS
Default Auctions (the ‘‘CDS Auction
Terms’’) and CDS Default Management
Policy (the ‘‘Policy’’). On May 20, 2020,
ICE Clear Europe filed Partial
Amendment No. 1 to the proposed rule
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57 See
supra note 3.
Amendment No. 3, supra note 11.
59 15 U.S.C. 78s(b)(2).
60 Id.
61 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
58 See
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40369
change.3 The proposed rule change, as
modified by Partial Amendment No. 1,
was published for comment in the
Federal Register on May 28, 2020.4 The
Commission did not receive comments
regarding the proposed rule change, as
modified by Partial Amendment No. 1.
For the reasons discussed below, the
Commission is approving the proposed
rule change, as modified by Partial
Amendment No. 1 (hereinafter the
‘‘proposed rule change’’).
II. Description of the Proposed Rule
Change
As discussed below, the proposed
rule change would amend the CDS
Auction Terms and the Policy.5 The
CDS Auction Terms explain how ICE
Clear Europe would auction one or more
lots of a defaulting Clearing Member’s
CDS Contracts, and the Policy describes
the processes that ICE Clear Europe
would use to close a defaulting Clearing
Member’s CDS Contracts, including by
auction.
A. Amendments to the CDS Auction
Terms
Currently, the CDS Auction Terms
contain provisions that apply to Primary
CDS Auctions (meaning initial auctions
of CDS contracts) and Secondary CDS
Auctions (meaning auctions conducted
under part two of the CDS Auction
Terms and in accordance with ICE Clear
Europe Rule 905(d)(i)(B).6 The
provisions of the CDS Auction Terms
applicable to Primary CDS Auctions are
substantially the same as those
applicable to Secondary CDS Auctions,
and the proposed rule change would
make the changes described below to
3 Partial Amendment Number 1 amended Exhibit
5A of the filing to correct the paragraph numbering
in Part 2 of the CDS Auction Terms.
4 Self-Regulatory Organizations; ICE Clear Europe
Limited; Notice of Filing of Proposed Rule Change,
as Modified by Partial Amendment No. 1, Relating
to the ICE Clear Europe Auction Terms for CDS
Default Auctions and CDS Default Management
Policy (formerly the CDS Default Management
Framework), Exchange Act Release No. 88928 (May
21, 2020); 85 FR 32075 (May 28, 2020) (SR–ICEEU–
2020–007) (‘‘Notice’’).
5 Capitalized terms not otherwise defined herein
have the meanings assigned to them in the CDS
Auction Terms, the Policy, or the ICE Clear Europe
Rulebook, as applicable. The description that
follows is excerpted from the Notice, 85 FR at
32075.
6 A Secondary CDS Auction is an auction that ICE
Clear Europe may conduct if ICE Clear Europe does
not terminate, transfer, or close out all of the CDS
Contracts of a Defaulter pursuant to a Primary CDS
Auction and the other actions permitted under ICE
Clear Europe Rule 905(a)–(c). Moreover, in the
event of the failure of one or more Secondary CDS
Auctions to eliminate or replace all remaining risk
of the open contracts of a defaulting Clearing
Member, ICE Clear Europe may employ its ability
to engage in reduced gains distributions under Rule
914 and to partially terminate open contracts under
Rule 915.
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both sets of provisions. Thus, for the
sake of brevity, the description below
refers collectively to changes to the CDS
Auction Terms and to an ‘‘Auction,’’
rather than a Primary CDS Auction and
Secondary CDS Auction, unless needed
to distinguish between the two terms.
As described below, the proposed rule
change would make changes primarily
related to (i) updating and revising
defined terms of the CDS Auction
Terms; (ii) interpretation and
application of the CDS Auction Terms;
(iii) the operation of an Auction; (iv)
Minimum Bid Requirements; (v) use of
the Default Management System; (vi)
introducing All or Nothing Bids; and
(vii) adding provisions to cover the EU
Market Abuse Regulation.
i. Amendments to the Defined Terms
The proposed rule change would
amend a number of the defined terms
found in Section 1 of the CDS Auction
Terms. First, the proposed rule change
would update the names of certain
defined terms to refer to an ‘‘Auction
Lot’’ rather than a ‘‘Lot.’’ For example,
the proposed rule change would re-title
the term ‘‘Failed Lot’’ to ‘‘Failed
Auction Lot.’’ ICE Clear Europe is
making this change to be more specific
and distinguish the term Auction Lot
from the more general term Lot.
Moreover, this change is consistent with
ICE Clear Europe’s current authority
under the CDS Auction Terms, which
permit ICE Clear Europe to divide a
Clearing Member’s portfolio into one or
more Auction Lots and auction off each
Auction Lot separately, as ICE Clear
Europe considers appropriate.
Similarly, the proposed rule change
would rename and amend certain
defined terms to clarify that they apply
to Primary CDS Auctions rather than
Secondary CDS Auctions. The CDS
Auction Terms contain one set of
defined terms that contain definitions
that are applicable to both Primary CDS
Auctions and Secondary CDS Auctions.
To clarify the terms applicable only to
Primary CDS Auctions and better
distinguish them from Secondary CDS
Auctions, the proposed rule change
would re-name the terms that currently
only refer to a ‘‘CDS Auction’’ to specify
that they apply to a Primary CDS
Auction. For example, the proposed rule
change would change the name of the
terms ‘‘CDS Auction’’ and ‘‘CDS
Auction Participant’’ to ‘‘Primary CDS
Auction’’ and ‘‘Primary CDS Auction
Participant.’’ With respect to Secondary
CDS Auctions, no change is necessary
because the CDS Auction Terms already
contain terms specific to Secondary CDS
Auctions. For example, the CDS
Auction Terms already have a term
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called ‘‘Secondary CDS Auction
Participant.’’
The proposed rule change would also
amend the defined term ‘‘Second CDS
Auction.’’ A Second CDS Auction is a
Primary CDS Auction that ICE Clear
Europe may hold to sell an Auction Lot
if it fails to sell all of the contracts in
that Auction Lot via an initial Primary
CDS Auction. A Second CDS Auction is
an additional Primary CDS Auction,
rather than a Secondary CDS Auction,
as described above, and would therefore
be subject to the rules for a Primary CDS
Auction. To better clarify that point, the
proposed rule change would rename the
term ‘‘Second CDS Auction’’ to ‘‘Repeat
CDS Auction.’’
Moreover, the proposed rule change
would revise the terms ‘‘Split Bidder’’
and ‘‘Subordinate Bidder’’ to note that
they could apply to either a Primary
CDS Auction Participant or a Secondary
CDS Auction Participant, as applicable
for the relevant auction. ICE Clear
Europe represents that this amendment
does not reflect a change in substance
but would make the drafting consistent
with the distinction between Primary
and Secondary CDS Auctions discussed
above.
Next, the proposed rule change would
make changes to defined terms that
affect the specifics of how ICE Clear
Europe conducts an Auction.
Specifically, the proposed rule change
would change the name of the term
‘‘Closing Time’’ to ‘‘Bidding Close
Time’’ to be more precise. The proposed
rule change would not alter the
substance of this definition, however.
Similarly, the proposed rule change
would slightly revise the definitions of
‘‘Primary CDS Auction Priority AC
Sequence’’, ‘‘Secondary CDS Auction
Priority AC Sequence’’, ‘‘Primary CDS
Auction Priority GF Sequence,’’ and
‘‘Secondary CDS Auction Priority GF
Sequence’’. These defined terms specify
the order in which ICE Clear Europe
would use non-defaulting Clearing
Members’ Guaranty Fund Contributions
and Assessment Contributions if needed
as additional financial resources to
resolve the default of a Clearing Member
under ICE Clear Europe Rule 908(i).
Generally, under the current definitions,
ICE Clear Europe would first apply the
contributions of those Clearing Members
whose bids in an Auction were the least
competitive, starting with Non-Bidding
CDS Clearing Members, and would then
apply the contributions of those
Clearing Members whose bids in an
Auction were more competitive. The
proposed rule change would not alter
this order of priority. The proposed rule
change would require, however, that
ICE Clear Europe take each amount in
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the sequence pro rata for the relevant
Auction Lot by applying the Auction
Lot Guaranty Fund Weighting. The
Auction Lot Guaranty Fund Weighting
would be a percentage equal to the
Initial Margin requirement associated
with the contracts in the Auction Lot
divided by the Initial Margin
requirement associated with all of the
contracts in all of the Auction Lots
comprising the defaulting Clearing
Member’s portfolio. Thus, under this
change, ICE Clear Europe would
determine the amounts in the sequence
by Auction Lot, taking into account the
Initial Margin requirement associated
with each Auction Lot versus all
Auction Lots. ICE Clear Europe
represents that this change is consistent
with, and does not represent an
alteration to, its current practices
because the CDS Auction Terms already
permit ICE Clear Europe to divide a
Clearing Member’s portfolio into one or
more Auction Lots and auction off each
Auction Lot separately, as ICE Clear
Europe considers appropriate.
Finally, consistent with the changes
described below, the proposed rule
change would add new defined terms.
For example, the proposed rule change
would add the terms ‘‘All or Nothing
Bid’’, ‘‘DMS’’, and ‘‘Standard Bid.’’ The
definitions of those new terms are
discussed further below as part of the
discussion of the specific changes
related to those terms.
ii. Interpretation and Application of
CDS Auction Terms
The proposed rule change would add
several paragraphs regarding
interpretation and application of the
CDS Auction Terms. For example, the
proposed rule change would add
paragraphs to define the governing law
for the CDS Auction Terms, to identify
which courts shall have jurisdiction
over disputes, and to provide for
submission of matters to arbitration. ICE
Clear Europe represents that these
provisions are substantially similar to
existing provisions in the Rulebook and
the other Procedures, and ICE Clear
Europe is proposing to add them to the
CDS Auction Terms for consistency
across its documentation.
Similarly, the proposed rule change
would clarify that nothing in the CDS
Auction Terms would prevent ICE Clear
Europe from administering a sale or
entering into offsetting transactions
without holding an Auction and that the
CDS Auction Terms are subject to ICE
Clear Europe’s Rulebook. These changes
reflect ICE Clear Europe’s existing
authority under its Rulebook, and ICE
Clear Europe is adding these
clarifications to avoid any potential
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confusion as to the scope of the CDS
Auction Terms.
The proposed rule change would also
clarify that references to CDS Contracts,
for purposes of the CDS Auction Terms,
include (i) CDS Contracts terminated via
automatic early termination or notional
amounts representing such terminated
CDS Contracts and (ii) CDS Contracts
that have arisen from hedging
transactions executed by ICE Clear
Europe. ICE Clear Europe is making
these changes to clarify that it may
auction such CDS Contracts to establish
replacement contracts with nondefaulting Clearing Members and to
determine a price for calculating ICE
Clear Europe’s loss from closing the
defaulting Clearing Member’s positions.
iii. Operation of an Auction
The proposed rule change would also
make certain changes regarding the
operation of an Auction, specifically
relating to the Bidding Close Time for
an Auction, the treatment of Bids, and
participation of customers of Clearing
Members in an Auction.
Currently, the CDS Auction Terms
provide that Clearing Members may
only submit Bids for an Auction prior to
the Bidding Close Time for that
Auction. The proposed rule change
would not alter this provision, but it
would further specify that ICE Clear
Europe could postpone the Bidding
Close Time for up to one hour by giving
notice of such postponement to all
participants and following consultation
to the extent practicable with the CDS
Default Committee. Similarly, the CDS
Auction Terms permit ICE Clear Europe
to withdraw an Auction Lot prior to the
Bidding Close Time. The proposed rule
change would expand this authority to
permit ICE Clear Europe to withdraw an
Auction Lot after the Bidding Close
Time. ICE Clear Europe believes these
changes would provide it additional
flexibility to deal with any potential
operational issues that could arise
during an Auction.
The proposed rule change would
update provisions related to the
treatment of Bids in an Auction. First,
the proposed rule change would revise
the wording of a number of provisions
to specify that in certain circumstances
ICE Clear Europe would treat Clearing
Members as having not made a Bid in
Auction rather than not participating in
an auction, as currently stated. This is
not a substantive change because in
either case, whether not participating in
the Auction or not making a Bid in the
Auction, the CDS Auction Terms as
amended would treat the Clearing
Member as a Non-Bidding CDS Clearing
Member. This designation is important
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because under the CDS Auction Terms
and ICE Clear Europe Rule 908(i), in the
event that ICE Clear Europe needs to use
non-defaulting Clearing Members’
Guaranty Fund Contributions or
Assessment Contributions to resolve the
default of a Clearing Member, ICE Clear
Europe would use Non-Bidding CDS
Clearing Members’ Contributions first.
Thus, under the proposed rule change,
the CDS Auction Terms would treat a
Clearing Member that submits a
referential Bid (meaning a Bid that is
one Euro higher or lower than the
highest or lowest bidder), an invalid
Bid, a void Bid, a Bid after the Bidding
Close Time, a Bid in breach of the CDS
Auction Terms, position limits, or other
risk policies of ICE Clear Europe, or that
submits a Bid while a Defaulter, as
having not made a Bid in an Auction
and as a Non-Bidding Clearing Member.
