Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC Exercise Procedures and ICC Clearing Rules, 47827-47831 [2020-17129]
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Federal Register / Vol. 85, No. 152 / Thursday, August 6, 2020 / Notices
OTC Equity Securities. FINRA
anticipates no new costs to member
firms reporting to the CAT as a result of
this proposal, because any related costs
have already been built in the technical
specifications previously determined
and shared broadly in conformance with
the CAT NMS Plan, as amended. In
addition, FINRA and all national
securities exchanges are proposing this
amendment to their Compliance Rules.
Therefore, this is not a competitive rule
filing and does not impose a burden on
competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
FINRA has filed the proposed rule
change pursuant to Section
19(b)(3)(A)(iii) of the Act 9 and Rule
19b–4(f)(6) thereunder.10 Because the
proposed rule change does not: (i)
Significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
prior to 30 days from the date on which
it was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 11 and Rule 19b–4(f)(6)(iii)
thereunder.12
A proposed rule change filed under
Rule 19b–4(f)(6) 13 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b–4(f)(6)(iii),14 the
Commission may designate a shorter
time if such action is consistent with the
protection of investors and the public
interest. FINRA has asked the
Commission to waive the 30-day
operative delay so that the proposal may
become operative by July 31, 2020. The
Commission believes that waiver of the
30-day operative delay is consistent
9 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
11 15 U.S.C. 78s(b)(3)(A).
12 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires FINRA to give the Commission
written notice of FINRA’s intent to file the proposed
rule change, along with a brief description and text
of the proposed rule change, at least five business
days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. FINRA has satisfied this requirement.
13 17 CFR 240.19b–4(f)(6).
14 17 CFR 240.19b–4(f)(6)(iii).
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with the protection of investors and the
public interest because it implements an
amendment to the CAT NMS Plan
approved by the Commission.15
Accordingly, the Commission hereby
waives the 30-day operative delay and
designates the proposal operative as of
July 31, 2020.16
At any time within 60 days of the
filing of this proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2020–023 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–FINRA–2020–023. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
15 See Securities Exchange Act Release No. 89397
(July 24, 2020) (Federal Register publication
pending).
16 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of FINRA. All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2020–023, and should be submitted on
or before August 27, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–17134 Filed 8–5–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89436; File No. SR–ICC–
2020–008]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change Relating to the
ICC Exercise Procedures and ICC
Clearing Rules
July 31, 2020.
I. Introduction
On June 3, 2020, ICE Clear Credit LLC
(‘‘ICC’’) 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 thereunder,2 a
proposed rule change to formalize and
adopt the ICC Exercise Procedures (the
‘‘Procedures’’) and a related update to
the ICC Clearing Rules (the ‘‘Rules’’) to
accompany the clearing of options on
index credit default swaps (‘‘Index
Swaptions’’).3 The proposed rule change
was published for comment in the
17 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Capitalized terms used but not defined herein
have the meanings specified in the Procedures or
the Rules, as applicable.
1 15
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Federal Register on June 22, 2020.4 The
Commission did not receive comments
regarding the proposed rule change. For
the reasons discussed below, the
Commission is approving the proposed
rule change.
II. Description of the Proposed Rule
Change
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The proposed rule change would
formalize and adopt the Procedures and
make a related amendment to the Rules
in connection with ICC’s proposed
clearing of Index Swaptions. ICC has
previously filed with the Commission
changes to certain other policies and
procedures related to the clearing of
Index Swaptions on June 28, 2019 5 and
January 14, 2020.6 As described in those
filings, pursuant to an Index Swaption,
one party (the ‘‘Swaption Buyer’’) has
the right (but not the obligation) to
cause the other party (the ‘‘Swaption
Seller’’) to enter into an index credit
default swap transaction at a predetermined strike price on a specified
expiration date on specified terms. As
also described in those filings, ICC
intends to adopt certain related policies
and procedures in preparation for the
launch of clearing of Index Swaptions,
including those set out in this proposed
rule change, and would not commence
clearing of Index Swaptions until all
such policies and procedures have been
approved by the Commission or
otherwise become effective. As such,
ICC filed the proposed rule change to
formalize the Procedures and make the
related change to the Rules effective as
part of ICC’s larger effort to adopt the
necessary policies and procedures to the
eventual launch of the clearing of Index
Swaptions.7
4 Self-Regulatory Organizations; ICE Clear Credit
LLC; Notice of Filing of Proposed Rule Change,
Security-Based Swap Submission, or Advance
Notice Relating to the ICC Exercise Procedures and
ICC Clearing Rules, Exchange Act Release No.
89072 (June 16, 2020); 85 FR 37483 (June 22, 2020)
(SR–ICC–2020–008) (‘‘Notice’’).
5 Self-Regulatory Organizations; ICE Clear Credit
LLC; Notice of Filing of Partial Amendment No. 1
and Order Granting Accelerated Approval of
Proposed Rule Change, as Modified by Partial
Amendment No. 1, Relating to the ICC Rules, ICC
End-of-Day Price Discovery Policies and
Procedures, and ICC Risk Management Framework,
Exchange Act Release No. 87297 (Oct. 15, 2019); 84
FR 56270 (Oct. 21, 2019) (SR–ICC–2019–007)
(‘‘2019 Swaption Rule Amendments’’).
6 Self-Regulatory Organizations; ICE Clear Credit
LLC; Order Approving Proposed Rule Change
Relating to the ICC Risk Management Model
Description, ICC Stress Testing Framework, ICC
Liquidity Risk Management Framework, ICC BackTesting Framework, and ICC Risk Parameter Setting
and Review Policy, Exchange Act Release No.
89142 (June 24, 2020); 85 FR 39226 (June 30, 2020)
(SR–ICC–2020–002).
