Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC Recovery Plan and the ICC Wind-Down Plan, 26561-26567 [2021-10173]
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Federal Register / Vol. 86, No. 92 / Friday, May 14, 2021 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91806; File No. SR–ICC–
2021–005]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change Relating to the
ICC Recovery Plan and the ICC WindDown Plan
May 10, 2021.
I. Introduction
On March 23, 2021, ICE Clear Credit
LCC (‘‘ICC’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities and Exchange
Act of 1934 (the ‘‘Act’’),1 and Rule 19b–
4 thereunder,2 a proposed rule change
to update and formalize the ICC
Recovery Plan and the ICC Wind-Down
Plan (collectively, the ‘‘Plans’’). The
proposed rule change was published for
comment in the Federal Register on
April 5, 2021.3 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
A. Background
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As a ‘‘covered clearing agency,’’ ICC
is required to, among other things,
‘‘establish, implement, maintain and
enforce written policies and procedures
reasonably designed to . . . maintain a
sound risk management framework for
comprehensively managing legal, credit,
liquidity, operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency, which . . . includes
plans for the recovery and orderly winddown of the covered clearing agency
necessitated by credit losses, liquidity
shortfalls, losses from general business
risk, or any other losses.’’ 4 The
Commission has previously clarified
that it believes that such recovery and
wind-down plans are ‘‘rules’’ within the
meaning of Exchange Act Section 19(b)
and Rule 19b–4 because such plans
would constitute changes to a stated
policy, practice or interpretation of a
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Self-Regulatory Organizations; ICE Clear Credit
LLC; Notice of Filing of Proposed Rule Change
Relating to the ICC Recovery Plan and the ICC
Wind-Down Plan, Exchange Act Release No. 91439
(March 30, 2021); 86 FR 17649 (April 5, 2021) (SR–
ICC–2021–005) (‘‘Notice’’).
4 17 CFR 240.17Ad–22(e)(3)(ii).
2 17
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covered clearing agency.5 The Plans
have been in place at ICC for a number
of years. However, ICC has now filed
them with the Commission for the first
time since becoming a ‘‘covered clearing
agency’’ under the definition in Rule
17Ad–22(a)(5).6
B. Recovery Plan
The Recovery Plan describes the
actions ICC takes to (i) restore ICC to a
stable and sustainable condition in the
event that it comes under severe stress
and (ii) maintain effective arrangements
for ensuring that losses that threaten
ICC’s viability as a going concern are
allocated. The Recovery Plan consists of
14 sections, which are detailed below.
First, Section 1 of the Recovery Plan
introduces and summarizes key aspects
of ICC’s plan for recovery and explain
its purpose. Section 1 explains that the
Recovery Plan relies on ICC’s existing
Rules and policies and procedures and
describes recovery tools available to
ICC.
Section 2 of the Recovery Plan
provides an overview of ICC and the
regulation to which it is subject,
including key information regarding
ICC’s ownership structure, regulatory
registrations, and designations. Section
2 explains that ICC’s sole critical
operation is providing CDS clearing
services.
Section 3 of the Recovery Plan
discusses the applicable regulatory
requirements and obligations, including
regulatory guidance ICC considered in
writing the plan.
Section 4 provides an overview of the
key elements in any recovery of ICC.
First, Section 4 discusses the legal
entities that are material to ICC for the
Recovery Plan. The Recovery Plan
defines a material legal entity (‘‘MLE’’)
as a legal entity that is significant to the
activities of ICC’s critical operation and/
5 Standards for Covered Clearing Agencies,
Exchange Act Release No. 78961 (Sep. 28, 2016), 81
FR 70786, 70809 (Oct. 13, 2016).
6 ICC became a ‘‘covered clearing agency’’
following a change in the definition of the term in
Rule 17Ad–22(a)(5). The previous definition of
‘‘covered clearing agency’’ in Rule 17Ad–22(a)(5)
stated that ‘‘covered clearing agency’’ means a
designated clearing agency or a clearing agency
involved in activities with a more complex risk
profile for which the Commodity Futures Trading
Commission is not the Supervisory Agency as
defined in Section 803(8) of the Payment, Clearing
and Settlement Supervision Act of 2010 (12 U.S.C.
5461 et seq.). Under this definition, ICC was not a
covered clearing agency. Under the revised
definition, ‘‘covered clearing agency’’ means a
registered clearing agency that provides the services
of a central counterparty or central securities
depository. Under the revised definition, ICC is a
covered clearing agency. See Definition of ‘‘Covered
Clearing Agency’’, Exchange Act Release No. 88616
(April 9, 2020), 85 FR 28853, 28854–55 (May 14,
2020).
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or to the delivery of a critical service.7
Section 4 explains the metrics and
information that ICC considered to
identify the MLEs. Moreover, Section 4
explains that there are two MLEs for the
Recovery Plan: ICC itself and ICC’s
ultimate parent company,
Intercontinental Exchange, Inc. (‘‘ICE’’).
With respect to ICC, Section 4 also
explains (i) the requirements for ICC’s
Clearing Participants (‘‘CPs’’), such as
operational capacity, financial
responsibility, and capital; (ii) the
governance arrangements and
committees that have a direct and
indirect role in default management and
recovery, including the roles and
responsibilities of the Board, Risk
Committee, CDS Default Committee,
and Advisory Committee, among others;
(iii) ICC’s key performance metrics in
respect of the services that it provides;
and (iv) ICC’s management of collateral,
including the forms of collateral that
ICC accepts to satisfy initial margin
(‘‘IM’’) and guaranty fund (‘‘GF’’)
requirements and the monitoring of
collateral counterparties.
As further explained in Section 4, the
CDS Default Committee is responsible
for assisting ICC during the execution of
certain default management and
recovery procedures and convenes upon
the declaration of default. The Default
Committee is comprised of up to three
representatives from eligible CPs. For a
CP to be eligible to serve on the Default
Committee, the Board or its designee,
after consultation with the ICC Risk
Committee, needs to approve the CP for
participation. The Recovery Plan lists
the CPs currently eligible for
participation on the Default Committee.
Each member of the Default Committee
is deemed seconded to ICC and takes
actions in the best of interest of ICC.
Section 5 analyzes the critical services
that are necessary to continue daily
operations of CDS clearing services.
Section 5 categorizes the critical
services by those that are provided to
ICC by ICE and those that are provided
to ICC by external third parties.
Section 6 details the interconnections
and interdependencies between ICC and
other entities, including operational and
financial interconnections. Section 6
explains the interconnection between
ICE and ICC, including through services
provided to ICC by ICE, such as
accounting, human resources, audit, and
facilities. Section 6 also details the IT
systems and applications critical to
7 For purposes of the Recovery Plan, critical
services are services and operations, such as
information technology support and operations,
human resources, and facilities, which are
necessary to continue the ICC’s critical operation
(CDS central clearing services).