Although effectively this treatment is
the same as under the current CDS
Auction Terms (designation as a NonBidding CDS Clearing Member), ICE
Clear Europe is making this change
because its believes that it is more
accurate to describe the Clearing
Member as having not made a Bid rather
than not participating.
Relatedly, the CDS Auction Terms
currently permit ICE Clear Europe to
exclude certain Bids for purposes of
calculating the CDS Auction Clearing
Price (as defined below). Specifically,
the CDS Auction Terms permit ICE
Clear Europe to exclude a Bid that is
invalid because ICE Clear Europe
reasonably believes that if it accepted
such Bid, the Clearing Member would
not clear the resulting CDS Contract.
The proposed rule change would
expand this provision to include Bids
that are invalid for other reasons under
the CDS Auction Terms, like Bids
submitted below the minimum bid size,
if any, Bids submitted after the Bidding
Close Time, and Bids that do not
comply with the requirements of the
CDS Auction Terms.
In addition, under the current CDS
Auction Terms, each Bid constitutes an
offer from a CDS Clearing Member to
ICE Clear Europe to enter into CDS
Contracts. The proposed rule change
would not change this provision. The
proposed rule change would clarify,
however, that the offer would be an
offer to enter into CDS Contracts
pursuant to a Transfer governed by ICE
Clear Europe Rule 904(b) and Part 4 of
the ICE Clear Europe Rulebook. This
change would not alter the substance of
this provision. Rather, ICE Clear Europe
is making this change to provide
additional specificity by referencing the
existing process for entering into CDS
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40371
Contracts under the ICE Clear Europe
Rulebook.
Finally, the CDS Auction Terms
currently permit customers of Clearing
Members to participate in Auctions by
becoming Direct Participating
Customers. To become a Direct
Participating Customer, a customer must
meet certain requirements, including
making a deposit and entering into an
agreement with ICE Clear Europe
regarding its participation. The
proposed rule change would further
require that that each Direct
Participating Customer enter into a CDS
Auction Participation Agreement with
its CDS Clearing Member. ICE Clear
Europe is making this change to
establish a clearer and stronger basis for
enforcement of the CDS Auction Terms
against the Direct Participating
Customer.
iv. Minimum Bid Requirements
Currently, the CDS Auction Terms
require each CDS Clearing Member to
bid in every CDS Auction and for every
lot in a CDS Auction unless its
membership privileges permit it not to
participate and it elects not to
participate, with this obligation referred
to as a CDS Clearing Member’s
Minimum Bid Requirement. The CDS
Auction Terms provide further,
however, that a Minimum Bid
Requirement would not apply to the
extent: (i) it would breach applicable
law or the ICE Clear Europe Rulebook;
(ii) it would result in a self-referencing
CDS; or (iii) where ICE Clear Europe,
after being notified in writing by the
Clearing Member that it would be
inappropriate, reasonably determines
that the Minimum Bid Requirement
does not apply. In that case, the Clearing
Member must notify ICE Clear Europe
promptly and in any event at least 12
hours prior to the opening of the
relevant Auction.
The proposed rule change would
make a number of amendments to these
provisions. First, to acknowledge the
fact there may be circumstances where
a minimum Bid is not required, the
proposed rule change would amend the
requirement that each CDS Clearing
Member bid in every CDS Auction for
every lot in a CDS Auction to make it
subject to a zero Minimum Bid
Requirement being established under
the conditions described further below.
Next, the proposed rule change would
delete the qualification that the
Minimum Bid Requirement does not
apply to a CDS Clearing Member whose
membership privileges permit it not to
participate. ICE Clear Europe is deleting
that particular provision because there
are no Clearing Members whose
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membership privileges permit them not
to participate in CDS Auctions.
Relatedly, the proposed rule change
would also delete the term ‘‘Elective
CDS Auction Participant,’’ which refers
to a CDS Clearing Member whose
membership privileges permit it not to
participate.
Moreover, with respect to the
circumstances in which a Minimum Bid
Requirement does not apply, the
proposed rule change would amend the
portion of the CDS Auction Terms
regarding a Clearing Member’s
notification to ICE Clear Europe that the
Minimum Bid Requirement should not
apply. Under the proposed rule change,
a Clearing Member would still be
required to notify ICE Clear Europe, and
ICE Clear Europe still would have to
reasonably determine that the Minimum
Bid Requirement would be
inappropriate. The Clearing Member
would be required to provide the notice,
however, within one hour of ICE Clear
Europe publishing details of the CDS
Contracts comprising the relevant
Auction Lot, and ICE Clear Europe
would need to confirm that it agrees
with the Clearing Member’s assessment.
ICE Clear Europe is making this
particular change because ICE Clear
Europe does not believe the current 12hour period is feasible given that it may
need to conduct an Auction with less
than 12 hours’ notice.
Finally, the CDS Auction Terms
currently provide that a Clearing
Member can satisfy its Minimum Bid
Requirement by submitting multiple
Bids with differing Bid prices and Bid
sizes provided that, in the aggregate, its
submitted Bids equal or exceed the
Minimum Bid Requirement and any
individual Bid is larger than any
applicable minimum Bid size imposed
for that particular Auction, consistent
with the CDS Auction Terms. The
proposed rule change would clarify this
provision by providing that any
individual Bid must be equal to or larger
than any applicable minimum Bid size.
Additionally, the CDS Auction Terms
currently allow affiliated Clearing
Members to transfer, outsource, or
aggregate their Minimum Bid
Requirements to apply to a single one of
them, subject to notifying ICE Clear
Europe prior to a CDS Auction. The CDS
Auction Terms further provide that a
Clearing Member that transfers or
outsources its Minimum Bid
Requirement to an Affiliate remains
liable for any breach by its Affiliate in
respect of such Clearing Member’s
Minimum Bid Requirement (in addition
to the liability on the part of its Affiliate
for such breach) and is subject to the
CDS Auction Priority as if such Bid
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were its own. Under the proposed rule
change, the CDS Auction Terms would
continue to allow a Clearing Member to
transfer its Minimum Bid Requirement
to an Affiliate but would further require
that the Affiliate also be a Clearing
Member and that both Clearing
Members execute an agreement
provided by ICE Clear Europe for this
purpose. The proposed rule change also
would allow Clearing Members to
outsource the operational processing of
any of their obligations under the CDS
Auction Terms pursuant to ICE Clear
Europe Rule 102(w), which permits
Clearing Members to outsource the
performance of their obligations under
the ICE Clear Europe Rulebook. Thus,
this change would expand a Clearing
Member’s ability to outsource the
operational processing of any of its
obligations under the CDS Auction
Terms (not just the Minimum Bid
Requirement) and would reference the
applicable ICE Clear Europe Rule.
Moreover, the proposed rule change, as
under the current CDS Auction Terms,
would provide that a Clearing Member
that transfers its Minimum Bid
Requirement to an Affiliate remains
liable with respect to that Minimum Bid
Requirement. The proposed rule change
also would expand this liability to make
a Clearing Member liable for any breach
of the CDS Auction Terms by the person
to whom the Clearing Member has
outsourced its operational obligations,
consistent with the expansion discussed
above. Finally, the proposed rule change
would further specify that a Clearing
Member that transfers or outsources its
Minimum Bid Requirement to an
Affiliate would assume the same
position as the Affiliate for the purposes
of determining the order of application
of non-defaulting Clearing Members’
Guaranty Fund Contributions and
Assessment Contributions under ICE
Clear Europe Rule 908(i) and for
designation as a Non-Bidding CDS
Clearing Member. ICE Clear Europe is
making this particular change to better
specify the consequences of transfer of
a CDS Clearing Member’s obligations to
an Affiliate.
Finally, to clarify the extent of the
Minimum Bid Requirements, the
proposed rule change would add a
provision to state that only those Bids
that count toward the Minimum Bid
Requirement would be taken into
account in determining the order of
application of Guaranty Fund
Contributions and Assessment
Contributions under the Primary and
Secondary CDS Auction Priority AC
Sequence, Primary and Secondary CDS
Auction Priority GF Sequence, and ICE
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Clear Europe Rule 908(i) (as discussed
above). Thus, for example, a Clearing
Member that submits a Bid despite
having a Minimum Bid Requirement of
zero (for one of the reasons discussed
above), would not see that Bid
considered in determining where the
Clearing Member stands in the CDS
Auction Priority GF Sequence.
v. Use of the Default Management
System
As mentioned above, the proposed
rule change would add a new defined
term, ‘‘DMS.’’ The proposed rule change
would define DMS as the Default
Management System operated by ICE
Clear Europe. The Default Management
System would be the system used by
ICE Clear Europe to communicate
information to, and receive information
from, CDS Clearing Members regarding
Auctions. The proposed rule change
would make changes to various aspects
of the CDS Auction Terms to reflect use
of this new defined term. With respect
to the defined terms, the proposed rule
change would make amendments to
reflect the use of the DMS rather than
the currently specified forms of
communication, which usually require
some form of manual delivery. For
example, the proposed rule change
would rename the term ‘‘Bid Form’’ to
‘‘Bid Submission’’ and revise the
definition to reflect that it would refer
to a Bid submitted via the DMS rather
than a Bid submitted on a form
prescribed by ICE Clear Europe.
Similarly, the proposed rule change
would amend the definitions for
Primary and Secondary CDS Auction
Announcement to reflect that ICE Clear
Europe would send the announcement
via the DMS rather than a circular.
Similarly, the proposed rule change
would amend other parts of the CDS
Auction Terms to reflect ICE Clear
Europe’s use of the DMS. Specifically,
the proposed rule change would require
that Minimum Bid Requirements be
communicated via the DMS (or via such
other means and in such format as is
specified by ICE Clear Europe), rather
than by the template notification
currently set out in Annex B.
Accordingly, the proposed rule change
would delete Annex B from the CDS
Auction Terms. The proposed rule
change would also require that ICE
Clear Europe send the particular
specifications for an Auction Lot, like
its minimum reserve price (the lowest
price ICE Clear Europe would accept),
via the DMS rather than by the template
notification currently set out in Annex
A. Accordingly, the proposed rule
change would delete Annex A from the
CDS Auction Terms. Finally, the
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proposed rule change would require
that ICE Clear Europe notify the
winning bidders for particular Auction
Lots via the DMS.
In addition, the proposed rule change
would amend the CDS Auction Terms to
reflect Clearing Members’ use of the
DMS. The proposed rule change would
require Clearing Members to submit
bids via the DMS. The proposed rule
change would also specify that a
Clearing Member could amend its Bid
by resubmitting the entire bid through
DMS.
To reflect the particular operations of
the DMS, the proposed rule change
would delete a provision from the CDS
Auction Terms that currently states that
Clearing Members may make an
unlimited number of separate Bids.
Operationally, the DMS does not accept
an unlimited number of separate Bids
from Clearing Members. Rather, the
DMS would allow a Clearing Member to
make separate Bids in respect of either
its Customers for whom it acts as
Clearing Member or its Sponsored
Principals for whom it acts as Sponsor
(in addition to any Bids for its
Proprietary Accounts), in the same way
as it may make a Bid for one of its
Proprietary Accounts and subject to the
same provisions of the CDS Auction
Terms. Similarly, the proposed rule
change would delete a statement that a
Clearing Member who has made a
mistaken or erroneous bid may
withdraw the Bid and correct the
mistake. The DMS would not permit
Clearing Members to withdraw Bids.
Instead, the Clearing Member would
need to request that ICE Clear Europe
invalidate the Bid, which, as under the
current CDS Auction Terms, ICE Clear
Europe could do at its own discretion if
the Clearing Member has made a
genuine mistake in the submission of a
Bid.
Finally, the CDS Auction Terms
currently allow ICE Clear Europe to set
a minimum bid size for an Auction and
provide that any bid below the
minimum bid size will be null and void.
The proposed rule change would
leverage the DMS to automate these
existing requirements by specifying that
the DMS would be designed to
automatically prevent Clearing Members
from submitting bids below the
minimum bid size and to render null
and void any bid below the minimum
bid size that the DMS accepted in error.
vi. All or Nothing Bids
As mentioned above, the proposed
rule change would add a new defined
term, ‘‘All or Nothing Bid.’’ An All or
Nothing Bid would be a Bid that
stipulates that if the Bid is the winning
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Bid, the bidder would receive all of the
contracts being auctioned in the lot,
without any of the contracts being split
among other Bids. To make an All or
Nothing Bid, the bidder would need to
mark the Bid as such in its submission.
The proposed rule change would
introduce a new defined term for Bids
that are not All or Nothing Bids, calling
them Standard Bids.
Clearing Members would not be
required to make All or Nothing Bids
pursuant to the proposed rule change. If
a Clearing Member submits an All or
Nothing Bid, however, then in the
absence of other bids, the All or Nothing
Bid would satisfy the Clearing Member’s
Minimum Bid Requirement (if any) at
the same price but adjusted on a pro rata
basis for the notional amount of
contracts in the Auction Lot. If a
Clearing Member makes an All or
Nothing Bid, the Clearing Member still
would be able to submit one or more
Standard Bids for the same Auction Lot,
whether for its account or the account
of its customers, provided that all of the
Bids are submitted in the same
submission.