7 Notice, 85 FR at 37483.
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A. The Procedures
The Procedures would supplement
the provisions of Subchapter 26R of the
Rules 8 with respect to Index Swaptions
and provide further detail as to (i)
which Swaption Buyers may exercise;
(ii) how an Index Swaption is exercised,
including detail as to the amount being
exercised, circumstances in which an
exercise is valid and irrevocable or
invalid and rejected, and limitations ICC
may impose upon exercise; (iii) how ICC
would assign exercised positions to
Swaptions Sellers; and (iv) what steps
ICC would take in response to systems
failures that inhibit ICC from accepting
exercises and communications failures
that inhibit a Swaption Buyer from
exercising an Index Swaption.
i. Who May Exercise
First, the Procedures would specify
who is authorized to exercise an Index
Swaption. Under the Procedures, a
Swaption Buyer that is a Clearing
Participant owning an Index Swaption
in its house account would be permitted
to exercise that Index Swaption, and a
Swaption Buyer that is a nonparticipant client of a Clearing
Participant owning an Index Swaption
carried in the Clearing Participant’s
Client Origin Account (i.e., the Clearing
Participant’s client account) would be
able to exercise that Index Swaption
(each an ‘‘Exercising Party’’). The
Procedures would not permit a Clearing
Participant to exercise on behalf of a
non-participant client. Rather, the
Procedures would permit only a nonparticipant client to exercise its Index
Swaption. However, in the event of a
default or termination event with
respect to a non-participant for which it
carries an Index Swaption, the
Procedures would permit a Clearing
Participant to (i) exercise such Index
Swaption on behalf of the nonparticipant party for the purpose of
liquidating or closing out such position,
or (ii) convert such Index Swaption into
a position in the Clearing Participant’s
house account, which is consistent with
existing ICC Rule 304. Finally, the
Procedures would require a Clearing
Participant to obtain the agreement of
each non-participant party for which it
carries an open position in Index
Swaptions to the provisions of the Rules
and the Procedures applicable to Index
Swaptions.
8 ICC adopted Subchapter 26R of the Rules in a
prior rule filing related to the clearing of Index
Swaptions. See 2019 Swaption Rule Amendments,
84 FR at 56270.
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ii. How to Exercise
Next, the Procedures would specify
the process for exercising an Index
Swaption. To exercise an Index
Swaption, the Exercising Party would
deliver an exercise notice to ICC using
an electronic system known as the
Exercise System during the Exercise
Period that specifies the notional
amount being exercised (the ‘‘Exercised
Notional Amount’’). Under the
Procedures, the Exercise Period would
be the time period during which an
Exercising Party may deliver an exercise
notice to ICC, i.e., 9:00 a.m. to 11:00
a.m. New York time for an Index
Swaption referencing a CDX.NA index,
and 9:00 a.m. to 4:00 p.m. London time
for an Index Swaption referencing an
iTraxx Europe index.
With respect to the amount that an
Exercising Party may exercise, the
Procedures would provide that an open
position may be exercised in whole or
part. The Procedures would provide that
ICC may elect to require a partial
exercise be in a specified notional
amount, which is designated as the
Exercise Block. If ICC requires a specific
notional amount as the Exercise Block,
an Exercising Party must make any
partial exercise in that notional amount,
or in an integer multiple thereof. If ICC
does not require any specific notional
amount as the Exercise Block, the
Exercise Block would be 0.01 in the
currency of denomination. If an
Exercising Party submits an exercise
notice with an Exercised Notional
Amount less than the notional amount
of the Index Swaption, the Procedures
would permit the Exercising Party to
submit during the Exercise Period a
subsequent exercise notice increasing
the Exercised Notional Amount, but the
Procedures would not permit an
Exercising Party to reduce the Exercised
Notional Amount of an exercise notice.
The Procedures also would specify
the circumstances in which an exercise
notice would be treated as irrevocable.
Once an exercise notice is submitted to
ICC during the Exercise Period, it would
be irrevocable and binding on the
Exercising Party. ICC will then consider
whether to validate the Exercise Notice,
as discussed further below, and if it is
validated, it would then be accepted by
ICC and become binding on ICC and the
Exercising Party (and, in the case of a
non-participant, its Clearing
Participant). The Procedures would also
allow ICC to establish a pre-exercise
notification period during which an
Exercising Party may submit, modify, or
withdraw a preliminary exercise notice.
If an Exercising Party submitted a
preliminary exercise notice but does not
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submit another exercise notice or
withdraw the preliminary exercise
notice, then the Procedures would treat
the Exercising Party as having submitted
an exercise notice with the Exercised
Notional Amount specified under such
preliminary notice.
If ICC rejects an exercise notice as not
valid, it would inform the submitting
party, who may resubmit a corrected
exercise notice within the Exercise
Period. Under the Procedures, ICC
would deem a Swaption Exercise Notice
invalid if it has (i) an Exercised Notional
Amount of less than zero, (ii) an
Exercised Notional Amount greater than
the notional amount of the Index
Swaption, or (iii) an Exercised Notional
Amount less than the notional amount
of the Index Swaption and not an
integer multiple of the Exercise Block.
The Procedures would further provide
that ICC may impose limitations on the
speed, frequency, and notional amounts
in which an Index Option may be
exercised at certain times during the
Exercise Period. Any attempted exercise
in violation of these limitations would
be rejected. The Procedures would also
state that ICC would not be responsible
for any failure or inability of a
participant or non-participant party to
exercise any Index Swaption, instead
providing that each Exercising Party
would be responsible for monitoring
submission requirements, exercise
limitations, and pertinent deadlines.
iii. Assignment of Exercised Positions
The Procedures also would explain
how ICC would assign exercised
positions of Index Swaptions. First, the
Procedures would set forth ICC’s
process of netting all open positions in
an expiring Index Swaption on the
business day prior to the expiration date
of an Index Swaption. Additionally, the
Procedures would allow, but not
obligate, ICC to estimate and provide the
notional amount that it would assign to
each open position in an Index
Swaption of a Swaption Seller during
the Exercise Period. These estimates
would be purely for informational
purposes and would not be binding on
ICC.