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ICC’s clearing operations, including
those provided by ICE, those provided
by external third parties, and those that
ICC provides to itself, through in-house
systems. Section 6 also explains how
ICC uses financial entities and monitors
financial entities that have multiple
roles and relationships with ICC (such
as a CP that also provides financial
services to ICC). Finally, Section 6
analyzes ICC’s contractual arrangements
in the context of continuing services
under those contracts during recovery.
Section 7 of the proposed Recovery
Plan describes the potential stress
scenarios that may prevent ICC from
meeting obligations and providing
services, as well as the recovery tools
available to ICC to address such
scenarios. Section 7 of the Recovery
Plan categorizes stress scenarios as: (i)
Uncovered credit losses and/or liquidity
shortfalls triggered by a CP or multiple
CPs defaulting (‘‘CP default stress
scenario’’), and (ii) stress triggered by
general business risks, operational risks,
or other risks that may threaten ICC’s
viability as a going concern, other than
a CP default (‘‘non-CP default stress
scenario’’). Section 7 also discusses the
monitoring mechanisms for both
categories of scenarios, such as daily
monitoring of GF and collateral
requirements and daily review of backtesting and stress-testing results, as well
as the process for notifying regulators of
the initiation of the Recovery Plan.
Finally, Appendix D further analyzes
each scenario, including the triggering
events and the specific steps ICC takes
when the scenario occurs or appears
likely to occur.
Section 8 of the proposed Recovery
Plan describes the circumstances in
which ICC initiates the Recovery Plan
and the tools that are available to ICC to
achieve recovery. Specifically, under
both the CP default stress scenario and
the non-CP default stress scenario,
Section 8 defines the point at which ICC
activates the Recovery Plan and the
point at which ICC begins recovery.
Section 8 then describes the recovery
tools available to ICC. Appendix E
further analyzes and summarizes these
recovery tools, including whether the
particular tool is mandatory under ICC’s
rules or voluntary and the specific
governance steps that required to
implement each tool. For a CP default
stress scenario, these recovery tools
include:
• Auctions to close out a defaulter’s
portfolio ((ICC Rule 20–605(d)(v) and
(f)(ii));
• An insurance policy covering
specified losses resulting from a CP
default (ICC Rule 802);
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• CPs’ obligation to replenish their
GF contribution to the required level in
the event of any use of the GF
contributions of non-defaulting CPs (ICC
Rule 803(a)) and to make assessment
contributions to the GF following a CP
default and the consumption of the prefunded GF (ICC Rule 803(b)), subject to
a cap;
• Partial tear-up of remaining
positions (ICC Rules 20–605(f)(iii) and
809) where ICC terminates positions of
non-defaulting CPs that exactly offset
those in the defaulter’s remaining
portfolio; and
• Reduced gains distributions
(‘‘RGD’’) (ICC Rule 808) for up to five
consecutive business days, allowing ICC
to reduce payment of variation, or markto-market, gains that would otherwise
be owed to CPs, as ICC attempts a
secondary auction or conducts a partial
tear-up.
Section 8 also discusses the tools that
are available to ICC to address a
situation where ICC experiences
liquidity shortfalls triggered by a default
of one or more CPs and has insufficient
liquid resources in the proper currency
to meet payments obligations. These
tools include entering into transactions
to exchange certain sovereign debt
securities for cash or to exchange U.S.
dollar cash for Euro cash under one of
ICC’s committed repurchase or
committed foreign exchange
agreements, respectively.
Finally, Section 8 discusses the tools
available to ICC in the event that ICC
experiences severe stress triggered by a
non-CP default stress scenario,
including the application of resources
from ICC and contributions from CPs to
address certain investment and
custodial losses. ICC Rule 811 provides
a mechanism for allocating investment
losses and custodial losses as between
ICC and CPs, with ICC being responsible
for a first loss position up to the amount
of defined resources and with CPs being
responsible for the remaining loss, in
proportion to and capped at their
margin and GF contributions.
Additional tools to address non-CP
default stress scenarios include
insurance coverage, seeking additional
capital through the ICE group,
renegotiating certain agreements, and
reducing personnel and other expenses.
Section 9 of the Recovery Plan
describes the governance arrangements
that provide oversight and direction in
respect of the Recovery Plan, including
design, implementation, testing, review,
and ongoing maintenance. Specifically,
overall responsibility for the Recovery
Plan rests with the ICC Board. The ICC
Board is responsible for reviewing and
approving the Recovery Plan. The ICC
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Board has, in turn, delegated to the ICC
President responsibility for
implementing the Recovery Plan, as
well as considering and developing any
needed amendments or modifications to
the Recovery Plan over time, and the
ICC President is accountable to the ICC
Board with respect to such matters.
Accordingly, ICC management prepared
the Recovery Plan under the direction of
the ICC President.
Section 9 also describes how ICC
considers feedback from CPs and
customers in developing the Recovery
Plan, including through detailed
consultation with CPs as to overall
design and implementation. Moreover,
Section 9 describes how ICC considers
the interests of CPs and customers on an
ongoing basis, including through the
ICC Risk Committee and CP
representation on the ICC Board.
Finally, Section 9 describes the
process for reviewing and approving the
Recovery Plan, including changes to the
Recovery Plan and testing. ICC
Management, the ICC Risk Committee,
and the ICC Board are responsible for
reviewing and approving the Recovery
Plan. Annually, the ICC General
Counsel coordinates with ICC
management to review and update the
Recovery Plan. Moreover, ICC’s General
Counsel coordinates with ICC
management to revise the Recovery Plan
promptly when warranted by material
changes to ICC’s Rules, policies,
procedures, or other circumstances. The
ICC Risk Committee reviews the annual
update and ongoing material
amendments to the Recovery Plan and
make a recommendation to the ICC
Board with respect to Board approval.
The ICC Board considers the Risk
Committee’s recommendation and is
ultimately responsible for approval of
revisions to the Recovery Plan. ICC
notifies its regulatory authorities of
changes to the Recovery Plan. Section 9
notes that ICC tests the Recovery Plan at
least annually, as part of its annual
default management drills, and ICC
management provides the results of
such testing, as well as any changes it
recommends due to such testing, to the
ICC Board and Risk Committee.
Section 10 of the Recovery Plan
analyzes the financial resources that ICC
maintains for recovery in compliance
with relevant regulations, including the
procedures it follows in case of any
shortfall. This section also discusses the
timing for implementing ICC’s recovery
tools and ICC’s projected estimated
recovery and wind-down costs.