Under the CDS Auction Terms, ICE
Clear Europe currently determines the
price of an Auction by ordering Bids
sequentially, starting with the highest
price and ending with the lowest price.
The price of the Bid at which, along
with any equal or higher Bids, the sum
of the notional amount of contracts
being purchased equals or is greater
than the notional amount of contracts
that ICE Clear Europe is auctioning is
the clearing price of the Auction (the
‘‘CDS Auction Clearing Price’’). In other
words, ICE Clear Europe proceeds down
the list of Bids by price, starting with
the highest priced Bid, and sets the CDS
Auction Clearing Price at the Bid that,
along with the other higher priced Bids
before it, allows ICE Clear Europe to
allocate 100% of the open CDS contracts
in the Auction Lot.
The CDS Auction Terms currently
require that, in the event there are
multiple Bids at the CDS Auction
Clearing Price and there is a shortfall of
open CDS contracts, ICE Clear Europe
must allocate the contracts pro rata
according to the notional amount of
contracts that each winning bidder
requested in its Bid. As revised under
the proposed rule change, the CDS
Auction Terms would require that,
where there is an All or Nothing Bid in
the sequence of Bids before the CDS
Auction Clearing Price, the price of the
All or Nothing Bid would set the CDS
Auction Clearing Price (because that
would be the highest priced bid that
would allow ICE Clear Europe to
allocate 100% of the open contracts). In
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that case, ICE Clear Europe would
allocate to the bidder that submitted the
All or Nothing Bid 100% of the
contracts even if there are Standard Bids
at a higher or equal price. If there were
more than one All or Nothing Bid at the
CDS Auction Clearing Price, then the
CDS Auction Procedures, as revised
under the proposed rule change, would
require that ICE Clear Europe allocate
the portfolio equally among the All or
Nothing Bids.
The proposed rule change would
update two other provisions of the CDS
Auction Terms to clarify how those
provisions would apply in light of the
presence of All or Nothing Bids. First,
the CDS Auction Terms currently
provide that ICE Clear Europe may, after
a Primary Auction, in its discretion and
after consultation with the CDS Default
Committee, determine the CDS Auction
Clearing Price to be less than 100% of
the notional amount of the contracts and
declare a Repeat Auction to auction off
the remaining contracts. ICE Clear
Europe may do so if, in its reasonable
determination, awarding 100% of the
notional amount of the contracts would
have a material impact on the amounts
payable or receivable by ICE Clear
Europe. The proposed rule change
would not alter this provision but
would specify that, in such a situation,
ICE Europe could disregard any All or
Nothing Bids.
Second, the proposed rule change
would revise the CDS Auction Terms to
clarify how an All or Nothing Bid affects
the calculation of a Clearing Member’s
Bid price for purposes of determining
the competitiveness of a Clearing
Member’s Bid and satisfaction of a
Clearing Member’s Minimum Bid
Requirement. The competitiveness of a
Clearing Member’s Bid and satisfaction
of a Clearing Member’s Minimum Bid
Requirement are important because
under the CDS Auction Terms and ICE
Clear Europe Rule 908(i), in the event
that ICE Clear Europe needs to use nondefaulting Clearing Members’ Guaranty
Fund Contributions or Assessment
Contributions to resolve the default of a
Clearing Member, ICE Clear Europe uses
first the contributions attributable to
Clearing Members that did not satisfy
their Minimum Bid Requirement (NonBidding CDS Clearing Members),
followed by those that submitted less
competitive Bids. Currently, ICE Clear
Europe uses the weighted average price
of all valid Standard Bids made by the
Clearing Member in the Auction
(weighted by the portfolio size of each
such Bid, and converted into Euro, if
applicable) to determine Bid price and
thus to determine the competitiveness
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of a Clearing Member’s Bids in an
Auction.
Under the CDS Auction Terms as
revised by the proposed rule change,
where a Clearing Member has submitted
both an All or Nothing Bid and one or
more Standard Bids, the Clearing
Member’s Bid price would be the (i) the
weighted average price of all valid
Standard Bids made by the Clearing
Member in the Auction (weighted by the
portfolio size of each such bid, and
converted into Euro, if applicable) and
(ii) the price of any valid All or Nothing
Bid made by the Clearing Member in the
Auction, in either case proportionately
scaled to a portfolio size representing
100% of the relevant Auction Lot.
Moreover, under the proposed rule
change, if a Clearing Member’s Standard
Bids do not satisfy its Minimum Bid
Requirement, the Clearing Member’s Bid
price would be the price of its All or
Nothing Bid. Where a Clearing Member
has submitted one or more Standard
Bids (and has not submitted an All or
Nothing Bid), and that Clearing
Member’s Standard Bids do not satisfy
its Minimum Bid Requirement, the CDS
Auction Terms would treat the Clearing
Member as a Non-Bidding CDS Clearing
Member, which, as noted above, has
consequences under ICE Clear Europe
Rule 908(i).
vii. Market Abuse Regulation
The proposed rule change would also
amend the CDS Auction Terms to clarify
and state explicitly certain obligations
for auction participants in respect of
information they may receive in
connection with an Auction, including
the contents of the portfolio and the
outcome or timing of an Auction.
Specifically, a participant in an Auction
would be required to acknowledge that
such information may constitute inside
information for the purposes of the EU
Market Abuse Regulation (Regulation
(EU) No 596/2014) or any similar under
applicable law in respect of any
Contracts cleared by the ICE Clear
Europe or in respect of securities of a
defaulting Clearing Member. Under the
proposed rule change, each participant
in an Auction would be required to
assess whether such information is
inside information for purposes of the
Market Abuse Regulation and, if so, to
agree to: (i) Comply with applicable
Market Abuse Laws; (ii) generally not
disclose such information to persons
outside of its organization; (iii) prevent
persons engaged in client trading at
such organization from possessing such
information; (iv) prevent those in
possession of such information from
trading on such information until it
ceases to be inside information; and (v)
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where such information constitutes
inside information under Regulation
(EU) No. 596/2014, maintain an insider
list of persons with access to this
information.
B. Amendments to the Policy
The proposed rule change would
make a number of changes to the Policy
in relation to the amendments to the
CDS Auction Terms. First, as mentioned
above, the proposed rule change would
change the name from the CDS Default
Management Framework to the CDS
Default Management Policy. The
proposed rule change would make
amendments to that effect throughout
the document.
Next, the proposed rule change would
revise certain characterizations of the
timeframe within which certain actions
would occur under the Policy. The
Policy currently provides that after the
approval for the declaration of a default,
ICE Clear Europe will immediately
institute its default management process
as outlined in the Policy. The proposed
rule change would remove
‘‘immediately’’ from this provision. In
addition, the proposed rule change
would remove ‘‘immediately’’ from the
provision that ICE Clear Europe cease
clearing trades for the defaulting
Clearing Member when that Clearing
Member is declared in default. Although
ICE Clear Europe expects that it would
implement such actions in a timely
manner under the circumstances, ICE
Clear Europe does not believe it is
necessary or feasible to specify that it
would do take such actions
immediately.
Similarly, with respect to assembling
the Clearing Risk Team after a default,
the Policy currently requires that the
Head of Clearing Risk assemble the
Clearing Risk Team as soon as a
Clearing Member is deemed to have
defaulted. The proposed rule change
would amend this to require assembly
once a Clearing Member is deemed to
have defaulted. Again, ICE Clear Europe
does not believe it is necessary or
feasible to specify that assembly occur
as soon as a Clearing Member is deemed
to have defaulted. Finally, the Policy
currently provides that when
liquidating collateral assets of a default
Clearing Member, ICE Clear Europe
ensures that it can sell the collateral,
subject to settlements terms, within a
single working day, but the Head of
Clearing Risk has discretion to postpone
the collateral sale. The proposed rule
change would delete this statement. ICE
Clear Europe believes the statement is
not needed to ensure timely sale of
collateral and that it is unnecessary
given that ICE Clear Europe relies on its
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existing and detailed collateral and
liquidity policies to ensure it has
sufficient access to liquidity in case of
default.
The proposed rule change would also
make a change with respect to the
personnel authorized to take action
regarding default management. The
proposed rule change would remove a
statement that in the event that the
President/Chief Operating Officer is
absent, the Head of Clearing Risk has
the ability to overrule any other head of
department (including Head of Treasury
and Head of Operations) where
necessary, on matters relating to default
management. Thus, if the President/
Chief Operating Officer is absent, the
Head of Clearing Risk no longer has the
ability to overrule any head of
department. ICE Clear Europe is making
this amendment to reflect a change in
the Board’s delegation of authority.
Under the current delegation of
authority, where the President/Chief
Operating Officer is absent, the
Executive Risk Committee has authority
to make decisions, and thus override
any head of department.
The proposed rule change would also
amend the Policy regarding ICE Clear
Europe’s authority to convert a default
Clearing Member’s non-cash margin to
cash. The Policy currently provides that
to manage the risks related to a Clearing
Member’s default, ICE Clear Europe will
internally isolate the Defaulting Clearing
Member’s positions and, if deemed
appropriate, convert any non-cash
portion of the Defaulting Member’s
margin and collateral securing their
portion of the Guaranty Fund into cash.
The proposed rule change would alter
this slightly to provide that ICE Clear
Europe ‘‘may’’ convert any non-cash
portion of the Defaulting Member’s
margin and collateral securing their
portion of the Guaranty Fund into cash.
ICE Clear Europe is making this change
to clarify the drafting of this provision,
but it does not believe this change
would substantively alter ICE Clear
Europe’s authority under this provision.
The proposed rule change would also
amend the portion of the Policy related
to the mechanics of bidding in an
Auction to address the introduction of
All or Nothing Bids, as discussed above.
The proposed amendments would
provide explanation regarding the
meaning of an All or Nothing Bid and
an example of how an All or Nothing
Bid would work. The proposed
amendments would also provide that
ICE Clear Europe would publish further
information on the bidding types
utilized in any given Auction as part of
the specifications for that Auction.
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Finally, the proposed rule change
would amend the Policy’s provisions
regarding review, breach management,
and exception handling. With respect to
reviewing and revising the Policy, the
Policy currently provides that ICE Clear
Europe will conduct a quarterly review
of the Policy, to include an assessment
of responsibilities, trading facilities, and
equipment. The proposed rule change
would delete this provision because ICE
Clear Europe would review and revise
the Policy as part of ICE Clear Europe’s
separate annual documentation review
process rather than on a quarterly basis
and, as discussed below, the document
owner would be responsible for
ensuring the Policy remains up-to-date.
In its place, the proposed rule change
would add a provision explaining that
ICE Clear Europe, in coordination with
its Clearing Members, would conduct an
annual mock Clearing Member default
test with the Clearing Risk Department,
appropriate Clearing House
management, and CDS Default
Committee Members for each Clearing
Member. The proposed rule change
would also make the Policy’s provisions
for breach management and exception
handling consistent with other ICE Clear
Europe policies and governance
processes.7 Pursuant to the
amendments, the document owner, as
specified in ICE Clear Europe policies,
would be responsible for making sure
the Policy is up-to-date and for
reporting report material breaches or
unapproved deviations from the Policy
to the Head of Department, the Chief
Risk Officer and the Head of
Compliance (or their delegates) who
together would determine if further
escalation should be made to relevant
senior executives, the Board and/or
competent authorities. Exceptions to the
Policy would be approved in
accordance with ICE Clear Europe’s
governance process for the approval of
changes to the Policy.
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III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act directs
the Commission to approve a proposed
7 See Self-Regulatory Organizations; ICE Clear
Europe Limited; Notice of Filing of Partial
Amendment No. 2 and Order Granting Accelerated
Approval of Proposed Rule Change, as Modified by
Partial Amendment No. 1 and Partial Amendment
No. 2, To Revise the ICE Clear Europe Treasury and
Banking Services Policy, Liquidity Management
Procedures, Investment Management Procedures
and Unsecured Credit Limits Procedures, Exchange
Act Release No. 86891 (Sept. 6, 2019); 84 FR 48191
(Sep. 12, 2019) (SR–ICEEU–2019–012) (approving
similar provisions in the ICE Clear Europe Treasury
and Banking Services Policy, Liquidity
Management Procedures, Investment Management
Procedures and Unsecured Credit Limits
Procedures).