At the conclusion of the Exercise
Period, ICC would determine the final
assignments to open positions in Index
Swaptions of Swaption Sellers and
notify participants accordingly. The
Procedures would specify that ICC
would make assignments across all open
positions of participants that are
Swaption Sellers in the relevant Index
Swaptions. ICC would make final
assignments proportionally based on the
notional amount of each open position
of a Swaption Seller, relative to the total
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notional amount of all open positions of
Swaption Sellers in a particular Index
Swaption. Once issued, the final
assignments would constitute ICC’s
exercise as Swaption Buyer of the Index
Swaption held by a Swaption Seller,
and ICC would not be required to
provide any further notice of such
exercise.
iv. System and Communications
Failures
The Procedures also would describe
in detail what steps ICC would take in
the event of technical issues disrupting
the clearing of Index Swaptions and the
processing of exercise notices. The
Procedures would first define an
Exercise System Failure as any failure of
the Exercise System to be fully
operational during the 45-minute period
prior to the end of the Exercise Period
or any other circumstance in which ICC
determines that it is unable to process
Swaption Exercise Notices in a timely
manner. In case of an Exercise System
Failure, the Procedures would require
that ICC give notice and, at ICC’s
election: (i) Cancel and reschedule the
Exercise Period, (ii) determine that
automatic exercise will apply, and/or
(iii) take such other action as ICC
determines appropriate to permit
Exercising Parties to submit exercise
notices and to permit ICC to assign such
notices. The Procedures would further
specify that if automatic exercise
applies under the system failure
provisions, ICC would automatically
exercise any open positions determined
by ICC to be in the money.9
Similarly, the Procedures would
specify the steps ICC would take in
response to an Exercising Party’s
inability to submit notices to the
Exercise System. Where an Exercising
Party is affected by a significant
communications or technological failure
resulting in it being impossible or
impracticable for the Exercising Party to
deliver all, or substantially all, of its
exercise notices electronically through
the Exercise System (a ‘‘Party
Communication Failure’’), and there is
no Exercise System Failure, the
Procedures would require that ICC take
one of two steps. ICC could either (i)
follow the normal process outlined in
the Procedures for accepting exercise
notices and assigning exercise notices to
open positons described above
notwithstanding such Party
Communication Failure or (ii) take
9 The Procedures would explain that ICC would
determine whether an open position is in the
money based on the average of the end-of-day price
of the underlying CDS Contract on the preceding
Business Day and the end-of-day price of the
underlying CDS Contract on the Expiration Date.
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actions that it deems appropriate to
allow the Exercising Party to effectively
submit exercise notices and to allow ICC
to assign such exercise notices to other
participants.
B. Rule Amendments
Finally, ICC also proposes to amend
ICC Rule 304 related to offsets to
incorporate a reference to the
Procedures. Rule 304 describes ICC’s
ability to net a Clearing Participant’s
trades that constitute opposite positions
in a single Contract that are identical in
all material respects. The proposed rule
change would not change the substance
of Rule 304, but it would amend Rule
304(a) to clarify that netting of
applicable offsetting positions in Index
Swaptions would be subject to any
provisions in the Procedures.
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.10 For
the reasons given below, the
Commission finds that the proposed
rule change is consistent with Section
17A(b)(3)(F) of the Act 11 and Rules
17Ad–22(e)(1) and 17Ad–22(e)(17)(i)
and (ii).12
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act
requires, among other things, that the
rules of ICC be designed to promote the
prompt and accurate clearance and
settlement of securities transactions
and, to the extent applicable, derivative
agreements, contracts, and transactions,
as well as to assure the safeguarding of
securities and funds which are in the
custody or control of ICC or for which
it is responsible.13
The Commission believes that the
Procedures generally should facilitate
the exercise of Index Swaptions and,
therefore, the clearance and settlement
of index credit swaps that would result
from such exercise by enabling an
electronic notice system for exercising
Index Swaptions. In particular,
specifying exactly who may submit
exercise notices for Swaptions and
requiring a Clearing Participant to
obtain the agreement of each customer
10 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
12 17 CFR 240.17Ad–22(e)(1), (e)(17)(i) and (ii).
13 15 U.S.C. 78q–1(b)(3)(F).
11 15
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for which it carries an Index Swaption
to the Rules and the Procedures, as
discussed in Part II.A.i above, should
establish clear standards for
determining which Swaption Buyers
may exercise Index Swaptions, thereby
helping to reduce any possible
confusion in the exercise process.
Similarly, providing a process for how
an Index Swaption is exercised, as
discussed in Part II.A.ii above,
including preliminary exercise notices,
partial exercises, and specifying when
an exercise is valid and binding, should
establish a clear and reliable process for
exercising Index Swaptions and for
determining the validity and finality of
an exercise.
Moreover, identifying how ICC would
assign exercised positions to Swaption
Sellers, as discussed in Part II.A.iii
above, including providing a formal and
clear method for determining the final
assignment of open positions to
Swaption Sellers and requiring that ICC
determine all final assignments of open
positions in the accounts of Swaption
Sellers proportionally, should provide a
transparent and predictable process for
assignment thereby allowing Swaption
Buyers and Swaption Sellers to
anticipate and prepare for assignments.
Finally, explaining the steps that ICC
would take in the event of an Exercise
System Failure and Party
Communication Failure, as discussed in
Part II.A.iv above, should provide a
backup process that would allow ICC
and Clearing Participants to continue
exercising Index Swaptions in case of
such failures, thereby further increasing
the adaptability and reliability of the
exercise process.
Thus, the Commission believes that
these aspects of the proposed rule
change, by establishing a clear,
transparent, predictable, and reliable
process for exercising Index Swaptions
through the Procedures, should
facilitate the exercise of Index
Swaptions and, in turn, the clearance
and settlement of index credit default
swaps that would result from such
exercise.