Specifically, Section 10 provides that
ICC maintains capital in accordance
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with SEC Rule 17Ad–22(e)(15) 8 as well
as CFTC requirements and, on a
voluntary basis, calculates what its
regulatory capital requirement would be
if ICC was subject to EU-based clearing
house regulatory capital requirements.
ICC maintains regulatory capital in an
amount at least equal to the highest of
these three requirements (Commission,
CFTC, and EU). Section 10 provides that
currently the EU regulatory capital
requirement results in the highest
capital requirement and therefore ICC
maintains regulatory capital in
accordance with this requirement,
which results in ICC maintaining
regulatory capital in an amount
materially more than the amounts
required by SEC Rule 17Ad–22(e)(15) 9
or CFTC requirements. Section 10 then
describes how ICC maintains this
regulatory capital as liquid assets
funded by equity and how ICC could
raise additional capital from its parent
company in the event of any shortfall in
its regulatory capital. Finally, Section 10
describes the estimated costs and time
period for implementing the Recovery
Plan and how ICC estimates these
figures, and demonstrates how ICC’s
regulatory capital exceeds these costs.
The remaining sections provide
additional relevant information for the
Recovery Plan. Section 11 provides
financial information relevant to ICC
and ICE. Section 12 sets forth key
systems used by ICC to generate reports
to monitor and support clearing
operations. Section 13 consists of the
appendices to the Recovery Plan,
including a glossary, diagrams and
charts of clearing processes and
financial service providers, and analyses
related to different stress scenarios and
recovery tools. Section 14 is an index of
exhibits to the Recovery Plan.
C. Wind-Down Plan
The Wind-Down Plan establishes how
ICC could be wound-down in an orderly
manner. ICC only invokes the WindDown Plan where recovery actions in
the proposed Recovery Plan fail to
preserve ICC’s viability as a going
concern (and therefore recovery is not
possible) and resolution is not triggered.
ICC could also use the Wind-Down Plan
where ICC makes a business decision to
exit all clearing activities. The proposed
Wind-Down Plan is divided into 12
sections, which are detailed below.
Similar to the proposed Recovery
Plan, the Wind-Down Plan provides
necessary background and context
regarding ICC for wind-down planning.
Section 1 of the Wind-Down Plan
8 17
9 17
CFR 240.17Ad–22(e)(15).
CFR 240.17Ad–22(e)(15).
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introduces the plan, summarizes key
aspects of the Wind-Down Plan, and
explains the plan’s purpose. Section 2
provides an overview of ICC and the
regulation to which it is subject,
including key information regarding
ICC’s ownership structure and
regulatory registrations and
designations. Section 3 describes the
regulatory requirements and obligations
applicable to ICC, including regulatory
guidance that ICC considered in writing
the plan.
Section 4 of the Wind-Down Plan
describes ICC’s CPs and the governance
arrangements that are relevant to winddown, including the roles and
responsibilities of the Board and Risk
Committee. If ICC’s recovery efforts fail,
the ICC Board determines whether to
implement the Wind-Down Plan and
determines which options to use to
achieve an orderly wind-down, taking
into consideration the interests of CPs,
through both the recommendations of
the Risk Committee and the
participation of CPs on the Board itself.
ICC also regularly takes into account
feedback of customers of CPs, both
through its Advisory Committee and
through direct communications with
representatives of customers. Finally,
Section 4 describes the ICC committees
involved in the wind-down process,
with the Risk Committee the principal
committee involved in the wind-down
process.
Next, Section 5 of the Wind-Down
Plan describes the potential stress
scenarios that could prevent ICC from
meeting obligations and providing
services, resulting in wind-down.
Similar to the Recovery Plan, Section 5
categorizes the stress scenarios as: (i) CP
default stress scenarios, and (ii) severe
stress triggered by general business
risks, operational risks, or other risks
that may threaten ICC’s viability as a
going concern, other than a CP default
(‘‘non-CP default severe stress
scenarios’’). Appendix D further
analyzes each scenario, including,
among other things, the events
triggering wind-down under each
scenario. These triggering events fall
into two broad categories: (i) A critical
reduction in market participation, and
(ii) a critical reduction in ICC’s financial
resources below regulatory capital
requirements. With respect to a business
decision to wind-down, the triggering
event is the Board’s decision to exit the
business.
Section 6 examines ICC’s options for
wind-down, how ICC executes those
options, and the potential obstacles to
an orderly wind-down. ICC has three
options for wind-down: (i) A transfer of
CDS clearing activities from ICC to an
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alternative clearinghouse; (ii) the sale of
ICC to another entity; or (iii) the
termination of open positions. Although
Section 6 presents the three options as
alternatives, it also notes that the
options could be used in combination
with each other. Section 6 also notes
that while the selection of the winddown option depends on the
circumstances, ICC prefers a transfer or
sale and considers termination only if a
transfer or sale cannot be achieved.
Moreover, ICC could use any these
options in the event ICC makes a
business decision to exit all clearing
activities.
To execute these options, the ICC
Board first makes a decision to winddown, and as noted above, that is only
in the event that recovery fails to
preserve ICC’s viability as a going
concern and resolution is not triggered.
Section 6 notes that before the Board
makes a wind-down decision, ICC first
consults with, among others, market
participants, potential alternative
clearing houses, and regulators.
Moreover, once the ICC Board makes the
decision to wind-down, ICC informs
both the CFTC and the Commission.
After the ICC Board agrees in
principle to a wind-down, ICC staff
undertakes an analysis under the
direction of the Board and may consult
with CPs, market participants,
alternative clearing houses, swap
execution platforms, and regulators with
respect to the options and approaches to
wind-down, to gain their input and
relevant information for consideration
by the ICC Board. The ICC Board
ultimately decides which of the options
to use. Section 6 notes that, to the extent
possible, ICC’s primary determinant of
feasibility for wind-down options is the
ability to continue providing centralized
clearing of CDS with as little disruption
as possible. If continuation is not
feasible, the primary determinant is the
ability to discontinue CDS clearing
services in an orderly manner with
minimum negative impact to the
marketplace and stakeholders.
Section 6 sets forth the plans that ICC
uses for executing each wind-down
option, including the approach,
timeline, potential impediments, and
other considerations. The Board
considers and approves the execution
plan prior to implementation. Where the
Board makes a business decision to
wind-down, ICC executes wind-down
using one or more of the wind-down
options listed above, with an execution
plan based on those provided in the
Wind-Down Plan.
Finally, Section 6 discusses the
potential obstacles to executing an
orderly wind-down. These obstacles
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include, among others: Staff retention;
the ability to continue to receive key
services from affiliates or third party
vendors; risk of litigation; and finding
an appropriate buyer.