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rule change of a self-regulatory
organization if it finds that such
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to such organization.8 For the
reasons given below, the Commission
finds that the proposed rule change is
consistent with Section 17A(b)(3)(F) of
the Act 9 and Rules 17Ad–22(e)(2)(v)
and (e)(13).10
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act
requires, among other things, that the
rules of ICE Clear Europe be designed to
promote the prompt and accurate
clearance and settlement of securities
transactions and, to the extent
applicable, derivative agreements,
contracts, and transactions, as well as to
assure the safeguarding of securities and
funds which are in the custody or
control of ICE Clear Europe or for which
it is responsible.11 As discussed in more
detail below, the Commission generally
believes that the proposed rule change
should improve the CDS Auction Terms
and the Policy and, therefore, ICE Clear
Europe’s conduct of an Auction in
response to a Clearing Member’s default,
and, as a result, believes that the
proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act.12
Specifically, the Commission believes
that the proposed rule change, in
amending certain defined terms and
adding defined terms needed for the
other changes as discussed in Part II,A,i
above, should reduce the possibility for
confusion in the application of the CDS
Auction Terms by clarifying the
terminology in the CDS Auction Terms
and by identifying and defining the
terms needed to enact the other changes
discussed above. In addition, amending
the defined terms with respect to certain
operations of an auction, including
changing the term Closing Time to
Bidding Close Time and revising the
definitions of Primary and Secondary
CDS Auction Priority AC Sequence and
Primary and Secondary CDS Auction
Priority GF Sequence, should help to
clarify these operational aspects of
Auctions and thereby improve the
efficiency of Auctions.
Moreover, adding provisions to
explain how ICE Clear Europe would
interpret and apply the CDS Auction
Terms, as discussed in Part II.A.ii above,
including how the CDS Auctions Terms
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8 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
10 17 CFR 240.17Ad–22(e)(2)(v), (e)(13).
11 15 U.S.C. 78q–1(b)(3)(F).
12 15 U.S.C. 78q–1(b)(3)(F).
9 15
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40375
would relate to the ICE Clear Europe
Rulebook, should help to reduce the
possibility for confusion when
interpreting and applying the CDS
Auction Terms alongside the ICE Clear
Europe Rulebook. Similarly, the
additional provisions to explain that the
CDS Contracts part of an Auction would
include certain terminated CDS
Contracts and hedging CDS Contracts
should allow ICE Clear Europe to
replace such contracts and establish a
price to calculate its loss with respect to
such contracts, thereby further
improving the efficacy of Auctions.
Further, giving ICE Clear Europe the
ability to postpone the Bidding Close
Time and withdraw a lot after the
Bidding Close Time, as discussed in
Part II.A.iii above, should afford ICE
Clear Europe flexibility to respond to
changing conditions as Auctions are
being conducted and therefore to
respond as needed to conduct a
successful Auction. Clearing Members
should also benefit from additional
clarity with respect to the consequences
of making Bids in an Auction as a result
of the proposed rule change specifying
the circumstances in which a Clearing
Member is treated as having not made
a Bid, in which ICE Clear Europe could
exclude certain bids for purposes of
calculating the CDS Auction Clearing
Price, and in which a Bid would
constitute an offer governed by ICE
Clear Europe Rule 904(b) and Part 4 of
the ICE Clear Europe Rulebook. Finally,
the additional requirement that each
Direct Participating Customer enter into
a CDS Auction Participation Agreement
with its CDS Clearing Member should
provide an additional assurance that
Customers participating in an Auction
would comply with the requirements of
the CDS Auction Terms.
As it relates to Minimum Bid
Requirements discussed in Part II.A.iv
above, the Commission believes that the
proposed rule change could increase
participation in Auctions by reducing
the potential for avoidance of Minimum
Bid Requirements, thereby leading to
more successful Auctions. Three
particular aspects of the proposed rule
change should help to reduce the
possibility that a Clearing Member
elects not to participate in an Auction
or avoids the Minimum Bid
Requirement: (i) Removal of the
possibility that a Clearing Member
could elect not to participate in an
Auction; (ii) shortening the time by
which a Clearing Member must provide
notice to ICE Clear Europe that a
Minimum Bid Requirement should not
apply; and (iii) requiring ICE Clear
Europe to confirm that it agrees to the
Clearing Member’s assessment
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At the same time, the proposed rule
change should increase the flexibility
with which Clearing Members may
address Minimum Bid Requirements by
allowing Clearing Members to outsource
the operational processing of their
obligations under the CDS Auction
Terms; continuing to allow Clearing
Members to transfer their Minimum Bid
Requirements to Affiliates (subject to
both being Clearing Members and
entering into an agreement); making
explicit that a Clearing Member can
satisfy its Minimum Bid Requirement
with multiple Bids provided that any
individual Bid is equal to or larger than
the applicable minimum Bid size; and
adding a provision to state that only
those Bids that count toward the
Minimum Bid Requirement would be
taken into account under the Primary
and Secondary CDS Auction Priority AC
Sequence, Primary and Secondary CDS
Auction Priority GF Sequence, and ICE
Clear Europe Rule 908(i). Similarly, the
additional clarity provided regarding
the continued liability of a Clearing
Member that transfers its Minimum Bid
Requirement or outsources other
operational obligations would allow
Clearing Members to better understand
the consequences of transferring or
outsourcing a Minimum Bid
Requirement. The Commission believes
that this additional flexibility and
information should generally help to
ensure Clearing Members comply with
Minimum Bid Requirements, which, in
turn, should help to increase the
likelihood of a successful Auction.
As discussed in part II.A.v above, the
proposed rule change would make a
number of changes reflecting the role
and operations of the DMS in the
context of an Auction. These changes
would replace manual communications
with electronic ones and therefore
should improve the efficiency and
accuracy of communications regarding
Auctions, which may help to avoid
delays or miscommunications that
could delay the successful completion
of an Auction. Thus, requiring use of the
DMS and amending the CDS Auction
Terms to reflect the operation of the
DMS should help to promote the
smooth conduct and successful
completion of Auctions.
The proposed rule change would also
add All or Nothing Bids, and make
related changes, to the CDS Auction
Terms, as discussed in Part II.A.vi
above. Because an All or Nothing Bid
provides a means for a single bidder to
take all of the contracts in an Auction
and requires that ICE Clear Europe
allocate such contracts to that bidder if
the All or Nothing Bid meets the
Auction Clearing Price, All or Nothing
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Bidding should increase the likelihood
that ICE Clear Europe successfully sells
all of a defaulting Clearing Member’s
contracts by an Auction. Thus, the
Commission believes that the changes
discussed regarding All or Nothing Bids,
including how an All or Nothing Bid
would affect Minimum Bid
Requirements and the calculation of bid
price, should help to increase the
likelihood of a successful Auction.
Moreover, adding provisions for the
EU Market Abuse Regulations as
discussed in Part II.A.vii above should
ensure compliance with applicable EU
law in the conduct of Auctions and
should protect sensitive information
shared as part of an Auction. The
Commission believes this should, in
turn, increase participants’ confidence
in the security of information shared as
part of an Auction and therefore
increase participation in an Auction.
Finally, the Commission believes that
the changes to the Policy discussed in
Part II.B above should improve ICE
Clear Europe’s ability to use the
processes outlined in the Policy to
respond to a Clearing Member’s default
and increase the clarity regarding the
operation of the Policy, including when
ICE Clear Europe may take certain
actions and its authority for doing so.
These changes include: (i) Renaming the
Policy; (ii) revising the timing
requirements for certain actions; and
(iii) specifying that ICE Clear Europe
may convert the defaulting Clearing
Member’s non-cash Margin and
Guaranty Fund Contributions into cash.
Similarly, removing a statement that in
the event that the President/Chief
Operating Officer being absent, the Head
of Clearing Risk has the ability to
overrule any other head of department
(including Head of Treasury and Head
of Operations) to reflect a change in the
Board’s delegation of authority, should
reduce the possibility for confusion or
mistakes in taking action under the
Policy. Amending the mechanics of
bidding in an Auction to address the
introduction of All or Nothing Bids
should further help to implement All or
Nothing Bidding, which, as discussed
above, should increase the likelihood
for a successful Auction. Deleting the
requirement that ICE Clear Europe
conduct a quarterly review and instead
making the document owner
responsible for ensuring that the Policy
is up-to-date and for reporting breaches,
consistent with other ICE Clear Europe
policies and governance processes,
should establish a means for ensuring
that ICE Clear Europe maintains and
adheres to the Policy. For these reasons,
the Commission believes the changes to
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the Policy should generally improve ICE
Clear Europe’s conduct of Auctions.
Through Auctions, ICE Clear Europe
sells the open CDS contracts of a
defaulting Clearing Member. Thus, in
improving the efficiency of such
Auctions, the Commission believes the
proposed rule change should promote
the prompt and accurate clearance and
settlement of the CDS transactions
resulting from such Auctions. Moreover,
the Commission believes that the
default of a Clearing Member, if not
promptly resolved, could cause losses
for ICE Clear Europe. The Commission
believes the proposed rule change
should help to avoid these losses by
promoting the prompt resolution of
Auctions, and therefore the prompt
resolution of a Clearing Member’s
default. Because losses resulting from
the default of a Clearing Member could
disrupt ICE Clear Europe’s ability to
operate and therefore threaten ICE Clear
Europe’s ability to clear and settle
transactions and access securities and
funds, the Commission believes the
proposed rule change also should help
to promote the prompt and accurate
clearance and settlement of transactions
and assure the safeguarding of securities
and funds in ICE Clear Europe’s custody
and control.
Therefore, the Commission finds that
the proposed rule change should
promote the prompt and accurate
clearance and settlement of securities
transactions and assure the safeguarding
of securities and funds in ICE Clear
Europe’s custody and control, consistent
with the Section 17A(b)(3)(F) of the
Act.13
B. Consistency with Rule 17Ad–
22(e)(2)(v)
Rule 17Ad–22(e)(2)(v) requires that
ICE Clear Europe establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
provide for governance arrangements
that, among other things, specify clear
and direct lines of responsibility.14 As
discussed in Part II.B above, the
proposed rule change would amend the
Policy to make the document owner
responsible for ensuring that the Policy
is up-to-date and for reporting breaches.
The Commission believes that this
aspect of the proposed rule change
would place on the document owner a
clear and direct responsibility for
ensuring that ICE Clear Europe
maintains the Policy and complies with
it. For this reason, the Commission finds
13 15
14 15
E:\FR\FM\06JYN1.SGM
U.S.C. 78q–1(b)(3)(F).
U.S.C. 17Ad–22(e)(2)(v).
06JYN1
Federal Register / Vol. 85, No. 129 / Monday, July 6, 2020 / Notices
that the proposed rule change is
consistent with Rule 17Ad–22(e)(2)(v).15
khammond on DSKJM1Z7X2PROD with NOTICES
C. Consistency with Rule 17Ad–
22(e)(13)
Rule 17Ad–22(e)(13) requires that ICE
Clear Europe establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
ensure ICE Clear Europe has the
authority and operational capacity to
take timely action to contain losses and
liquidity demands and continue to meet
its obligations by, at a minimum,
requiring its Clearing Members and,
when practicable, other stakeholders to
participate in the testing and review of
its default procedures, including any
close-out procedures, at least annually
and following material changes
thereto.16
As discussed above, the Commission
believes the proposed rule change
should generally improve the clarity
and operation of the CDS Auction
Terms and, therefore, ICE Clear Europe’s
ability to conduct a successful Auction
via the CDS Auction Terms. Because
ICE Clear Europe uses Auctions to close
out a defaulting Clearing Member’s
contracts and contain the losses and
liquidity demands stemming from a
Clearing Member’s default, the
Commission believes the proposed rule
change, in improving ICE Clear Europe’s
ability to conduct a successful Auction
via the CDS Auction Terms, should help
to ensure ICE Clear Europe has the
authority and operational capacity to
take timely action to contain losses and
liquidity demands. Moreover, as
discussed in Part II.B above, the
proposed rule change would amend the
Policy to add a provision explaining
that ICE Clear Europe, in coordination
with its Clearing Members, would
conduct an annual mock Clearing
Member default test with the Clearing
Risk Department, appropriate ICE Clear
Europe management, and CDS Default
Committee Members for each Clearing
Member. The Commission believes this
particular change should help to ensure
that ICE Clear Europe requires its
Clearing Members to participate in the
testing and review of its default
procedures.
For these reasons, the Commission
finds that the proposed rule change is
consistent with Rule 17Ad–22(e)(13).17
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change is consistent with the
15 15
U.S.C. 17Ad–22(e)(2)(v).
U.S.C. 17Ad–22(e)(13).
17 15 U.S.C. 17Ad–22(e)(13).
16 15
VerDate Sep<11>2014
04:41 Jul 03, 2020
Jkt 250001
requirements of the Act, and in
particular, with the requirements of
Section 17A(b)(3)(F) of the Act 18 and
Rules 17Ad–22(e)(2)(v) and (e)(13).19
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 20 that the
proposed rule change, as modified by
Partial Amendment No. 1 (SR–ICEEU–
2020–007), be, and hereby is,
approved.21
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–14389 Filed 7–2–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89176; File No. SR–
NYSECHX–2020–19]
Self-Regulatory Organizations; NYSE
Chicago, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Extend the Temporary
Waiver of the Co-location Hot Hands
Fee
June 29, 2020.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b-4 thereunder,3
notice is hereby given that, on June 17,
2020 the NYSE Chicago, Inc. (‘‘NYSE
Chicago’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to extend the
temporary waiver of the co-location
‘‘Hot Hands’’ fee. The proposed rule
change is available on the Exchange’s
website at www.nyse.com, at the
principal office of the Exchange, and at
18 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(2)(v) and (e)(13).
20 15 U.S.C. 78s(b)(2).
21 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).
22 17 CFR 200.30–3(a)(12).