For similar reasons, the Commission
believes that amending Rule 304 related
to offsets to incorporate a reference to
the Procedures, as discussed in Part II.B
above, should reduce any possible
confusion in applying Rule 304 to Index
Swaptions by clarifying that netting of
applicable offsetting positions in Index
Swaptions would be subject to any
provisions in the Procedures, thereby
further facilitating the exercise of Index
Swaptions and, therefore, the clearance
and settlement of index credit default
swaps.
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Finally, the Commission believes that
the Procedures should also assure the
safeguarding of securities and funds in
ICC’s custody or control or for which it
is responsible. Specifically, the
Commission believes that identifying
certain exercise notices as invalid that
have obvious errors (e.g., an Exercise
Notional Amount of less than zero), as
described in Part II.A.ii above, should
help to protect Exercising Parties from
losses resulting from erroneous exercise
notices. Similarly, cancelling and
rescheduling the Exercise Period or
automatically assigning Open Positions
that are in the money during an Exercise
System Failure should help to protect
the positions of Exercising Parties that
are in the money and allow those
Exercising Parties to benefit from such
positions. By allowing Exercising
Parties to avoid losses and to benefit
from in the money positions in the
event of an Exercise System Failure, the
Commission believes the Procedures
should help safeguard Index Swaptions
cleared and exercised at ICC and,
therefore, should assure the
safeguarding of securities or funds in
ICC’s custody or control or for which it
is responsible.
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 ICC’s custody
and control or for which it is
responsible, consistent with the Section
17A(b)(3)(F) of the Act.14
B. Consistency With Rule 17Ad–22(e)(1)
Rule 17Ad–22(e)(1) requires that ICC
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to provide for a
well-founded, clear, transparent, and
enforceable legal basis for each aspect of
its activities in all relevant
jurisdictions.15 As discussed above, the
Commission believes that the
Procedures should provide clear
guidance for ICC’s clearance of Index
Swaption by ensuring the accuracy of
the exercise process, harmonizing the
Procedures with existing ICC rules, and
creating clear and transparent rules for
determining legal liability. Similarly, in
determining certain exercise notices to
be invalid that have obvious errors, as
described above, the Commission
believes the Procedures should provide
for a clear basis for the rejection of
exercise notices. Additionally, in adding
a reference to the Procedures to Rule
304, the Commission believes the
proposed rule change should help to
ensure that ICC’s Rules and the
Procedures are consistent with each
other and should help to foreclose any
opportunity for conflicting
interpretations. Finally, the Commission
believes the Procedures should clarify
potential legal liability by specifying
that ICC would not be responsible for
any failure of a party to exercise a
Swaption and that Exercising Parties
would be responsible for tracking
deadlines and ensuring that they
comply with all requirements in the
submission of exercise notices.
For these reasons, the Commission
finds that the proposed rule change is
consistent with Rule 17Ad–22(e)(1).16
C. Consistency With Rules 17Ad–
22(e)(17)(i) and (ii)
Rules 17Ad–22(e)(17)(i) and (ii)
require that ICC establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
manage its operational risks by (i)
identifying the plausible sources of
operational risk, both internal and
external, and mitigating their impact
through the use of appropriate systems,
policies, procedures, and controls, and
(ii) ensuring that systems have a high
degree of security, resiliency,
operational reliability, and adequate,
scalable capacity.17 The Commission
believes that by identifying certain
exercise notices as invalid that have
obvious errors, as described above, the
Procedures should provide appropriate
controls to mitigate the operational risk
associated with erroneous exercise
notices. Similarly, the Commission
believes that by identifying the actions
that ICC would take during an Exercise
System Failure or Party Communication
Failure, such as instituting automatic
assignments and allowing ICC to permit
an Exercising Party to submit exercise
notices during a Party Communication
Failure, the proposed rule change
should allow the exercise and
assignment of Index Swaptions to
continue even during such failures, and
thereby should help to ensure that the
Exercise System has a high degree of
resiliency and operational reliability.
For these reasons, the Commission
finds that the proposed rule change is
consistent with Rule 17Ad–22(e)(17)(i)
and (ii).18
D. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change is consistent with the
16 17
14 15
U.S.C. 78q–1(b)(3)(F).
15 17 CFR 240.17Ad–22(e)(1)
PO 00000
Frm 00102
Fmt 4703
Sfmt 4703
CFR 240.17Ad–22(e)(1).
U.S.C. 17Ad–22(e)(17)(i) and (ii).
18 15 U.S.C. 17Ad–22(e)(17)(i) and (ii).
17 15
E:\FR\FM\06AUN1.SGM
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Federal Register / Vol. 85, No. 152 / Thursday, August 6, 2020 / Notices
requirements of the Act, and in
particular, with the requirements of
Section 17A(b)(3)(F) of the Act 19 and
Rules 17Ad–22(e)(1) and 17Ad–
22(e)(17)(i) and (ii).20
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 21 that the
proposed rule change (SR–ICC–2020–
008) be, and hereby is, approved.22
to be consistent with an amendment to
the CAT NMS Plan recently approved
by the Commission. The text of the
proposed rule change is provided in
Exhibit 5.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–17129 Filed 8–5–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89447; File No. SR–MEMX–
2020–02]
Self-Regulatory Organizations; MEMX
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend the Exchange’s
Rule 4.5 Regarding the National Market
System Plan Governing the
Consolidated Audit Trail
July 31, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 31,
2020, MEMX LLC (‘‘MEMX’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing with the
Commission a proposed rule change to
amend Rule 4.5, a part of the Exchange’s
compliance rule (‘‘Compliance Rule’’)
regarding the National Market System
Plan Governing the Consolidated Audit
Trail (the ‘‘CAT NMS Plan’’ or ‘‘Plan’’) 3
19 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(1), (e)(17)(i) and (ii).
21 15 U.S.C. 78s(b)(2).
22 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).