Section 7 describes the
interconnections and interdependencies
between ICC and other entities. Similar
to the Recovery Plan, Section 7 analyzes
the legal entities that are material to ICC
for the Wind-Down Plan, the critical
services provided to ICC by ICE or
external third parties, and ICC’s
operational and financial
interconnections. This analysis
identifies ICE as ICC’s sole MLE for the
purpose of wind-down and explains the
interconnection between ICE and ICC,
including through services provided to
ICC by ICE, such as accounting, human
resources, audit, and facilities.
Again, similar to the Recovery Plan,
Section 7 also (i) details the critical
services that are necessary to continue
daily operations of CDS clearing
services; (ii) categorizes the critical
services by those that are provided to
ICC by ICE and those that are provided
to ICC by external third parties; (iii)
describes the IT systems and
applications critical to ICC’s clearing
operations; and (iv) explains how ICC
uses financial service providers and
how ICC monitors entities that have
multiple roles and relationships with
ICC (such as a CP that also provides
financial services to ICC).
Section 8 of the Wind-Down Plan
analyzes ICC’s contractual arrangements
in the context of continuing services
during wind-down.
Section 9 of the Wind-Down Plan
analyzes the financial resources
maintained by ICC to support winddown in compliance with relevant
regulations, including the procedures to
follow in case of any shortfall. This
section also discusses the timing for
executing the wind-down options and
ICC’s projected estimated recovery and
wind-down costs. As with the Recovery
Plan, this section of the Wind-Down
Plan notes that ICC maintains capital in
accordance with SEC Rule 17Ad–
22(e)(15) 10 as well as CFTC
requirements and, on a voluntary basis,
calculates what its regulatory capital
requirement would be if ICC was subject
to EU-based clearing house regulatory
capital requirements. ICC maintains
regulatory capital in an amount at least
equal to the highest of these three
requirements (Commission, CFTC, and
EU). Section 9 provides that currently
the EU regulatory capital requirement
results in the highest capital
requirement and therefore ICC
10 17
CFR 240.17Ad–22(e)(15).
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maintains regulatory capital in
accordance with this requirement,
which results in ICC maintaining
regulatory capital in an amount
materially more than the amounts
required by SEC Rule 17Ad–22(e)(15) 11
or CFTC requirements. Section 9 then
describes how ICC maintains this
regulatory capital as liquid assets
funded by equity and how ICC could
raise additional capital from its parent
company in the event of any shortfall in
its regulatory capital. Section 9
describes the estimated costs and time
period for implementing the WindDown Plan and how ICC estimates these
figures, and demonstrates how ICC’s
regulatory capital exceeds these costs.
Section 10 of the Wind-Down Plan
describes the governance arrangements
that provide oversight and direction in
respect of the Wind-Down Plan,
including design, implementation,
testing, review, and on-going
maintenance. Specifically, overall
responsibility for the Wind-Down Plan
rests with the ICC Board. The ICC Board
reviews and approves the Wind-Down
Plan. As explained in Section 10, the
ICC Board has delegated to the ICC
President responsibility for
implementing the Wind-Down Plan, as
well as considering and developing any
needed amendments or modifications to
the Wind-Down Plan over time, and the
ICC President is accountable to the ICC
Board with respect to such matters.
Accordingly, ICC management prepared
the Wind-Down Plan under the
direction of the ICC President.
Section 10 also notes that in
developing and approving the WindDown Plan, ICC management and the
ICC Board consider the legitimate
interests of CPs, customers of CPs, and
other relevant stakeholders, and that
ICC considers the legitimate interests of
such stakeholders in the execution and
implementation of the Wind-Down
Plan.
Section 10 describes the process for
reviewing and approving the WindDown Plan, including changes to the
Wind-Down Plan and testing. ICC
Management, the ICC Risk Committee,
and the ICC Board review and approve
the Wind-Down Plan. Annually, the ICC
General Counsel coordinates with ICC
management to review and update the
Wind-Down Plan. Moreover, ICC’s
General Counsel coordinates with ICC
management to revise the Wind-Down
Plan promptly when warranted by
material changes to ICC’s Rules,
policies, procedures, or other
circumstances. The ICC Risk Committee
reviews the annual update and ongoing
11 17
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material amendments to the WindDown Plan and makes a
recommendation to the ICC Board with
respect to Board approval. The ICC
Board considers the Risk Committee’s
recommendation and is ultimately
responsible for approval of revisions to
the Wind-Down Plan. ICC notifies its
regulatory authorities of changes to the
Wind-Down Plan. Section 10 notes that
ICC tests the Recovery Plan at least
annually, as part of its annual default
management drills, and ICC
management provides the results of
such testing, as well as any changes it
recommends due to such testing, to the
ICC Board and Risk Committee.
Finally, Section 10 describes the
governance for implementation of the
Wind-Down Plan. As discussed
elsewhere in the Wind-Down Plan, the
ICC Board decides whether to winddown and selects the option to use to
achieve an orderly wind-down. ICC
informs both the Commission and the
CFTC of the decision to wind-down.
The ICC President is responsible for
implementing and overseeing the
execution of the wind-down option
chosen by the ICC Board.
The remaining sections provide
additional relevant information for the
Wind-Down Plan. Section 11 contains
appendices, including a glossary,
diagrams and charts of both clearing
processes and financial service
providers, and analyses related to
different stress scenarios. Lastly, Section
12 is an index of exhibits to the WindDown Plan.
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.12 After
careful review, the Commission finds
that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to ICC. In
particular, the Commission finds that
the proposed rule change is consistent
with Section 17A(b)(3)(F) of the Act; 13
Rules 17Ad–22(e)(2)(i), (iii), and (v); 14
Rule 17Ad–22(e)(3)(ii); 15 and Rules
17Ad–22(e)(15)(i) and (ii).16
12 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
14 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v).
15 17 CFR 240.17Ad–22(e)(3)(ii).
16 17 CFR 240.17Ad–22(e)(15)(i) and (ii).
13 15
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Federal Register / Vol. 86, No. 92 / Friday, May 14, 2021 / Notices
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) 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.17
As discussed in greater detail below,
the Commission believes that the
Recovery Plan, generally, is designed to
help ICC promote the prompt and
accurate clearance and settlement of
securities transactions and assure the
safeguarding of securities and funds
which are in the custody or control of
ICC or for which it is responsible, by
providing a roadmap for actions it may
employ to monitor and manage its risks,
and, as needed, to stabilize its financial
condition in the event those risks
materialize. Specifically, as described
above, the Recovery Plan establishes
triggers for the potential application of
the recovery tools described in the
Recovery Plan. The Commission
believes that establishing such triggers
alongside a list of available recovery
tools helps ICC more promptly
determine when and how it may need
to manage a significant stress event,
and, as needed, stabilize its financial
condition.