1 15 U.S.C.78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
19 17
PO 00000
Frm 00194
Fmt 4703
Sfmt 4703
40377
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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to extend of
the temporary waiver of the colocation 4 ‘‘Hot Hands’’ fee through the
earlier of August 31, 2020 and the
reopening of the Mahwah, New Jersey
data center (‘‘Data Center’’). The waiver
of the Hot Hands fee is scheduled to
expire on June 30, 2020.5
The Exchange is an indirect
subsidiary of Intercontinental Exchange,
Inc. (‘‘ICE’’). Through its ICE Data
Services (‘‘IDS’’) business, ICE operates
the Data Center, from which the
Exchange provides co-location services
to Users.6 Among those services is a
‘‘Hot Hands’’ service, which allows
Users to use on-site Data Center
personnel to maintain User equipment,
support network troubleshooting, rack
and stack a server in a User’s cabinet;
4 The Exchange initially filed rule changes
relating to its co-location services with the
Securities and Exchange Commission
(‘‘Commission’’) in October 2019. See Securities
Exchange Act Release No. 87408 (October 28, 2019),
84 FR 58778 (November 1, 2019) (SR–NYSECHX–
2019–27).
5 See Securities Exchange Act Release No. 88957
(May 27, 2020), 85 FR 33766 (June 2, 2020) (SR–
NYSECHX–2020–15).
6 For purposes of the Exchange’s co-location
services, a ‘‘User’’ means any market participant
that requests to receive co-location services directly
from the Exchange. See 84 FR 58778, supra note 4,
at note 6. As specified in the Fee Schedule of NYSE
Chicago, Inc. (‘‘Fee Schedule’’), a User that incurs
co-location fees for a particular co-location service
pursuant thereto would not be subject to co-location
fees for the same co-location service charged by the
Exchange’s affiliates the New York Stock Exchange
LLC, NYSE American LLC, NYSE Arca, Inc., and
NYSE National, Inc. (together, the ‘‘Affiliate
SROs’’). See id. at 58779. Each Affiliate SRO has
submitted substantially the same proposed rule
change to propose the changes described herein.
See SR–NYSE–2020–53, SR–NYSEAmer-2020- 46,
SR–NYSEArca-2020–58, and SR–NYSENAT–2020–
20.
E:\FR\FM\06JYN1.SGM
06JYN1
]]>Agencies
[Federal Register Volume 85, Number 129 (Monday, July 6, 2020)]
[Notices]
[Pages 40369-40377]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14389]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89186; File No. SR-ICEEU-2020-007]
Self-Regulatory Organizations; ICE Clear Europe Limited; Order
Approving Proposed Rule Change, as Modified by Partial Amendment No. 1,
Relating to the ICE Clear Europe Auction Terms for CDS Default Auctions
and CDS Default Management Policy
June 29, 2020.
I. Introduction
On May 12, 2020, ICE Clear Europe Limited (``ICE Clear Europe'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4,\2\ a proposed rule change to amend
its Auction Terms for CDS Default Auctions (the ``CDS Auction Terms'')
and CDS Default Management Policy (the ``Policy''). On May 20, 2020,
ICE Clear Europe filed Partial Amendment No. 1 to the proposed rule
change.\3\ The proposed rule change, as modified by Partial Amendment
No. 1, was published for comment in the Federal Register on May 28,
2020.\4\ The Commission did not receive comments regarding the proposed
rule change, as modified by Partial Amendment No. 1. For the reasons
discussed below, the Commission is approving the proposed rule change,
as modified by Partial Amendment No. 1 (hereinafter the ``proposed rule
change'').
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Partial Amendment Number 1 amended Exhibit 5A of the filing
to correct the paragraph numbering in Part 2 of the CDS Auction
Terms.
\4\ Self-Regulatory Organizations; ICE Clear Europe Limited;
Notice of Filing of Proposed Rule Change, as Modified by Partial
Amendment No. 1, Relating to the ICE Clear Europe Auction Terms for
CDS Default Auctions and CDS Default Management Policy (formerly the
CDS Default Management Framework), Exchange Act Release No. 88928
(May 21, 2020); 85 FR 32075 (May 28, 2020) (SR-ICEEU-2020-007)
(``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
As discussed below, the proposed rule change would amend the CDS
Auction Terms and the Policy.\5\ The CDS Auction Terms explain how ICE
Clear Europe would auction one or more lots of a defaulting Clearing
Member's CDS Contracts, and the Policy describes the processes that ICE
Clear Europe would use to close a defaulting Clearing Member's CDS
Contracts, including by auction.
---------------------------------------------------------------------------
\5\ Capitalized terms not otherwise defined herein have the
meanings assigned to them in the CDS Auction Terms, the Policy, or
the ICE Clear Europe Rulebook, as applicable. The description that
follows is excerpted from the Notice, 85 FR at 32075.
---------------------------------------------------------------------------
A. Amendments to the CDS Auction Terms
Currently, the CDS Auction Terms contain provisions that apply to
Primary CDS Auctions (meaning initial auctions of CDS contracts) and
Secondary CDS Auctions (meaning auctions conducted under part two of
the CDS Auction Terms and in accordance with ICE Clear Europe Rule
905(d)(i)(B).\6\ The provisions of the CDS Auction Terms applicable to
Primary CDS Auctions are substantially the same as those applicable to
Secondary CDS Auctions, and the proposed rule change would make the
changes described below to
[[Page 40370]]
both sets of provisions. Thus, for the sake of brevity, the description
below refers collectively to changes to the CDS Auction Terms and to an
``Auction,'' rather than a Primary CDS Auction and Secondary CDS
Auction, unless needed to distinguish between the two terms.
---------------------------------------------------------------------------
\6\ A Secondary CDS Auction is an auction that ICE Clear Europe
may conduct if ICE Clear Europe does not terminate, transfer, or
close out all of the CDS Contracts of a Defaulter pursuant to a
Primary CDS Auction and the other actions permitted under ICE Clear
Europe Rule 905(a)-(c). Moreover, in the event of the failure of one
or more Secondary CDS Auctions to eliminate or replace all remaining
risk of the open contracts of a defaulting Clearing Member, ICE
Clear Europe may employ its ability to engage in reduced gains
distributions under Rule 914 and to partially terminate open
contracts under Rule 915.
---------------------------------------------------------------------------
As described below, the proposed rule change would make changes
primarily related to (i) updating and revising defined terms of the CDS
Auction Terms; (ii) interpretation and application of the CDS Auction
Terms; (iii) the operation of an Auction; (iv) Minimum Bid
Requirements; (v) use of the Default Management System; (vi)
introducing All or Nothing Bids; and (vii) adding provisions to cover
the EU Market Abuse Regulation.
i. Amendments to the Defined Terms
The proposed rule change would amend a number of the defined terms
found in Section 1 of the CDS Auction Terms. First, the proposed rule
change would update the names of certain defined terms to refer to an
``Auction Lot'' rather than a ``Lot.'' For example, the proposed rule
change would re-title the term ``Failed Lot'' to ``Failed Auction
Lot.'' ICE Clear Europe is making this change to be more specific and
distinguish the term Auction Lot from the more general term Lot.
Moreover, this change is consistent with ICE Clear Europe's current
authority under the CDS Auction Terms, which permit ICE Clear Europe to
divide a Clearing Member's portfolio into one or more Auction Lots and
auction off each Auction Lot separately, as ICE Clear Europe considers
appropriate.
Similarly, the proposed rule change would rename and amend certain
defined terms to clarify that they apply to Primary CDS Auctions rather
than Secondary CDS Auctions. The CDS Auction Terms contain one set of
defined terms that contain definitions that are applicable to both
Primary CDS Auctions and Secondary CDS Auctions. To clarify the terms
applicable only to Primary CDS Auctions and better distinguish them
from Secondary CDS Auctions, the proposed rule change would re-name the
terms that currently only refer to a ``CDS Auction'' to specify that
they apply to a Primary CDS Auction. For example, the proposed rule
change would change the name of the terms ``CDS Auction'' and ``CDS
Auction Participant'' to ``Primary CDS Auction'' and ``Primary CDS
Auction Participant.'' With respect to Secondary CDS Auctions, no
change is necessary because the CDS Auction Terms already contain terms
specific to Secondary CDS Auctions. For example, the CDS Auction Terms
already have a term called ``Secondary CDS Auction Participant.''
The proposed rule change would also amend the defined term ``Second
CDS Auction.'' A Second CDS Auction is a Primary CDS Auction that ICE
Clear Europe may hold to sell an Auction Lot if it fails to sell all of
the contracts in that Auction Lot via an initial Primary CDS Auction. A
Second CDS Auction is an additional Primary CDS Auction, rather than a
Secondary CDS Auction, as described above, and would therefore be
subject to the rules for a Primary CDS Auction. To better clarify that
point, the proposed rule change would rename the term ``Second CDS
Auction'' to ``Repeat CDS Auction.''
Moreover, the proposed rule change would revise the terms ``Split
Bidder'' and ``Subordinate Bidder'' to note that they could apply to
either a Primary CDS Auction Participant or a Secondary CDS Auction
Participant, as applicable for the relevant auction. ICE Clear Europe
represents that this amendment does not reflect a change in substance
but would make the drafting consistent with the distinction between
Primary and Secondary CDS Auctions discussed above.
Next, the proposed rule change would make changes to defined terms
that affect the specifics of how ICE Clear Europe conducts an Auction.
Specifically, the proposed rule change would change the name of the
term ``Closing Time'' to ``Bidding Close Time'' to be more precise. The
proposed rule change would not alter the substance of this definition,
however.
Similarly, the proposed rule change would slightly revise the
definitions of ``Primary CDS Auction Priority AC Sequence'',
``Secondary CDS Auction Priority AC Sequence'', ``Primary CDS Auction
Priority GF Sequence,'' and ``Secondary CDS Auction Priority GF
Sequence''. These defined terms specify the order in which ICE Clear
Europe would use non-defaulting Clearing Members' Guaranty Fund
Contributions and Assessment Contributions if needed as additional
financial resources to resolve the default of a Clearing Member under
ICE Clear Europe Rule 908(i). Generally, under the current definitions,
ICE Clear Europe would first apply the contributions of those Clearing
Members whose bids in an Auction were the least competitive, starting
with Non-Bidding CDS Clearing Members, and would then apply the
contributions of those Clearing Members whose bids in an Auction were
more competitive. The proposed rule change would not alter this order
of priority. The proposed rule change would require, however, that ICE
Clear Europe take each amount in the sequence pro rata for the relevant
Auction Lot by applying the Auction Lot Guaranty Fund Weighting. The
Auction Lot Guaranty Fund Weighting would be a percentage equal to the
Initial Margin requirement associated with the contracts in the Auction
Lot divided by the Initial Margin requirement associated with all of
the contracts in all of the Auction Lots comprising the defaulting
Clearing Member's portfolio. Thus, under this change, ICE Clear Europe
would determine the amounts in the sequence by Auction Lot, taking into
account the Initial Margin requirement associated with each Auction Lot
versus all Auction Lots. ICE Clear Europe represents that this change
is consistent with, and does not represent an alteration to, its
current practices because the CDS Auction Terms already permit ICE
Clear Europe to divide a Clearing Member's portfolio into one or more
Auction Lots and auction off each Auction Lot separately, as ICE Clear
Europe considers appropriate.
Finally, consistent with the changes described below, the proposed
rule change would add new defined terms. For example, the proposed rule
change would add the terms ``All or Nothing Bid'', ``DMS'', and
``Standard Bid.'' The definitions of those new terms are discussed
further below as part of the discussion of the specific changes related
to those terms.
ii. Interpretation and Application of CDS Auction Terms
The proposed rule change would add several paragraphs regarding
interpretation and application of the CDS Auction Terms. For example,
the proposed rule change would add paragraphs to define the governing
law for the CDS Auction Terms, to identify which courts shall have
jurisdiction over disputes, and to provide for submission of matters to
arbitration. ICE Clear Europe represents that these provisions are
substantially similar to existing provisions in the Rulebook and the
other Procedures, and ICE Clear Europe is proposing to add them to the
CDS Auction Terms for consistency across its documentation.
Similarly, the proposed rule change would clarify that nothing in
the CDS Auction Terms would prevent ICE Clear Europe from administering
a sale or entering into offsetting transactions without holding an
Auction and that the CDS Auction Terms are subject to ICE Clear
Europe's Rulebook. These changes reflect ICE Clear Europe's existing
authority under its Rulebook, and ICE Clear Europe is adding these
clarifications to avoid any potential
[[Page 40371]]
confusion as to the scope of the CDS Auction Terms.
The proposed rule change would also clarify that references to CDS
Contracts, for purposes of the CDS Auction Terms, include (i) CDS
Contracts terminated via automatic early termination or notional
amounts representing such terminated CDS Contracts and (ii) CDS
Contracts that have arisen from hedging transactions executed by ICE
Clear Europe. ICE Clear Europe is making these changes to clarify that
it may auction such CDS Contracts to establish replacement contracts
with non-defaulting Clearing Members and to determine a price for
calculating ICE Clear Europe's loss from closing the defaulting
Clearing Member's positions.
iii. Operation of an Auction
The proposed rule change would also make certain changes regarding
the operation of an Auction, specifically relating to the Bidding Close
Time for an Auction, the treatment of Bids, and participation of
customers of Clearing Members in an Auction.