23 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Unless otherwise specified, capitalized terms
used in this rule filing are defined as set forth in
the Compliance Rule.
jbell on DSKJLSW7X2PROD with NOTICES
20 17
VerDate Sep<11>2014
17:13 Aug 05, 2020
Jkt 250001
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this proposed rule
change is to amend Rule 4.5, a part of
the Compliance Rule regarding the CAT
NMS Plan, to be consistent with an
amendment to the CAT NMS Plan
recently approved by the Commission.4
The Commission approved an
amendment to the CAT NMS Plan to
amend the requirements for Firm
Designated IDs in four ways: (1) To
prohibit the use of account numbers as
Firm Designated IDs for trading
accounts that are not proprietary
accounts; (2) to require that the Firm
Designated ID for a trading account be
persistent over time for each Industry
Member so that a single account may be
tracked across time within a single
Industry Member; (3) to permit the use
of relationship identifiers as Firm
Designated IDs in certain circumstances;
and (4) to permit the use of entity
identifiers as Firm Designated IDs in
certain circumstances (the ‘‘FDID
Amendment’’). As a result, the
Exchange proposes to amend the
definition of ‘‘Firm Designated ID’’ in
Rule 4.5 to reflect the changes to the
CAT NMS Plan regarding the
requirements for Firm Designated IDs.
Rule 4.5(r) defines the term ‘‘Firm
Designated ID’’ to mean ‘‘a unique
identifier for each trading account
designated by Industry Members for
purposes of providing data to the
Central Repository, where each such
identifier is unique among all identifiers
4 Securities Exchange Act Release No. 89397 (July
24, 2020) (Federal Register pending).
PO 00000
Frm 00103
Fmt 4703
Sfmt 4703
47831
from any given Industry Member for
each business date.’’
(1) Prohibit Use of Account Numbers
The Exchange proposes to amend the
definition of ‘‘Firm Designated ID’’ in
Rule 4.5(r) to provide that Industry
Members may not use account numbers
as the Firm Designated ID for trading
accounts that are not proprietary
accounts. Specifically, the Exchange
proposes to add the following to the
definition of a Firm Designated ID:
‘‘provided, however, such identifier
may not be the account number for such
trading account if the trading account is
not a proprietary account.’’
(2) Persistent Firm Designated ID
The Exchange also proposes to amend
the definition of ‘‘Firm Designated ID’’
in Rule 4.5(r) to require a Firm
Designated ID assigned by an Industry
Member to a trading account to be
persistent over time, not for each
business day.5 To effect this change, the
Exchange proposes to amend the
definition of ‘‘Firm Designated ID’’ in
Rule 4.5(r) to add ‘‘and persistent’’ after
‘‘unique’’ and delete ‘‘for each business
date’’ so that the definition of ‘‘Firm
Designated ID’’ would read, in relevant
part, as follows:
a unique and persistent identifier for each
trading account designated by Industry
Members for purposes of providing data to
the Central Repository . . . where each such
identifier is unique among all identifiers
from any given Industry Member.
(3) Relationship Identifiers
The FDID Amendment also permits
an Industry Member to provide a
relationship identifier as the Firm
Designated ID, rather than an identifier
that represents a trading account, in
certain scenarios in which an Industry
Member does not have an account
number available to its order handling
and/or execution system at the time of
order receipt (e.g., certain institutional
accounts, managed accounts, accounts
for individuals). In such scenarios, the
trading account structure may not be
5 If an Industry Member assigns a new account
number or entity identifier to a client or customer
due to a merger, acquisition or some other corporate
action, then the Industry Member should create a
new Firm Designated ID to identify the new account
identifier/relationship identifier/entity identifier in
use at the Industry Member for the entity. In
addition, if a previously assigned Firm Designated
ID is no longer in use by an Industry Member (e.g.,
if the trading account associated with the Firm
Designated ID has been closed), then an Industry
Member may reuse the Firm Designated ID for
another trading account. The Plan Processor will
maintain a history of the use of each Firm
Designated ID, including, for example, the effective
dates of the Firm Designated ID with respect to each
associated trading account.
E:\FR\FM\06AUN1.SGM
06AUN1
]]>Agencies
[Federal Register Volume 85, Number 152 (Thursday, August 6, 2020)]
[Notices]
[Pages 47827-47831]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17129]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89436; File No. SR-ICC-2020-008]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Exercise Procedures
and ICC Clearing Rules
July 31, 2020.
I. Introduction
On June 3, 2020, ICE Clear Credit LLC (``ICC'') 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 thereunder,\2\ a proposed rule change to formalize
and adopt the ICC Exercise Procedures (the ``Procedures'') and a
related update to the ICC Clearing Rules (the ``Rules'') to accompany
the clearing of options on index credit default swaps (``Index
Swaptions'').\3\ The proposed rule change was published for comment in
the
[[Page 47828]]
Federal Register on June 22, 2020.\4\ The Commission did not receive
comments regarding the proposed rule change. For the reasons discussed
below, the Commission is approving the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Capitalized terms used but not defined herein have the
meanings specified in the Procedures or the Rules, as applicable.
\4\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Proposed Rule Change, Security-Based Swap Submission,
or Advance Notice Relating to the ICC Exercise Procedures and ICC
Clearing Rules, Exchange Act Release No. 89072 (June 16, 2020); 85
FR 37483 (June 22, 2020) (SR-ICC-2020-008) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The proposed rule change would formalize and adopt the Procedures
and make a related amendment to the Rules in connection with ICC's
proposed clearing of Index Swaptions. ICC has previously filed with the
Commission changes to certain other policies and procedures related to
the clearing of Index Swaptions on June 28, 2019 \5\ and January 14,
2020.\6\ As described in those filings, pursuant to an Index Swaption,
one party (the ``Swaption Buyer'') has the right (but not the
obligation) to cause the other party (the ``Swaption Seller'') to enter
into an index credit default swap transaction at a pre-determined
strike price on a specified expiration date on specified terms. As also
described in those filings, ICC intends to adopt certain related
policies and procedures in preparation for the launch of clearing of
Index Swaptions, including those set out in this proposed rule change,
and would not commence clearing of Index Swaptions until all such
policies and procedures have been approved by the Commission or
otherwise become effective. As such, ICC filed the proposed rule change
to formalize the Procedures and make the related change to the Rules
effective as part of ICC's larger effort to adopt the necessary
policies and procedures to the eventual launch of the clearing of Index
Swaptions.\7\
---------------------------------------------------------------------------
\5\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Partial Amendment No. 1 and Order Granting Accelerated
Approval of Proposed Rule Change, as Modified by Partial Amendment
No. 1, Relating to the ICC Rules, ICC End-of-Day Price Discovery
Policies and Procedures, and ICC Risk Management Framework, Exchange
Act Release No. 87297 (Oct. 15, 2019); 84 FR 56270 (Oct. 21, 2019)
(SR-ICC-2019-007) (``2019 Swaption Rule Amendments'').