Moreover, as described above, the
Recovery Plan specifies the steps that
ICC takes in recovery and the
governance framework applicable to
taking such steps. It analyzes the
anticipated impact of the recovery tools,
the incentives created by such tools, and
the risks associated with using such
tools. It also explains how the tools are
transparent, measurable, manageable,
and controllable. The Commission
believes that by identifying the steps
ICC takes and the tools it uses to bring
about recovery in the face of losses, the
Recovery Plan increases the likelihood
that recovery is orderly, efficient, and
successful. By increasing the likelihood
of an orderly, efficient, and successful
recovery, the Commission believes that
the Recovery Plan enhances ICC’s
ability to maintain the continuity of its
CDS clearing service during, through,
and following periods of extreme stress
giving rise to the need for recovery,
thereby promoting the prompt and
accurate settlement of CDS transactions.
The Commission also believes that the
Recovery Plan helps assure the
safeguarding of securities or funds in
the custody or control of ICC by
reducing the likelihood of a disorderly
or unsuccessful recovery that could
disrupt access to such securities or
funds.
Further, the Commission believes that
the Wind-Down Plan, generally, is
designed to help ICC to promote the
prompt and accurate clearance and
settlement of securities transactions and
to assure the safeguarding of securities
and funds which are in the custody or
control of ICC or for which it is
responsible by providing a roadmap to
wind-down designed to ensure the
availability of ICC’s services to the
marketplace, while reducing disruption
to the operations of CPs and financial
markets. For example, as described
above, the Wind-Down Plan provides
for the wind-down of ICC’s operations
as well as addressing transfer of
membership and critical services in the
case that recovery tools fail to return
ICC to financial viability. Moreover,
under the Wind-Down Plan, the ICC
Board seeks a wind-down option that
allows the continuance of centralized
clearing of CDS with as little disruption
as possible. Further to that end, the
Wind-Down Plan notes that while the
selection of the wind-down option
depends on the circumstances, ICC
prefers a transfer or sale and considers
termination only if a transfer or sale
cannot be achieved. By establishing the
Wind-Down Plan to enable continuity in
ICC’s critical services and membership
in an orderly manner while winding
down its services, the Commission
believes that the proposed rule change
promotes the prompt and accurate
clearance and settlement of securities
transactions and assures the
safeguarding of securities and funds in
the custody or control of ICC 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
or control or for which it is responsible,
consistent with Section 17A(b)(3)(F) of
the Act.18
B. Consistency With Rules 17Ad–
22(e)(2)(i), (iii), and (v)
Rules 17Ad–22(e)(2)(i), (iii), and (v)
require that ICC establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
provide for governance arrangements
that are clear and transparent; that
support the public interest requirements
in 17A of the Act 19 applicable to
clearing agencies, and the objectives of
owners and participants; and that
specify clear and direct lines of
responsibility.20
As described above, the Plans are
designed to identify clear lines of
responsibility concerning the recovery
and wind-down of ICC including (i) the
ongoing development of the Plans; (ii)
the ongoing maintenance and testing of
the Plans; (iii) reviews and approvals of
the Plans and updates to the Plans; and
(iv) the functioning and implementation
of the Plans. As described above, the
ICC General Counsel coordinates with
ICC management to review and update
the Plans annually, or more frequently
when warranted by material changes to
ICC’s Rules, policies, procedures, or
other circumstances. The ICC Risk
Committee reviews the annual update
and ongoing material amendments to
the Plans and makes a recommendation
to the ICC Board with respect to Board
approval. The ICC Board considers the
Risk Committee’s recommendation and
is responsible for approving revisions to
the Plans. Moreover, the Plans describe
the governance for implementation of
recovery and wind-down, including the
parties responsible for execution of
recovery tools and wind-down options.
The Plans also explain how ICC receives
input from relevant stakeholders,
including CPs through the ICC Risk
Committee and CP representation on the
ICC Board, and customers of CPs
through ICC’s Advisory Committee and
direct communications with customer
representatives.
In considering the above, the
Commission believes that the Plans help
contribute to establishing,
implementing, maintaining, and
enforcing written policies and
procedures reasonably designed to
provide for governance arrangements
that are clear and transparent by
specifying lines of control and
responsibility. The Commission also
believes that the Plans help contribute
to establishing, implementing,
maintaining, and enforcing written
policies and procedures reasonably
designed to provide for governance
arrangements that support the public
interest requirements in Section 17A of
the Act 21 applicable to clearing
agencies, and the objectives of owners
and participants, because they specify
the process ICC takes to receive input
from various ICC stakeholders. In
addition, the Commission believes that
the Plans help contribute to
19 15
U.S.C. 78q–1.
CFR 240.17Ad–22(e)(2)(i), (iii), and (v).
21 15 U.S.C. 78q–1.
20 17
17 15
U.S.C. 78q–1(b)(3)(F).
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establishing, implementing,
maintaining, and enforcing written
policies and procedures reasonably
designed to provide for governance
arrangements that specify clear and
direct lines of responsibility because
they identify who is responsible for the
ongoing development, maintenance,
reviews, approval, functioning, and
implementation of the Plans.
Therefore, the Commission finds that
the proposed rule change is consistent
with Rules 17Ad–22(e)(2)(i), (iii), and
(v).22
C. Consistency With Rule 17Ad–
22(e)(3)(ii)
Rule 17Ad–22(e)(3)(ii) requires that
ICC establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to maintain a
sound risk management framework for
comprehensively managing legal, credit,
liquidity, operational, general business,
investment, custody, and other risks
that arise in or are borne by ICC, which
includes plans for the recovery and
orderly wind-down of ICC necessitated
by credit losses, liquidity shortfalls,
losses from general business risk, or any
other losses.23
As described above, the Recovery
Plan provides a plan for ICC’s recovery
necessitated by credit losses, liquidity
shortfalls, losses from general business
risk, or any other losses by defining the
recovery tools that ICC may use to
address stress scenarios that could
eventually prevent ICC from being able
to provide its critical services as a going
concern. For example, the Recovery
Plan describes (i) the potential stress
scenarios that may prevent ICC from
being able to meet obligations and
provide services; (ii) the mechanisms
ICC uses to monitor for the occurrence
of such scenarios; and (iii) the tools ICC
uses to recover from those stress
scenarios, including when and how ICC
uses those tools. Moreover, the Recovery
Plan discusses the tools that are
available to ICC to address a situation
where ICC experiences liquidity
shortfalls triggered by a default of one
or more CPs and has insufficient liquid
resources in the proper currency to meet
payments obligations. Therefore, the
Commission believes the Recovery Plan
helps ICC establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
maintain a sound risk management
framework for comprehensively
managing legal, credit, liquidity,
operational, general business,
investment, custody, and other risks
22 17
23 17
CFR 240.17Ad–22(e)(2)(i), (iii), and (v).