Currently, the CDS Auction Terms provide that Clearing Members may
only submit Bids for an Auction prior to the Bidding Close Time for
that Auction. The proposed rule change would not alter this provision,
but it would further specify that ICE Clear Europe could postpone the
Bidding Close Time for up to one hour by giving notice of such
postponement to all participants and following consultation to the
extent practicable with the CDS Default Committee. Similarly, the CDS
Auction Terms permit ICE Clear Europe to withdraw an Auction Lot prior
to the Bidding Close Time. The proposed rule change would expand this
authority to permit ICE Clear Europe to withdraw an Auction Lot after
the Bidding Close Time. ICE Clear Europe believes these changes would
provide it additional flexibility to deal with any potential
operational issues that could arise during an Auction.
The proposed rule change would update provisions related to the
treatment of Bids in an Auction. First, the proposed rule change would
revise the wording of a number of provisions to specify that in certain
circumstances ICE Clear Europe would treat Clearing Members as having
not made a Bid in Auction rather than not participating in an auction,
as currently stated. This is not a substantive change because in either
case, whether not participating in the Auction or not making a Bid in
the Auction, the CDS Auction Terms as amended would treat the Clearing
Member as a Non-Bidding CDS Clearing Member. This designation is
important because under the CDS Auction Terms and ICE Clear Europe Rule
908(i), in the event that ICE Clear Europe needs to use non-defaulting
Clearing Members' Guaranty Fund Contributions or Assessment
Contributions to resolve the default of a Clearing Member, ICE Clear
Europe would use Non-Bidding CDS Clearing Members' Contributions first.
Thus, under the proposed rule change, the CDS Auction Terms would treat
a Clearing Member that submits a referential Bid (meaning a Bid that is
one Euro higher or lower than the highest or lowest bidder), an invalid
Bid, a void Bid, a Bid after the Bidding Close Time, a Bid in breach of
the CDS Auction Terms, position limits, or other risk policies of ICE
Clear Europe, or that submits a Bid while a Defaulter, as having not
made a Bid in an Auction and as a Non-Bidding Clearing Member. Although
effectively this treatment is the same as under the current CDS Auction
Terms (designation as a Non-Bidding CDS Clearing Member), ICE Clear
Europe is making this change because its believes that it is more
accurate to describe the Clearing Member as having not made a Bid
rather than not participating.
Relatedly, the CDS Auction Terms currently permit ICE Clear Europe
to exclude certain Bids for purposes of calculating the CDS Auction
Clearing Price (as defined below). Specifically, the CDS Auction Terms
permit ICE Clear Europe to exclude a Bid that is invalid because ICE
Clear Europe reasonably believes that if it accepted such Bid, the
Clearing Member would not clear the resulting CDS Contract. The
proposed rule change would expand this provision to include Bids that
are invalid for other reasons under the CDS Auction Terms, like Bids
submitted below the minimum bid size, if any, Bids submitted after the
Bidding Close Time, and Bids that do not comply with the requirements
of the CDS Auction Terms.
In addition, under the current CDS Auction Terms, each Bid
constitutes an offer from a CDS Clearing Member to ICE Clear Europe to
enter into CDS Contracts. The proposed rule change would not change
this provision. The proposed rule change would clarify, however, that
the offer would be an offer to enter into CDS Contracts pursuant to a
Transfer governed by ICE Clear Europe Rule 904(b) and Part 4 of the ICE
Clear Europe Rulebook. This change would not alter the substance of
this provision. Rather, ICE Clear Europe is making this change to
provide additional specificity by referencing the existing process for
entering into CDS Contracts under the ICE Clear Europe Rulebook.
Finally, the CDS Auction Terms currently permit customers of
Clearing Members to participate in Auctions by becoming Direct
Participating Customers. To become a Direct Participating Customer, a
customer must meet certain requirements, including making a deposit and
entering into an agreement with ICE Clear Europe regarding its
participation. The proposed rule change would further require that that
each Direct Participating Customer enter into a CDS Auction
Participation Agreement with its CDS Clearing Member. ICE Clear Europe
is making this change to establish a clearer and stronger basis for
enforcement of the CDS Auction Terms against the Direct Participating
Customer.
iv. Minimum Bid Requirements
Currently, the CDS Auction Terms require each CDS Clearing Member
to bid in every CDS Auction and for every lot in a CDS Auction unless
its membership privileges permit it not to participate and it elects
not to participate, with this obligation referred to as a CDS Clearing
Member's Minimum Bid Requirement. The CDS Auction Terms provide
further, however, that a Minimum Bid Requirement would not apply to the
extent: (i) it would breach applicable law or the ICE Clear Europe
Rulebook; (ii) it would result in a self-referencing CDS; or (iii)
where ICE Clear Europe, after being notified in writing by the Clearing
Member that it would be inappropriate, reasonably determines that the
Minimum Bid Requirement does not apply. In that case, the Clearing
Member must notify ICE Clear Europe promptly and in any event at least
12 hours prior to the opening of the relevant Auction.
The proposed rule change would make a number of amendments to these
provisions. First, to acknowledge the fact there may be circumstances
where a minimum Bid is not required, the proposed rule change would
amend the requirement that each CDS Clearing Member bid in every CDS
Auction for every lot in a CDS Auction to make it subject to a zero
Minimum Bid Requirement being established under the conditions
described further below.
Next, the proposed rule change would delete the qualification that
the Minimum Bid Requirement does not apply to a CDS Clearing Member
whose membership privileges permit it not to participate. ICE Clear
Europe is deleting that particular provision because there are no
Clearing Members whose
[[Page 40372]]
membership privileges permit them not to participate in CDS Auctions.
Relatedly, the proposed rule change would also delete the term
``Elective CDS Auction Participant,'' which refers to a CDS Clearing
Member whose membership privileges permit it not to participate.
Moreover, with respect to the circumstances in which a Minimum Bid
Requirement does not apply, the proposed rule change would amend the
portion of the CDS Auction Terms regarding a Clearing Member's
notification to ICE Clear Europe that the Minimum Bid Requirement
should not apply. Under the proposed rule change, a Clearing Member
would still be required to notify ICE Clear Europe, and ICE Clear
Europe still would have to reasonably determine that the Minimum Bid
Requirement would be inappropriate. The Clearing Member would be
required to provide the notice, however, within one hour of ICE Clear
Europe publishing details of the CDS Contracts comprising the relevant
Auction Lot, and ICE Clear Europe would need to confirm that it agrees
with the Clearing Member's assessment. ICE Clear Europe is making this
particular change because ICE Clear Europe does not believe the current
12-hour period is feasible given that it may need to conduct an Auction
with less than 12 hours' notice.
Finally, the CDS Auction Terms currently provide that a Clearing
Member can satisfy its Minimum Bid Requirement by submitting multiple
Bids with differing Bid prices and Bid sizes provided that, in the
aggregate, its submitted Bids equal or exceed the Minimum Bid
Requirement and any individual Bid is larger than any applicable
minimum Bid size imposed for that particular Auction, consistent with
the CDS Auction Terms. The proposed rule change would clarify this
provision by providing that any individual Bid must be equal to or
larger than any applicable minimum Bid size.
Additionally, the CDS Auction Terms currently allow affiliated
Clearing Members to transfer, outsource, or aggregate their Minimum Bid
Requirements to apply to a single one of them, subject to notifying ICE
Clear Europe prior to a CDS Auction. The CDS Auction Terms further
provide that a Clearing Member that transfers or outsources its Minimum
Bid Requirement to an Affiliate remains liable for any breach by its
Affiliate in respect of such Clearing Member's Minimum Bid Requirement
(in addition to the liability on the part of its Affiliate for such
breach) and is subject to the CDS Auction Priority as if such Bid were
its own. Under the proposed rule change, the CDS Auction Terms would
continue to allow a Clearing Member to transfer its Minimum Bid
Requirement to an Affiliate but would further require that the
Affiliate also be a Clearing Member and that both Clearing Members
execute an agreement provided by ICE Clear Europe for this purpose. The
proposed rule change also would allow Clearing Members to outsource the
operational processing of any of their obligations under the CDS
Auction Terms pursuant to ICE Clear Europe Rule 102(w), which permits
Clearing Members to outsource the performance of their obligations
under the ICE Clear Europe Rulebook. Thus, this change would expand a
Clearing Member's ability to outsource the operational processing of
any of its obligations under the CDS Auction Terms (not just the
Minimum Bid Requirement) and would reference the applicable ICE Clear
Europe Rule. Moreover, the proposed rule change, as under the current
CDS Auction Terms, would provide that a Clearing Member that transfers
its Minimum Bid Requirement to an Affiliate remains liable with respect
to that Minimum Bid Requirement. The proposed rule change also would
expand this liability to make a Clearing Member liable for any breach
of the CDS Auction Terms by the person to whom the Clearing Member has
outsourced its operational obligations, consistent with the expansion
discussed above. Finally, the proposed rule change would further
specify that a Clearing Member that transfers or outsources its Minimum
Bid Requirement to an Affiliate would assume the same position as the
Affiliate for the purposes of determining the order of application of
non-defaulting Clearing Members' Guaranty Fund Contributions and
Assessment Contributions under ICE Clear Europe Rule 908(i) and for
designation as a Non-Bidding CDS Clearing Member. ICE Clear Europe is
making this particular change to better specify the consequences of
transfer of a CDS Clearing Member's obligations to an Affiliate.
Finally, to clarify the extent of the Minimum Bid Requirements, the
proposed rule change would add a provision to state that only those
Bids that count toward the Minimum Bid Requirement would be taken into
account in determining the order of application of Guaranty Fund
Contributions and Assessment Contributions under the Primary and
Secondary CDS Auction Priority AC Sequence, Primary and Secondary CDS
Auction Priority GF Sequence, and ICE Clear Europe Rule 908(i) (as
discussed above). Thus, for example, a Clearing Member that submits a
Bid despite having a Minimum Bid Requirement of zero (for one of the
reasons discussed above), would not see that Bid considered in
determining where the Clearing Member stands in the CDS Auction
Priority GF Sequence.
v. Use of the Default Management System
As mentioned above, the proposed rule change would add a new
defined term, ``DMS.'' The proposed rule change would define DMS as the
Default Management System operated by ICE Clear Europe. The Default
Management System would be the system used by ICE Clear Europe to
communicate information to, and receive information from, CDS Clearing
Members regarding Auctions. The proposed rule change would make changes
to various aspects of the CDS Auction Terms to reflect use of this new
defined term. With respect to the defined terms, the proposed rule
change would make amendments to reflect the use of the DMS rather than
the currently specified forms of communication, which usually require
some form of manual delivery. For example, the proposed rule change
would rename the term ``Bid Form'' to ``Bid Submission'' and revise the
definition to reflect that it would refer to a Bid submitted via the
DMS rather than a Bid submitted on a form prescribed by ICE Clear
Europe. Similarly, the proposed rule change would amend the definitions
for Primary and Secondary CDS Auction Announcement to reflect that ICE
Clear Europe would send the announcement via the DMS rather than a
circular.
Similarly, the proposed rule change would amend other parts of the
CDS Auction Terms to reflect ICE Clear Europe's use of the DMS.
Specifically, the proposed rule change would require that Minimum Bid
Requirements be communicated via the DMS (or via such other means and
in such format as is specified by ICE Clear Europe), rather than by the
template notification currently set out in Annex B. Accordingly, the
proposed rule change would delete Annex B from the CDS Auction Terms.
The proposed rule change would also require that ICE Clear Europe send
the particular specifications for an Auction Lot, like its minimum
reserve price (the lowest price ICE Clear Europe would accept), via the
DMS rather than by the template notification currently set out in Annex
A. Accordingly, the proposed rule change would delete Annex A from the
CDS Auction Terms. Finally, the
[[Page 40373]]
proposed rule change would require that ICE Clear Europe notify the
winning bidders for particular Auction Lots via the DMS.
In addition, the proposed rule change would amend the CDS Auction
Terms to reflect Clearing Members' use of the DMS. The proposed rule
change would require Clearing Members to submit bids via the DMS. The
proposed rule change would also specify that a Clearing Member could
amend its Bid by resubmitting the entire bid through DMS.
To reflect the particular operations of the DMS, the proposed rule
change would delete a provision from the CDS Auction Terms that
currently states that Clearing Members may make an unlimited number of
separate Bids. Operationally, the DMS does not accept an unlimited
number of separate Bids from Clearing Members. Rather, the DMS would
allow a Clearing Member to make separate Bids in respect of either its
Customers for whom it acts as Clearing Member or its Sponsored
Principals for whom it acts as Sponsor (in addition to any Bids for its
Proprietary Accounts), in the same way as it may make a Bid for one of
its Proprietary Accounts and subject to the same provisions of the CDS
Auction Terms. Similarly, the proposed rule change would delete a
statement that a Clearing Member who has made a mistaken or erroneous
bid may withdraw the Bid and correct the mistake. The DMS would not
permit Clearing Members to withdraw Bids. Instead, the Clearing Member
would need to request that ICE Clear Europe invalidate the Bid, which,
as under the current CDS Auction Terms, ICE Clear Europe could do at
its own discretion if the Clearing Member has made a genuine mistake in
the submission of a Bid.