\6\ Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Risk Management
Model Description, ICC Stress Testing Framework, ICC Liquidity Risk
Management Framework, ICC Back-Testing Framework, and ICC Risk
Parameter Setting and Review Policy, Exchange Act Release No. 89142
(June 24, 2020); 85 FR 39226 (June 30, 2020) (SR-ICC-2020-002).
\7\ Notice, 85 FR at 37483.
---------------------------------------------------------------------------
A. The Procedures
The Procedures would supplement the provisions of Subchapter 26R of
the Rules \8\ with respect to Index Swaptions and provide further
detail as to (i) which Swaption Buyers may exercise; (ii) how an Index
Swaption is exercised, including detail as to the amount being
exercised, circumstances in which an exercise is valid and irrevocable
or invalid and rejected, and limitations ICC may impose upon exercise;
(iii) how ICC would assign exercised positions to Swaptions Sellers;
and (iv) what steps ICC would take in response to systems failures that
inhibit ICC from accepting exercises and communications failures that
inhibit a Swaption Buyer from exercising an Index Swaption.
---------------------------------------------------------------------------
\8\ ICC adopted Subchapter 26R of the Rules in a prior rule
filing related to the clearing of Index Swaptions. See 2019 Swaption
Rule Amendments, 84 FR at 56270.
---------------------------------------------------------------------------
i. Who May Exercise
First, the Procedures would specify who is authorized to exercise
an Index Swaption. Under the Procedures, a Swaption Buyer that is a
Clearing Participant owning an Index Swaption in its house account
would be permitted to exercise that Index Swaption, and a Swaption
Buyer that is a non-participant client of a Clearing Participant owning
an Index Swaption carried in the Clearing Participant's Client Origin
Account (i.e., the Clearing Participant's client account) would be able
to exercise that Index Swaption (each an ``Exercising Party''). The
Procedures would not permit a Clearing Participant to exercise on
behalf of a non-participant client. Rather, the Procedures would permit
only a non-participant client to exercise its Index Swaption. However,
in the event of a default or termination event with respect to a non-
participant for which it carries an Index Swaption, the Procedures
would permit a Clearing Participant to (i) exercise such Index Swaption
on behalf of the non-participant party for the purpose of liquidating
or closing out such position, or (ii) convert such Index Swaption into
a position in the Clearing Participant's house account, which is
consistent with existing ICC Rule 304. Finally, the Procedures would
require a Clearing Participant to obtain the agreement of each non-
participant party for which it carries an open position in Index
Swaptions to the provisions of the Rules and the Procedures applicable
to Index Swaptions.
ii. How to Exercise
Next, the Procedures would specify the process for exercising an
Index Swaption. To exercise an Index Swaption, the Exercising Party
would deliver an exercise notice to ICC using an electronic system
known as the Exercise System during the Exercise Period that specifies
the notional amount being exercised (the ``Exercised Notional
Amount''). Under the Procedures, the Exercise Period would be the time
period during which an Exercising Party may deliver an exercise notice
to ICC, i.e., 9:00 a.m. to 11:00 a.m. New York time for an Index
Swaption referencing a CDX.NA index, and 9:00 a.m. to 4:00 p.m. London
time for an Index Swaption referencing an iTraxx Europe index.
With respect to the amount that an Exercising Party may exercise,
the Procedures would provide that an open position may be exercised in
whole or part. The Procedures would provide that ICC may elect to
require a partial exercise be in a specified notional amount, which is
designated as the Exercise Block. If ICC requires a specific notional
amount as the Exercise Block, an Exercising Party must make any partial
exercise in that notional amount, or in an integer multiple thereof. If
ICC does not require any specific notional amount as the Exercise
Block, the Exercise Block would be 0.01 in the currency of
denomination. If an Exercising Party submits an exercise notice with an
Exercised Notional Amount less than the notional amount of the Index
Swaption, the Procedures would permit the Exercising Party to submit
during the Exercise Period a subsequent exercise notice increasing the
Exercised Notional Amount, but the Procedures would not permit an
Exercising Party to reduce the Exercised Notional Amount of an exercise
notice.
The Procedures also would specify the circumstances in which an
exercise notice would be treated as irrevocable. Once an exercise
notice is submitted to ICC during the Exercise Period, it would be
irrevocable and binding on the Exercising Party. ICC will then consider
whether to validate the Exercise Notice, as discussed further below,
and if it is validated, it would then be accepted by ICC and become
binding on ICC and the Exercising Party (and, in the case of a non-
participant, its Clearing Participant). The Procedures would also allow
ICC to establish a pre-exercise notification period during which an
Exercising Party may submit, modify, or withdraw a preliminary exercise
notice. If an Exercising Party submitted a preliminary exercise notice
but does not
[[Page 47829]]
submit another exercise notice or withdraw the preliminary exercise
notice, then the Procedures would treat the Exercising Party as having
submitted an exercise notice with the Exercised Notional Amount
specified under such preliminary notice.