CFR 240.17Ad–22(e)(3)(ii).
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19:58 May 13, 2021
Jkt 253001
that arise in or are borne by ICC, which
includes a plan for the recovery of ICC
necessitated by credit losses, liquidity
shortfalls, losses from general business
risk, or any other losses.
As discussed above, the Wind-Down
Plan provides a plan for orderly winddown of ICC in the event the actions
described in the Recovery Plan fail to
preserve ICC’s viability as a going
concern and resolution is not triggered.
Once triggered, the Wind-Down Plan is
designed to maintain continued access
to ICC’s critical services and minimize
market impacts while ICC seeks to
ultimately wind-down its services.
Moreover, the Wind-Down Plan
provides options for wind-down and
describes plans for executing those
options, as well as the responsibilities of
various groups at ICC. The ICC Board
seeks a wind-down option that allows
the continuance of centralized clearing
of CDS with as little disruption as
possible and gives preference to a
transfer or sale, to minimize the
disruption to the marketplace and ICC’s
CDS clearing service. Therefore, the
Commission believes that the WindDown Plan helps ICC establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to maintain a
sound risk management framework for
comprehensively managing legal, credit,
liquidity, operational, general business,
investment, custody, and other risks
that arise in or are borne by ICC, which
includes a plan for the orderly winddown of ICC necessitated by credit
losses, liquidity shortfalls, losses from
general business risk, or any other
losses.
For these reasons, the Commission
finds that the proposed rule change is
consistent with Rule 17Ad–
22(e)(3)(ii).24
D. Consistency With Rules 17Ad–
22(e)(15)(i) and (ii)
Rules 17Ad–22(e)(15)(i) and (ii) 25
require that ICC establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
identify, monitor, and manage ICC’s
general business risk and hold sufficient
liquid net assets funded by equity to
cover potential general business losses
so that ICC can continue operations and
services as a going concern if those
losses materialize, including by (i)
determining the amount of liquid net
assets funded by equity based upon its
general business risk profile and the
length of time required to achieve a
recovery or orderly wind-down, as
24 17
25 17
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CFR 240.17Ad–22(e)(15)(i) and (ii).
Frm 00110
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appropriate, of its critical operations
and services if such action is taken and
(ii) holding liquid net assets funded by
equity equal to the greater of either (x)
six months of ICC’s current operating
expenses, or (y) the amount determined
by the board of directors to be sufficient
to ensure a recovery or orderly winddown of critical operations and services
of ICC, as contemplated by the plans
established under Rule 17Ad–
22(e)(3)(ii).26
As discussed above, both of the Plans
describe how ICC maintains capital in
accordance with SEC Rule 17Ad–
22(e)(15).27 ICC does so by maintaining
regulatory capital as if it was subject to
EU-based clearing house regulatory
capital requirements, which results in
ICC maintaining an amount of capital
exceeding what is required by Rule
17Ad–22(e)(15).28 Moreover, the Plans
describe how ICC ensures that it
maintains this amount, including
through monthly calculations of ICC’s
net assets and its regulatory capital
requirements. The Plans also describe
how ICC maintains this regulatory
capital as liquid assets funded by equity
and how ICC could raise additional
capital from its parent company in the
event of any shortfall in its regulatory
capital. Finally, the Plans describes the
estimated costs and time period for
implementing recovery and wind-down
and how ICC estimates these figures,
and demonstrate how ICC’s regulatory
capital exceeds these costs.
Therefore, the Commission finds that
the proposed rule change is consistent
with Rules 17Ad–22(e)(15)(i) and (ii).29
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,30 Rules
17Ad–22(e)(2)(i), (iii), and (v),31 Rule
17Ad–22(e)(3)(ii),32 and Rules 17Ad–
22(e)(15)(i) and (ii).33
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 34 that the
proposed rule change (SR–ICC–2021–
005) be, and hereby is, approved.35
26 17
CFR 240.17Ad–22(e)(3)(ii).
CFR 240.17Ad–22(e)(15).
28 17 CFR 240.17Ad–22(e)(15).
29 17 CFR 240.17Ad–22(e)(15)(i) and (ii).
30 15 U.S.C. 78q–1(b)(3)(F).
31 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v).
32 17 CFR 240.17Ad–22(e)(3)(ii).
33 17 CFR 240.17Ad–22(e)(15)(i) and (ii).
34 15 U.S.C. 78s(b)(2).
35 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
27 17
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Federal Register / Vol. 86, No. 92 / Friday, May 14, 2021 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–10173 Filed 5–13–21; 8:45 am]
BILLING CODE 8011–01–P
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
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91830; File No. SR–BX–
2021–012]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Relocate Its Equity
and General Rules From Its Current
Rulebook Into Its New Rulebook Shell
May 10, 2021.
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 April 27,
2021, Nasdaq BX, Inc. (‘‘BX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to relocate its
equity and general rules from its current
Rulebook into its new Rulebook shell.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/bx/rules, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
khammond on DSKJM1Z7X2PROD with NOTICES
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
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
19:58 May 13, 2021
Universal Changes
The Exchange proposes to update all
cross-references within the Rulebook
shell to the new relocated rule cites. The
Exchange proposes to replace internal
rule references to simply state ‘‘this
Rule’’ where the rule is citing itself
without a more specific cite included in
the Rule. For example, if BX Rule 4619
refers currently to ‘‘Rule 4619’’ or ‘‘this
Rule 4619’’ the Exchange will amend
the phrase to simply ‘‘this Rule.’’ Except
where the Exchange specifies below that
it will retain the current rule
numbering, the Exchange also proposes
to conform the paragraph numbering
and lettering to that used in the
Rulebook shell for greater consistency,
and to correct punctuation. The
Exchange proposes to rename the term
‘‘Commentary’’ with ‘‘Supplementary
Material.’’ Furthermore, the Exchange
proposes to delete reserved rules, other
than those within the 5000 Series Rules
and 11100 Series Rules which are both
being relocated without deleting the
reserved rules, with the exception of
Rules 5300 and 5400, which are
currently reserved, and are being
deleted. The Exchange also proposes to
delete rules that are currently marked as
deleted.
The Exchange proposes to update the
references to the 9000 Series and 9600
Series to refer to the General 5, 9000
Series and General 5, 9600 Series
respectively in connection with a prior
rule change that incorporated Nasdaq
3 Previously, the Exchange filed to relocate other
rules within its Rulebook. See Securities Exchange
Act Release No. 87468 (November 5, 2019), 84 FR
61091 (November 12, 2019) (SR–BX–2019–039).