Finally, the CDS Auction Terms currently allow ICE Clear Europe to
set a minimum bid size for an Auction and provide that any bid below
the minimum bid size will be null and void. The proposed rule change
would leverage the DMS to automate these existing requirements by
specifying that the DMS would be designed to automatically prevent
Clearing Members from submitting bids below the minimum bid size and to
render null and void any bid below the minimum bid size that the DMS
accepted in error.
vi. All or Nothing Bids
As mentioned above, the proposed rule change would add a new
defined term, ``All or Nothing Bid.'' An All or Nothing Bid would be a
Bid that stipulates that if the Bid is the winning Bid, the bidder
would receive all of the contracts being auctioned in the lot, without
any of the contracts being split among other Bids. To make an All or
Nothing Bid, the bidder would need to mark the Bid as such in its
submission. The proposed rule change would introduce a new defined term
for Bids that are not All or Nothing Bids, calling them Standard Bids.
Clearing Members would not be required to make All or Nothing Bids
pursuant to the proposed rule change. If a Clearing Member submits an
All or Nothing Bid, however, then in the absence of other bids, the All
or Nothing Bid would satisfy the Clearing Member's Minimum Bid
Requirement (if any) at the same price but adjusted on a pro rata basis
for the notional amount of contracts in the Auction Lot. If a Clearing
Member makes an All or Nothing Bid, the Clearing Member still would be
able to submit one or more Standard Bids for the same Auction Lot,
whether for its account or the account of its customers, provided that
all of the Bids are submitted in the same submission.
Under the CDS Auction Terms, ICE Clear Europe currently determines
the price of an Auction by ordering Bids sequentially, starting with
the highest price and ending with the lowest price. The price of the
Bid at which, along with any equal or higher Bids, the sum of the
notional amount of contracts being purchased equals or is greater than
the notional amount of contracts that ICE Clear Europe is auctioning is
the clearing price of the Auction (the ``CDS Auction Clearing Price'').
In other words, ICE Clear Europe proceeds down the list of Bids by
price, starting with the highest priced Bid, and sets the CDS Auction
Clearing Price at the Bid that, along with the other higher priced Bids
before it, allows ICE Clear Europe to allocate 100% of the open CDS
contracts in the Auction Lot.
The CDS Auction Terms currently require that, in the event there
are multiple Bids at the CDS Auction Clearing Price and there is a
shortfall of open CDS contracts, ICE Clear Europe must allocate the
contracts pro rata according to the notional amount of contracts that
each winning bidder requested in its Bid. As revised under the proposed
rule change, the CDS Auction Terms would require that, where there is
an All or Nothing Bid in the sequence of Bids before the CDS Auction
Clearing Price, the price of the All or Nothing Bid would set the CDS
Auction Clearing Price (because that would be the highest priced bid
that would allow ICE Clear Europe to allocate 100% of the open
contracts). In that case, ICE Clear Europe would allocate to the bidder
that submitted the All or Nothing Bid 100% of the contracts even if
there are Standard Bids at a higher or equal price. If there were more
than one All or Nothing Bid at the CDS Auction Clearing Price, then the
CDS Auction Procedures, as revised under the proposed rule change,
would require that ICE Clear Europe allocate the portfolio equally
among the All or Nothing Bids.
The proposed rule change would update two other provisions of the
CDS Auction Terms to clarify how those provisions would apply in light
of the presence of All or Nothing Bids. First, the CDS Auction Terms
currently provide that ICE Clear Europe may, after a Primary Auction,
in its discretion and after consultation with the CDS Default
Committee, determine the CDS Auction Clearing Price to be less than
100% of the notional amount of the contracts and declare a Repeat
Auction to auction off the remaining contracts. ICE Clear Europe may do
so if, in its reasonable determination, awarding 100% of the notional
amount of the contracts would have a material impact on the amounts
payable or receivable by ICE Clear Europe. The proposed rule change
would not alter this provision but would specify that, in such a
situation, ICE Europe could disregard any All or Nothing Bids.
Second, the proposed rule change would revise the CDS Auction Terms
to clarify how an All or Nothing Bid affects the calculation of a
Clearing Member's Bid price for purposes of determining the
competitiveness of a Clearing Member's Bid and satisfaction of a
Clearing Member's Minimum Bid Requirement. The competitiveness of a
Clearing Member's Bid and satisfaction of a Clearing Member's Minimum
Bid Requirement are important because under the CDS Auction Terms and
ICE Clear Europe Rule 908(i), in the event that ICE Clear Europe needs
to use non-defaulting Clearing Members' Guaranty Fund Contributions or
Assessment Contributions to resolve the default of a Clearing Member,
ICE Clear Europe uses first the contributions attributable to Clearing
Members that did not satisfy their Minimum Bid Requirement (Non-Bidding
CDS Clearing Members), followed by those that submitted less
competitive Bids. Currently, ICE Clear Europe uses the weighted average
price of all valid Standard Bids made by the Clearing Member in the
Auction (weighted by the portfolio size of each such Bid, and converted
into Euro, if applicable) to determine Bid price and thus to determine
the competitiveness
[[Page 40374]]
of a Clearing Member's Bids in an Auction.
Under the CDS Auction Terms as revised by the proposed rule change,
where a Clearing Member has submitted both an All or Nothing Bid and
one or more Standard Bids, the Clearing Member's Bid price would be the
(i) the weighted average price of all valid Standard Bids made by the
Clearing Member in the Auction (weighted by the portfolio size of each
such bid, and converted into Euro, if applicable) and (ii) the price of
any valid All or Nothing Bid made by the Clearing Member in the
Auction, in either case proportionately scaled to a portfolio size
representing 100% of the relevant Auction Lot. Moreover, under the
proposed rule change, if a Clearing Member's Standard Bids do not
satisfy its Minimum Bid Requirement, the Clearing Member's Bid price
would be the price of its All or Nothing Bid. Where a Clearing Member
has submitted one or more Standard Bids (and has not submitted an All
or Nothing Bid), and that Clearing Member's Standard Bids do not
satisfy its Minimum Bid Requirement, the CDS Auction Terms would treat
the Clearing Member as a Non-Bidding CDS Clearing Member, which, as
noted above, has consequences under ICE Clear Europe Rule 908(i).
vii. Market Abuse Regulation
The proposed rule change would also amend the CDS Auction Terms to
clarify and state explicitly certain obligations for auction
participants in respect of information they may receive in connection
with an Auction, including the contents of the portfolio and the
outcome or timing of an Auction. Specifically, a participant in an
Auction would be required to acknowledge that such information may
constitute inside information for the purposes of the EU Market Abuse
Regulation (Regulation (EU) No 596/2014) or any similar under
applicable law in respect of any Contracts cleared by the ICE Clear
Europe or in respect of securities of a defaulting Clearing Member.
Under the proposed rule change, each participant in an Auction would be
required to assess whether such information is inside information for
purposes of the Market Abuse Regulation and, if so, to agree to: (i)
Comply with applicable Market Abuse Laws; (ii) generally not disclose
such information to persons outside of its organization; (iii) prevent
persons engaged in client trading at such organization from possessing
such information; (iv) prevent those in possession of such information
from trading on such information until it ceases to be inside
information; and (v) where such information constitutes inside
information under Regulation (EU) No. 596/2014, maintain an insider
list of persons with access to this information.
B. Amendments to the Policy
The proposed rule change would make a number of changes to the
Policy in relation to the amendments to the CDS Auction Terms. First,
as mentioned above, the proposed rule change would change the name from
the CDS Default Management Framework to the CDS Default Management
Policy. The proposed rule change would make amendments to that effect
throughout the document.
Next, the proposed rule change would revise certain
characterizations of the timeframe within which certain actions would
occur under the Policy. The Policy currently provides that after the
approval for the declaration of a default, ICE Clear Europe will
immediately institute its default management process as outlined in the
Policy. The proposed rule change would remove ``immediately'' from this
provision. In addition, the proposed rule change would remove
``immediately'' from the provision that ICE Clear Europe cease clearing
trades for the defaulting Clearing Member when that Clearing Member is
declared in default. Although ICE Clear Europe expects that it would
implement such actions in a timely manner under the circumstances, ICE
Clear Europe does not believe it is necessary or feasible to specify
that it would do take such actions immediately.
Similarly, with respect to assembling the Clearing Risk Team after
a default, the Policy currently requires that the Head of Clearing Risk
assemble the Clearing Risk Team as soon as a Clearing Member is deemed
to have defaulted. The proposed rule change would amend this to require
assembly once a Clearing Member is deemed to have defaulted. Again, ICE
Clear Europe does not believe it is necessary or feasible to specify
that assembly occur as soon as a Clearing Member is deemed to have
defaulted. Finally, the Policy currently provides that when liquidating
collateral assets of a default Clearing Member, ICE Clear Europe
ensures that it can sell the collateral, subject to settlements terms,
within a single working day, but the Head of Clearing Risk has
discretion to postpone the collateral sale. The proposed rule change
would delete this statement. ICE Clear Europe believes the statement is
not needed to ensure timely sale of collateral and that it is
unnecessary given that ICE Clear Europe relies on its existing and
detailed collateral and liquidity policies to ensure it has sufficient
access to liquidity in case of default.
The proposed rule change would also make a change with respect to
the personnel authorized to take action regarding default management.
The proposed rule change would remove a statement that in the event
that the President/Chief Operating Officer is absent, the Head of
Clearing Risk has the ability to overrule any other head of department
(including Head of Treasury and Head of Operations) where necessary, on
matters relating to default management. Thus, if the President/Chief
Operating Officer is absent, the Head of Clearing Risk no longer has
the ability to overrule any head of department. ICE Clear Europe is
making this amendment to reflect a change in the Board's delegation of
authority. Under the current delegation of authority, where the
President/Chief Operating Officer is absent, the Executive Risk
Committee has authority to make decisions, and thus override any head
of department.
The proposed rule change would also amend the Policy regarding ICE
Clear Europe's authority to convert a default Clearing Member's non-
cash margin to cash. The Policy currently provides that to manage the
risks related to a Clearing Member's default, ICE Clear Europe will
internally isolate the Defaulting Clearing Member's positions and, if
deemed appropriate, convert any non-cash portion of the Defaulting
Member's margin and collateral securing their portion of the Guaranty
Fund into cash. The proposed rule change would alter this slightly to
provide that ICE Clear Europe ``may'' convert any non-cash portion of
the Defaulting Member's margin and collateral securing their portion of
the Guaranty Fund into cash. ICE Clear Europe is making this change to
clarify the drafting of this provision, but it does not believe this
change would substantively alter ICE Clear Europe's authority under
this provision.
The proposed rule change would also amend the portion of the Policy
related to the mechanics of bidding in an Auction to address the
introduction of All or Nothing Bids, as discussed above. The proposed
amendments would provide explanation regarding the meaning of an All or
Nothing Bid and an example of how an All or Nothing Bid would work. The
proposed amendments would also provide that ICE Clear Europe would
publish further information on the bidding types utilized in any given
Auction as part of the specifications for that Auction.
[[Page 40375]]
Finally, the proposed rule change would amend the Policy's
provisions regarding review, breach management, and exception handling.
With respect to reviewing and revising the Policy, the Policy currently
provides that ICE Clear Europe will conduct a quarterly review of the
Policy, to include an assessment of responsibilities, trading
facilities, and equipment. The proposed rule change would delete this
provision because ICE Clear Europe would review and revise the Policy
as part of ICE Clear Europe's separate annual documentation review
process rather than on a quarterly basis and, as discussed below, the
document owner would be responsible for ensuring the Policy remains up-
to-date. In its place, the proposed rule change would add a provision
explaining that ICE Clear Europe, in coordination with its Clearing
Members, would conduct an annual mock Clearing Member default test with
the Clearing Risk Department, appropriate Clearing House management,
and CDS Default Committee Members for each Clearing Member. The
proposed rule change would also make the Policy's provisions for breach
management and exception handling consistent with other ICE Clear
Europe policies and governance processes.\7\ Pursuant to the
amendments, the document owner, as specified in ICE Clear Europe
policies, would be responsible for making sure the Policy is up-to-date
and for reporting report material breaches or unapproved deviations
from the Policy to the Head of Department, the Chief Risk Officer and
the Head of Compliance (or their delegates) who together would
determine if further escalation should be made to relevant senior
executives, the Board and/or competent authorities. Exceptions to the
Policy would be approved in accordance with ICE Clear Europe's
governance process for the approval of changes to the Policy.