If ICC rejects an exercise notice as not valid, it would inform the
submitting party, who may resubmit a corrected exercise notice within
the Exercise Period. Under the Procedures, ICC would deem a Swaption
Exercise Notice invalid if it has (i) an Exercised Notional Amount of
less than zero, (ii) an Exercised Notional Amount greater than the
notional amount of the Index Swaption, or (iii) an Exercised Notional
Amount less than the notional amount of the Index Swaption and not an
integer multiple of the Exercise Block.
The Procedures would further provide that ICC may impose
limitations on the speed, frequency, and notional amounts in which an
Index Option may be exercised at certain times during the Exercise
Period. Any attempted exercise in violation of these limitations would
be rejected. The Procedures would also state that ICC would not be
responsible for any failure or inability of a participant or non-
participant party to exercise any Index Swaption, instead providing
that each Exercising Party would be responsible for monitoring
submission requirements, exercise limitations, and pertinent deadlines.
iii. Assignment of Exercised Positions
The Procedures also would explain how ICC would assign exercised
positions of Index Swaptions. First, the Procedures would set forth
ICC's process of netting all open positions in an expiring Index
Swaption on the business day prior to the expiration date of an Index
Swaption. Additionally, the Procedures would allow, but not obligate,
ICC to estimate and provide the notional amount that it would assign to
each open position in an Index Swaption of a Swaption Seller during the
Exercise Period. These estimates would be purely for informational
purposes and would not be binding on ICC.
At the conclusion of the Exercise Period, ICC would determine the
final assignments to open positions in Index Swaptions of Swaption
Sellers and notify participants accordingly. The Procedures would
specify that ICC would make assignments across all open positions of
participants that are Swaption Sellers in the relevant Index Swaptions.
ICC would make final assignments proportionally based on the notional
amount of each open position of a Swaption Seller, relative to the
total notional amount of all open positions of Swaption Sellers in a
particular Index Swaption. Once issued, the final assignments would
constitute ICC's exercise as Swaption Buyer of the Index Swaption held
by a Swaption Seller, and ICC would not be required to provide any
further notice of such exercise.
iv. System and Communications Failures
The Procedures also would describe in detail what steps ICC would
take in the event of technical issues disrupting the clearing of Index
Swaptions and the processing of exercise notices. The Procedures would
first define an Exercise System Failure as any failure of the Exercise
System to be fully operational during the 45-minute period prior to the
end of the Exercise Period or any other circumstance in which ICC
determines that it is unable to process Swaption Exercise Notices in a
timely manner. In case of an Exercise System Failure, the Procedures
would require that ICC give notice and, at ICC's election: (i) Cancel
and reschedule the Exercise Period, (ii) determine that automatic
exercise will apply, and/or (iii) take such other action as ICC
determines appropriate to permit Exercising Parties to submit exercise
notices and to permit ICC to assign such notices. The Procedures would
further specify that if automatic exercise applies under the system
failure provisions, ICC would automatically exercise any open positions
determined by ICC to be in the money.\9\
---------------------------------------------------------------------------
\9\ The Procedures would explain that ICC would determine
whether an open position is in the money based on the average of the
end-of-day price of the underlying CDS Contract on the preceding
Business Day and the end-of-day price of the underlying CDS Contract
on the Expiration Date.
---------------------------------------------------------------------------
Similarly, the Procedures would specify the steps ICC would take in
response to an Exercising Party's inability to submit notices to the
Exercise System. Where an Exercising Party is affected by a significant
communications or technological failure resulting in it being
impossible or impracticable for the Exercising Party to deliver all, or
substantially all, of its exercise notices electronically through the
Exercise System (a ``Party Communication Failure''), and there is no
Exercise System Failure, the Procedures would require that ICC take one
of two steps. ICC could either (i) follow the normal process outlined
in the Procedures for accepting exercise notices and assigning exercise
notices to open positons described above notwithstanding such Party
Communication Failure or (ii) take actions that it deems appropriate to
allow the Exercising Party to effectively submit exercise notices and
to allow ICC to assign such exercise notices to other participants.
B. Rule Amendments
Finally, ICC also proposes to amend ICC Rule 304 related to offsets
to incorporate a reference to the Procedures. Rule 304 describes ICC's
ability to net a Clearing Participant's trades that constitute opposite
positions in a single Contract that are identical in all material
respects. The proposed rule change would not change the substance of
Rule 304, but it would amend Rule 304(a) to clarify that netting of
applicable offsetting positions in Index Swaptions would be subject to
any provisions in the Procedures.
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.\10\ For the reasons given below, the Commission finds
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \11\ and Rules 17Ad-22(e)(1) and 17Ad-22(e)(17)(i) and
(ii).\12\
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78s(b)(2)(C).
\11\ 15 U.S.C. 78q-1(b)(3)(F).
\12\ 17 CFR 240.17Ad-22(e)(1), (e)(17)(i) and (ii).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, as well
as to assure the safeguarding of securities and funds which are in the
custody or control of ICC or for which it is responsible.\13\
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Commission believes that the Procedures generally should
facilitate the exercise of Index Swaptions and, therefore, the
clearance and settlement of index credit swaps that would result from
such exercise by enabling an electronic notice system for exercising
Index Swaptions. In particular, specifying exactly who may submit
exercise notices for Swaptions and requiring a Clearing Participant to
obtain the agreement of each customer
[[Page 47830]]
for which it carries an Index Swaption to the Rules and the Procedures,
as discussed in Part II.A.i above, should establish clear standards for
determining which Swaption Buyers may exercise Index Swaptions, thereby
helping to reduce any possible confusion in the exercise process.
Similarly, providing a process for how an Index Swaption is exercised,
as discussed in Part II.A.ii above, including preliminary exercise
notices, partial exercises, and specifying when an exercise is valid
and binding, should establish a clear and reliable process for
exercising Index Swaptions and for determining the validity and
finality of an exercise.