36 17
VerDate Sep<11>2014
The purpose of this rule change is to
relocate BX’s equity and general rules
from the current Rulebook into the new
Rulebook shell.3 The Exchange also
proposes a number of minor, nonsubstantive changes to the Rulebook
shell as described below. The relocation
and harmonization of these rules is part
of the Exchange’s continued effort to
promote efficiency and conformity of its
rules to the extent applicable with those
of its affiliated exchanges. The Exchange
believes that the placement of these
rules into their new location in the
Rulebook shell will facilitate the use of
the Rulebook by members.
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General 5, Rule 9000 and 9600 Series
into BX General 5.4
The Exchange also proposes to delete
the following section headers that are
currently within the BX Rules: 2100.
General Standards; 2800. Special
Products; 2900. Responsibilities to
Other Brokers or Dealers; 5 2000A.
Business Conduct; 3000.
Responsibilities Relating to Associated
Persons, Employees, and Others’
Employees; 3300. Trading; 4000. Listing
and Trading on the Exchange; 4100,
General; 4400, Other Listing Rules;
4600, Requirements for Equities Market
Makers and Other Participants in the
Nasdaq BX Equities Market; 4610,
Registration and Other Requirements;
4700, The Nasdaq BX Equities Market;
4750, Execution Services; 5000. BX
Venture Market Listing Rules; 6000.
Other Systems and Programs; 6 7000A.
Order Audit Trail Series; 7400A, Order
Audit Trail System; and 11000. Uniform
Practice Code.
General 1
The Exchange proposes to amend the
section heading from General 1, General
1 to General 1, Section 1. The Exchange
also proposes to retitle General 1,
Section 1 from ‘‘General Provisions’’ to
‘‘Definitions.’’ The Exchange proposes
to update the citations within General 1,
Section 10 (Exchange Review Council)
to account for rule relocations proposed
herein and remove the word ‘‘Rules’’
associated with the citations.
General 2
The Exchange proposes to relocate
Rule 4615 (Sponsored Participants) to
General 2, Section 22, which is
currently reserved, to harmonize the
Exchange’s rule numbering to that of
Nasdaq PHLX LLC (‘‘Phlx’’) General 2,
Section 22, which currently sets forth
the same rule on Phlx.
General 3
The Exchange proposes to reword
references to the Nasdaq Rule 1000
Series to Nasdaq General 3, Rule 1000
Series to reflect the placement and
numbering of the rule within the
4 See Securities and Exchange Act Release No.
88938 (June 1, 2020), 85 FR 33235 (May 26, 2020)
(SR–BX–2020–009) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change To Relocate
the BX Disciplinary Rules and Incorporate by
Reference the Disciplinary Rules of The Nasdaq
Stock Market LLC).
5 BX proposes to delete the other non-substantive
rule text under this header which replicates the
header and indicates that Rule 2910 was deleted.
6 BX proposes to delete the non-substantive
reference to 6800 which is reserved under this
header.
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]]>Agencies
[Federal Register Volume 86, Number 92 (Friday, May 14, 2021)]
[Notices]
[Pages 26561-26567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10173]
[[Page 26561]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91806; File No. SR-ICC-2021-005]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Recovery Plan and
the ICC Wind-Down Plan
May 10, 2021.
I. Introduction
On March 23, 2021, ICE Clear Credit LCC (``ICC'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities and Exchange Act of 1934 (the
``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
update and formalize the ICC Recovery Plan and the ICC Wind-Down Plan
(collectively, the ``Plans''). The proposed rule change was published
for comment in the Federal Register on April 5, 2021.\3\ 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\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Proposed Rule Change Relating to the ICC Recovery Plan
and the ICC Wind-Down Plan, Exchange Act Release No. 91439 (March
30, 2021); 86 FR 17649 (April 5, 2021) (SR-ICC-2021-005)
(``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
A. Background
As a ``covered clearing agency,'' ICC is required to, among other
things, ``establish, implement, maintain and enforce written policies
and procedures reasonably designed to . . . maintain a sound risk
management framework for comprehensively managing legal, credit,
liquidity, operational, general business, investment, custody, and
other risks that arise in or are borne by the covered clearing agency,
which . . . includes plans for the recovery and orderly wind-down of
the covered clearing agency necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses.''
\4\ The Commission has previously clarified that it believes that such
recovery and wind-down plans are ``rules'' within the meaning of
Exchange Act Section 19(b) and Rule 19b-4 because such plans would
constitute changes to a stated policy, practice or interpretation of a
covered clearing agency.\5\ The Plans have been in place at ICC for a
number of years. However, ICC has now filed them with the Commission
for the first time since becoming a ``covered clearing agency'' under
the definition in Rule 17Ad-22(a)(5).\6\
---------------------------------------------------------------------------
\4\ 17 CFR 240.17Ad-22(e)(3)(ii).
\5\ Standards for Covered Clearing Agencies, Exchange Act
Release No. 78961 (Sep. 28, 2016), 81 FR 70786, 70809 (Oct. 13,
2016).
\6\ ICC became a ``covered clearing agency'' following a change
in the definition of the term in Rule 17Ad-22(a)(5). The previous
definition of ``covered clearing agency'' in Rule 17Ad-22(a)(5)
stated that ``covered clearing agency'' means a designated clearing
agency or a clearing agency involved in activities with a more
complex risk profile for which the Commodity Futures Trading
Commission is not the Supervisory Agency as defined in Section
803(8) of the Payment, Clearing and Settlement Supervision Act of
2010 (12 U.S.C. 5461 et seq.). Under this definition, ICC was not a
covered clearing agency. Under the revised definition, ``covered
clearing agency'' means a registered clearing agency that provides
the services of a central counterparty or central securities
depository. Under the revised definition, ICC is a covered clearing
agency. See Definition of ``Covered Clearing Agency'', Exchange Act
Release No. 88616 (April 9, 2020), 85 FR 28853, 28854-55 (May 14,
2020).
---------------------------------------------------------------------------
B. Recovery Plan
The Recovery Plan describes the actions ICC takes to (i) restore
ICC to a stable and sustainable condition in the event that it comes
under severe stress and (ii) maintain effective arrangements for
ensuring that losses that threaten ICC's viability as a going concern
are allocated. The Recovery Plan consists of 14 sections, which are
detailed below.
First, Section 1 of the Recovery Plan introduces and summarizes key
aspects of ICC's plan for recovery and explain its purpose. Section 1
explains that the Recovery Plan relies on ICC's existing Rules and
policies and procedures and describes recovery tools available to ICC.
Section 2 of the Recovery Plan provides an overview of ICC and the
regulation to which it is subject, including key information regarding
ICC's ownership structure, regulatory registrations, and designations.
Section 2 explains that ICC's sole critical operation is providing CDS
clearing services.
Section 3 of the Recovery Plan discusses the applicable regulatory
requirements and obligations, including regulatory guidance ICC
considered in writing the plan.