---------------------------------------------------------------------------
\7\ See Self-Regulatory Organizations; ICE Clear Europe Limited;
Notice of Filing of Partial Amendment No. 2 and Order Granting
Accelerated Approval of Proposed Rule Change, as Modified by Partial
Amendment No. 1 and Partial Amendment No. 2, To Revise the ICE Clear
Europe Treasury and Banking Services Policy, Liquidity Management
Procedures, Investment Management Procedures and Unsecured Credit
Limits Procedures, Exchange Act Release No. 86891 (Sept. 6, 2019);
84 FR 48191 (Sep. 12, 2019) (SR-ICEEU-2019-012) (approving similar
provisions in the ICE Clear Europe Treasury and Banking Services
Policy, Liquidity Management Procedures, Investment Management
Procedures and Unsecured Credit Limits Procedures).
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\8\ For the reasons given below, the Commission finds that
the proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act \9\ and Rules 17Ad-22(e)(2)(v) and (e)(13).\10\
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\8\ 15 U.S.C. 78s(b)(2)(C).
\9\ 15 U.S.C. 78q-1(b)(3)(F).
\10\ 17 CFR 240.17Ad-22(e)(2)(v), (e)(13).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICE Clear Europe be designed to promote the prompt and
accurate clearance and settlement of securities transactions and, to
the extent applicable, derivative agreements, contracts, and
transactions, as well as to assure the safeguarding of securities and
funds which are in the custody or control of ICE Clear Europe or for
which it is responsible.\11\ As discussed in more detail below, the
Commission generally believes that the proposed rule change should
improve the CDS Auction Terms and the Policy and, therefore, ICE Clear
Europe's conduct of an Auction in response to a Clearing Member's
default, and, as a result, believes that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act.\12\
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
\12\ 15 U.S.C. 78q-1(b)(3)(F).
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Specifically, the Commission believes that the proposed rule
change, in amending certain defined terms and adding defined terms
needed for the other changes as discussed in Part II,A,i above, should
reduce the possibility for confusion in the application of the CDS
Auction Terms by clarifying the terminology in the CDS Auction Terms
and by identifying and defining the terms needed to enact the other
changes discussed above. In addition, amending the defined terms with
respect to certain operations of an auction, including changing the
term Closing Time to Bidding Close Time and revising the definitions of
Primary and Secondary CDS Auction Priority AC Sequence and Primary and
Secondary CDS Auction Priority GF Sequence, should help to clarify
these operational aspects of Auctions and thereby improve the
efficiency of Auctions.
Moreover, adding provisions to explain how ICE Clear Europe would
interpret and apply the CDS Auction Terms, as discussed in Part II.A.ii
above, including how the CDS Auctions Terms would relate to the ICE
Clear Europe Rulebook, should help to reduce the possibility for
confusion when interpreting and applying the CDS Auction Terms
alongside the ICE Clear Europe Rulebook. Similarly, the additional
provisions to explain that the CDS Contracts part of an Auction would
include certain terminated CDS Contracts and hedging CDS Contracts
should allow ICE Clear Europe to replace such contracts and establish a
price to calculate its loss with respect to such contracts, thereby
further improving the efficacy of Auctions.
Further, giving ICE Clear Europe the ability to postpone the
Bidding Close Time and withdraw a lot after the Bidding Close Time, as
discussed in Part II.A.iii above, should afford ICE Clear Europe
flexibility to respond to changing conditions as Auctions are being
conducted and therefore to respond as needed to conduct a successful
Auction. Clearing Members should also benefit from additional clarity
with respect to the consequences of making Bids in an Auction as a
result of the proposed rule change specifying the circumstances in
which a Clearing Member is treated as having not made a Bid, in which
ICE Clear Europe could exclude certain bids for purposes of calculating
the CDS Auction Clearing Price, and in which a Bid would constitute an
offer governed by ICE Clear Europe Rule 904(b) and Part 4 of the ICE
Clear Europe Rulebook. Finally, the additional requirement that each
Direct Participating Customer enter into a CDS Auction Participation
Agreement with its CDS Clearing Member should provide an additional
assurance that Customers participating in an Auction would comply with
the requirements of the CDS Auction Terms.
As it relates to Minimum Bid Requirements discussed in Part II.A.iv
above, the Commission believes that the proposed rule change could
increase participation in Auctions by reducing the potential for
avoidance of Minimum Bid Requirements, thereby leading to more
successful Auctions. Three particular aspects of the proposed rule
change should help to reduce the possibility that a Clearing Member
elects not to participate in an Auction or avoids the Minimum Bid
Requirement: (i) Removal of the possibility that a Clearing Member
could elect not to participate in an Auction; (ii) shortening the time
by which a Clearing Member must provide notice to ICE Clear Europe that
a Minimum Bid Requirement should not apply; and (iii) requiring ICE
Clear Europe to confirm that it agrees to the Clearing Member's
assessment
[[Page 40376]]
At the same time, the proposed rule change should increase the
flexibility with which Clearing Members may address Minimum Bid
Requirements by allowing Clearing Members to outsource the operational
processing of their obligations under the CDS Auction Terms; continuing
to allow Clearing Members to transfer their Minimum Bid Requirements to
Affiliates (subject to both being Clearing Members and entering into an
agreement); making explicit that a Clearing Member can satisfy its
Minimum Bid Requirement with multiple Bids provided that any individual
Bid is equal to or larger than the applicable minimum Bid size; and
adding a provision to state that only those Bids that count toward the
Minimum Bid Requirement would be taken into account under the Primary
and Secondary CDS Auction Priority AC Sequence, Primary and Secondary
CDS Auction Priority GF Sequence, and ICE Clear Europe Rule 908(i).
Similarly, the additional clarity provided regarding the continued
liability of a Clearing Member that transfers its Minimum Bid
Requirement or outsources other operational obligations would allow
Clearing Members to better understand the consequences of transferring
or outsourcing a Minimum Bid Requirement. The Commission believes that
this additional flexibility and information should generally help to
ensure Clearing Members comply with Minimum Bid Requirements, which, in
turn, should help to increase the likelihood of a successful Auction.
As discussed in part II.A.v above, the proposed rule change would
make a number of changes reflecting the role and operations of the DMS
in the context of an Auction. These changes would replace manual
communications with electronic ones and therefore should improve the
efficiency and accuracy of communications regarding Auctions, which may
help to avoid delays or miscommunications that could delay the
successful completion of an Auction. Thus, requiring use of the DMS and
amending the CDS Auction Terms to reflect the operation of the DMS
should help to promote the smooth conduct and successful completion of
Auctions.
The proposed rule change would also add All or Nothing Bids, and
make related changes, to the CDS Auction Terms, as discussed in Part
II.A.vi above. Because an All or Nothing Bid provides a means for a
single bidder to take all of the contracts in an Auction and requires
that ICE Clear Europe allocate such contracts to that bidder if the All
or Nothing Bid meets the Auction Clearing Price, All or Nothing Bidding
should increase the likelihood that ICE Clear Europe successfully sells
all of a defaulting Clearing Member's contracts by an Auction. Thus,
the Commission believes that the changes discussed regarding All or
Nothing Bids, including how an All or Nothing Bid would affect Minimum
Bid Requirements and the calculation of bid price, should help to
increase the likelihood of a successful Auction.
Moreover, adding provisions for the EU Market Abuse Regulations as
discussed in Part II.A.vii above should ensure compliance with
applicable EU law in the conduct of Auctions and should protect
sensitive information shared as part of an Auction. The Commission
believes this should, in turn, increase participants' confidence in the
security of information shared as part of an Auction and therefore
increase participation in an Auction.
Finally, the Commission believes that the changes to the Policy
discussed in Part II.B above should improve ICE Clear Europe's ability
to use the processes outlined in the Policy to respond to a Clearing
Member's default and increase the clarity regarding the operation of
the Policy, including when ICE Clear Europe may take certain actions
and its authority for doing so. These changes include: (i) Renaming the
Policy; (ii) revising the timing requirements for certain actions; and
(iii) specifying that ICE Clear Europe may convert the defaulting
Clearing Member's non-cash Margin and Guaranty Fund Contributions into
cash. Similarly, removing a statement that in the event that the
President/Chief Operating Officer being absent, the Head of Clearing
Risk has the ability to overrule any other head of department
(including Head of Treasury and Head of Operations) to reflect a change
in the Board's delegation of authority, should reduce the possibility
for confusion or mistakes in taking action under the Policy. Amending
the mechanics of bidding in an Auction to address the introduction of
All or Nothing Bids should further help to implement All or Nothing
Bidding, which, as discussed above, should increase the likelihood for
a successful Auction. Deleting the requirement that ICE Clear Europe
conduct a quarterly review and instead making the document owner
responsible for ensuring that the Policy is up-to-date and for
reporting breaches, consistent with other ICE Clear Europe policies and
governance processes, should establish a means for ensuring that ICE
Clear Europe maintains and adheres to the Policy. For these reasons,
the Commission believes the changes to the Policy should generally
improve ICE Clear Europe's conduct of Auctions.
Through Auctions, ICE Clear Europe sells the open CDS contracts of
a defaulting Clearing Member. Thus, in improving the efficiency of such
Auctions, the Commission believes the proposed rule change should
promote the prompt and accurate clearance and settlement of the CDS
transactions resulting from such Auctions. Moreover, the Commission
believes that the default of a Clearing Member, if not promptly
resolved, could cause losses for ICE Clear Europe. The Commission
believes the proposed rule change should help to avoid these losses by
promoting the prompt resolution of Auctions, and therefore the prompt
resolution of a Clearing Member's default. Because losses resulting
from the default of a Clearing Member could disrupt ICE Clear Europe's
ability to operate and therefore threaten ICE Clear Europe's ability to
clear and settle transactions and access securities and funds, the
Commission believes the proposed rule change also should help to
promote the prompt and accurate clearance and settlement of
transactions and assure the safeguarding of securities and funds in ICE
Clear Europe's custody and control.
Therefore, the Commission finds that the proposed rule change
should promote the prompt and accurate clearance and settlement of
securities transactions and assure the safeguarding of securities and
funds in ICE Clear Europe's custody and control, consistent with the
Section 17A(b)(3)(F) of the Act.\13\
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\13\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency with Rule 17Ad-22(e)(2)(v)
Rule 17Ad-22(e)(2)(v) requires that ICE Clear Europe establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for governance arrangements that, among
other things, specify clear and direct lines of responsibility.\14\ As
discussed in Part II.B above, the proposed rule change would amend the
Policy to make the document owner responsible for ensuring that the
Policy is up-to-date and for reporting breaches. The Commission
believes that this aspect of the proposed rule change would place on
the document owner a clear and direct responsibility for ensuring that
ICE Clear Europe maintains the Policy and complies with it. For this
reason, the Commission finds
[[Page 40377]]
that the proposed rule change is consistent with Rule 17Ad-
22(e)(2)(v).\15\
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\14\ 15 U.S.C. 17Ad-22(e)(2)(v).
\15\ 15 U.S.C. 17Ad-22(e)(2)(v).
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C. Consistency with Rule 17Ad-22(e)(13)
Rule 17Ad-22(e)(13) requires that ICE Clear Europe establish,
implement, maintain and enforce written policies and procedures
reasonably designed to ensure ICE Clear Europe has the authority and
operational capacity to take timely action to contain losses and
liquidity demands and continue to meet its obligations by, at a
minimum, requiring its Clearing Members and, when practicable, other
stakeholders to participate in the testing and review of its default
procedures, including any close-out procedures, at least annually and
following material changes thereto.\16\
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\16\ 15 U.S.C. 17Ad-22(e)(13).
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As discussed above, the Commission believes the proposed rule
change should generally improve the clarity and operation of the CDS
Auction Terms and, therefore, ICE Clear Europe's ability to conduct a
successful Auction via the CDS Auction Terms. Because ICE Clear Europe
uses Auctions to close out a defaulting Clearing Member's contracts and
contain the losses and liquidity demands stemming from a Clearing
Member's default, the Commission believes the proposed rule change, in
improving ICE Clear Europe's ability to conduct a successful Auction
via the CDS Auction Terms, should help to ensure ICE Clear Europe has
the authority and operational capacity to take timely action to contain
losses and liquidity demands. Moreover, as discussed in Part II.B
above, the proposed rule change would amend the Policy to add a
provision explaining that ICE Clear Europe, in coordination with its
Clearing Members, would conduct an annual mock Clearing Member default
test with the Clearing Risk Department, appropriate ICE Clear Europe
management, and CDS Default Committee Members for each Clearing Member.
The Commission believes this particular change should help to ensure
that ICE Clear Europe requires its Clearing Members to participate in
the testing and review of its default procedures.
For these reasons, the Commission finds that the proposed rule
change is consistent with Rule 17Ad-22(e)(13).\17\
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\17\ 15 U.S.C. 17Ad-22(e)(13).
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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 \18\ and Rules 17Ad-22(e)(2)(v) and (e)(13).\19\
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\18\ 15 U.S.C. 78q-1(b)(3)(F).
\19\ 17 CFR 240.17Ad-22(e)(2)(v) and (e)(13).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\20\ that the proposed rule change, as modified by Partial Amendment
No. 1 (SR-ICEEU-2020-007), be, and hereby is, approved.\21\
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\20\ 15 U.S.C. 78s(b)(2).
\21\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14389 Filed 7-2-20; 8:45 am]
BILLING CODE 8011-01-P