Moreover, identifying how ICC would assign exercised positions to
Swaption Sellers, as discussed in Part II.A.iii above, including
providing a formal and clear method for determining the final
assignment of open positions to Swaption Sellers and requiring that ICC
determine all final assignments of open positions in the accounts of
Swaption Sellers proportionally, should provide a transparent and
predictable process for assignment thereby allowing Swaption Buyers and
Swaption Sellers to anticipate and prepare for assignments. Finally,
explaining the steps that ICC would take in the event of an Exercise
System Failure and Party Communication Failure, as discussed in Part
II.A.iv above, should provide a backup process that would allow ICC and
Clearing Participants to continue exercising Index Swaptions in case of
such failures, thereby further increasing the adaptability and
reliability of the exercise process.
Thus, the Commission believes that these aspects of the proposed
rule change, by establishing a clear, transparent, predictable, and
reliable process for exercising Index Swaptions through the Procedures,
should facilitate the exercise of Index Swaptions and, in turn, the
clearance and settlement of index credit default swaps that would
result from such exercise.
For similar reasons, the Commission believes that amending Rule 304
related to offsets to incorporate a reference to the Procedures, as
discussed in Part II.B above, should reduce any possible confusion in
applying Rule 304 to Index Swaptions by clarifying that netting of
applicable offsetting positions in Index Swaptions would be subject to
any provisions in the Procedures, thereby further facilitating the
exercise of Index Swaptions and, therefore, the clearance and
settlement of index credit default swaps.
Finally, the Commission believes that the Procedures should also
assure the safeguarding of securities and funds in ICC's custody or
control or for which it is responsible. Specifically, the Commission
believes that identifying certain exercise notices as invalid that have
obvious errors (e.g., an Exercise Notional Amount of less than zero),
as described in Part II.A.ii above, should help to protect Exercising
Parties from losses resulting from erroneous exercise notices.
Similarly, cancelling and rescheduling the Exercise Period or
automatically assigning Open Positions that are in the money during an
Exercise System Failure should help to protect the positions of
Exercising Parties that are in the money and allow those Exercising
Parties to benefit from such positions. By allowing Exercising Parties
to avoid losses and to benefit from in the money positions in the event
of an Exercise System Failure, the Commission believes the Procedures
should help safeguard Index Swaptions cleared and exercised at ICC and,
therefore, should assure the safeguarding of securities or funds in
ICC's custody or control or for which it is responsible.
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 ICC's custody and control or for which it is responsible,
consistent with the Section 17A(b)(3)(F) of the Act.\14\
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(1)
Rule 17Ad-22(e)(1) requires that ICC establish, implement, maintain
and enforce written policies and procedures reasonably designed to
provide for a well-founded, clear, transparent, and enforceable legal
basis for each aspect of its activities in all relevant
jurisdictions.\15\ As discussed above, the Commission believes that the
Procedures should provide clear guidance for ICC's clearance of Index
Swaption by ensuring the accuracy of the exercise process, harmonizing
the Procedures with existing ICC rules, and creating clear and
transparent rules for determining legal liability. Similarly, in
determining certain exercise notices to be invalid that have obvious
errors, as described above, the Commission believes the Procedures
should provide for a clear basis for the rejection of exercise notices.
Additionally, in adding a reference to the Procedures to Rule 304, the
Commission believes the proposed rule change should help to ensure that
ICC's Rules and the Procedures are consistent with each other and
should help to foreclose any opportunity for conflicting
interpretations. Finally, the Commission believes the Procedures should
clarify potential legal liability by specifying that ICC would not be
responsible for any failure of a party to exercise a Swaption and that
Exercising Parties would be responsible for tracking deadlines and
ensuring that they comply with all requirements in the submission of
exercise notices.
---------------------------------------------------------------------------
\15\ 17 CFR 240.17Ad-22(e)(1)
---------------------------------------------------------------------------
For these reasons, the Commission finds that the proposed rule
change is consistent with Rule 17Ad-22(e)(1).\16\
---------------------------------------------------------------------------
\16\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------
C. Consistency With Rules 17Ad-22(e)(17)(i) and (ii)
Rules 17Ad-22(e)(17)(i) and (ii) require that ICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to manage its operational risks by (i) identifying
the plausible sources of operational risk, both internal and external,
and mitigating their impact through the use of appropriate systems,
policies, procedures, and controls, and (ii) ensuring that systems have
a high degree of security, resiliency, operational reliability, and
adequate, scalable capacity.\17\ The Commission believes that by
identifying certain exercise notices as invalid that have obvious
errors, as described above, the Procedures should provide appropriate
controls to mitigate the operational risk associated with erroneous
exercise notices. Similarly, the Commission believes that by
identifying the actions that ICC would take during an Exercise System
Failure or Party Communication Failure, such as instituting automatic
assignments and allowing ICC to permit an Exercising Party to submit
exercise notices during a Party Communication Failure, the proposed
rule change should allow the exercise and assignment of Index Swaptions
to continue even during such failures, and thereby should help to
ensure that the Exercise System has a high degree of resiliency and
operational reliability.
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\17\ 15 U.S.C. 17Ad-22(e)(17)(i) and (ii).
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For these reasons, the Commission finds that the proposed rule
change is consistent with Rule 17Ad-22(e)(17)(i) and (ii).\18\
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\18\ 15 U.S.C. 17Ad-22(e)(17)(i) and (ii).
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D. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the
[[Page 47831]]
requirements of the Act, and in particular, with the requirements of
Section 17A(b)(3)(F) of the Act \19\ and Rules 17Ad-22(e)(1) and 17Ad-
22(e)(17)(i) and (ii).\20\
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\19\ 15 U.S.C. 78q-1(b)(3)(F).
\20\ 17 CFR 240.17Ad-22(e)(1), (e)(17)(i) and (ii).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\21\ that the proposed rule change (SR-ICC-2020-008) be, and hereby is,
approved.\22\
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\21\ 15 U.S.C. 78s(b)(2).
\22\ 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.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17129 Filed 8-5-20; 8:45 am]
BILLING CODE 8011-01-P