Section 4 provides an overview of the key elements in any recovery
of ICC. First, Section 4 discusses the legal entities that are material
to ICC for the Recovery Plan. The Recovery Plan defines a material
legal entity (``MLE'') as a legal entity that is significant to the
activities of ICC's critical operation and/or to the delivery of a
critical service.\7\ Section 4 explains the metrics and information
that ICC considered to identify the MLEs. Moreover, Section 4 explains
that there are two MLEs for the Recovery Plan: ICC itself and ICC's
ultimate parent company, Intercontinental Exchange, Inc. (``ICE'').
With respect to ICC, Section 4 also explains (i) the requirements for
ICC's Clearing Participants (``CPs''), such as operational capacity,
financial responsibility, and capital; (ii) the governance arrangements
and committees that have a direct and indirect role in default
management and recovery, including the roles and responsibilities of
the Board, Risk Committee, CDS Default Committee, and Advisory
Committee, among others; (iii) ICC's key performance metrics in respect
of the services that it provides; and (iv) ICC's management of
collateral, including the forms of collateral that ICC accepts to
satisfy initial margin (``IM'') and guaranty fund (``GF'') requirements
and the monitoring of collateral counterparties.
---------------------------------------------------------------------------
\7\ For purposes of the Recovery Plan, critical services are
services and operations, such as information technology support and
operations, human resources, and facilities, which are necessary to
continue the ICC's critical operation (CDS central clearing
services).
---------------------------------------------------------------------------
As further explained in Section 4, the CDS Default Committee is
responsible for assisting ICC during the execution of certain default
management and recovery procedures and convenes upon the declaration of
default. The Default Committee is comprised of up to three
representatives from eligible CPs. For a CP to be eligible to serve on
the Default Committee, the Board or its designee, after consultation
with the ICC Risk Committee, needs to approve the CP for participation.
The Recovery Plan lists the CPs currently eligible for participation on
the Default Committee. Each member of the Default Committee is deemed
seconded to ICC and takes actions in the best of interest of ICC.
Section 5 analyzes the critical services that are necessary to
continue daily operations of CDS clearing services. Section 5
categorizes the critical services by those that are provided to ICC by
ICE and those that are provided to ICC by external third parties.
Section 6 details the interconnections and interdependencies
between ICC and other entities, including operational and financial
interconnections. Section 6 explains the interconnection between ICE
and ICC, including through services provided to ICC by ICE, such as
accounting, human resources, audit, and facilities. Section 6 also
details the IT systems and applications critical to
[[Page 26562]]
ICC's clearing operations, including those provided by ICE, those
provided by external third parties, and those that ICC provides to
itself, through in-house systems. Section 6 also explains how ICC uses
financial entities and monitors financial entities that have multiple
roles and relationships with ICC (such as a CP that also provides
financial services to ICC). Finally, Section 6 analyzes ICC's
contractual arrangements in the context of continuing services under
those contracts during recovery.
Section 7 of the proposed Recovery Plan describes the potential
stress scenarios that may prevent ICC from meeting obligations and
providing services, as well as the recovery tools available to ICC to
address such scenarios. Section 7 of the Recovery Plan categorizes
stress scenarios as: (i) Uncovered credit losses and/or liquidity
shortfalls triggered by a CP or multiple CPs defaulting (``CP default
stress scenario''), and (ii) stress triggered by general business
risks, operational risks, or other risks that may threaten ICC's
viability as a going concern, other than a CP default (``non-CP default
stress scenario''). Section 7 also discusses the monitoring mechanisms
for both categories of scenarios, such as daily monitoring of GF and
collateral requirements and daily review of back-testing and stress-
testing results, as well as the process for notifying regulators of the
initiation of the Recovery Plan. Finally, Appendix D further analyzes
each scenario, including the triggering events and the specific steps
ICC takes when the scenario occurs or appears likely to occur.
Section 8 of the proposed Recovery Plan describes the circumstances
in which ICC initiates the Recovery Plan and the tools that are
available to ICC to achieve recovery. Specifically, under both the CP
default stress scenario and the non-CP default stress scenario, Section
8 defines the point at which ICC activates the Recovery Plan and the
point at which ICC begins recovery. Section 8 then describes the
recovery tools available to ICC. Appendix E further analyzes and
summarizes these recovery tools, including whether the particular tool
is mandatory under ICC's rules or voluntary and the specific governance
steps that required to implement each tool. For a CP default stress
scenario, these recovery tools include:
Auctions to close out a defaulter's portfolio ((ICC Rule
20-605(d)(v) and (f)(ii));
An insurance policy covering specified losses resulting
from a CP default (ICC Rule 802);
CPs' obligation to replenish their GF contribution to the
required level in the event of any use of the GF contributions of non-
defaulting CPs (ICC Rule 803(a)) and to make assessment contributions
to the GF following a CP default and the consumption of the pre-funded
GF (ICC Rule 803(b)), subject to a cap;
Partial tear-up of remaining positions (ICC Rules 20-
605(f)(iii) and 809) where ICC terminates positions of non-defaulting
CPs that exactly offset those in the defaulter's remaining portfolio;
and
Reduced gains distributions (``RGD'') (ICC Rule 808) for
up to five consecutive business days, allowing ICC to reduce payment of
variation, or mark-to-market, gains that would otherwise be owed to
CPs, as ICC attempts a secondary auction or conducts a partial tear-up.
Section 8 also discusses the tools that are available to ICC to
address a situation where ICC experiences liquidity shortfalls
triggered by a default of one or more CPs and has insufficient liquid
resources in the proper currency to meet payments obligations. These
tools include entering into transactions to exchange certain sovereign
debt securities for cash or to exchange U.S. dollar cash for Euro cash
under one of ICC's committed repurchase or committed foreign exchange
agreements, respectively.
Finally, Section 8 discusses the tools available to ICC in the
event that ICC experiences severe stress triggered by a non-CP default
stress scenario, including the application of resources from ICC and
contributions from CPs to address certain investment and custodial
losses. ICC Rule 811 provides a mechanism for allocating investment
losses and custodial losses as between ICC and CPs, with ICC being
responsible for a first loss position up to the amount of defined
resources and with CPs being responsible for the remaining loss, in
proportion to and capped at their margin and GF contributions.
Additional tools to address non-CP default stress scenarios include
insurance coverage, seeking additional capital through the ICE group,
renegotiating certain agreements, and reducing personnel and other
expenses.
Section 9 of the Recovery Plan describes the governance
arrangements that provide oversight and direction in respect of the
Recovery Plan, including design, implementation, testing, review, and
ongoing maintenance. Specifically, overall responsibility for the
Recovery Plan rests with the ICC Board. The ICC Board is responsible
for reviewing and approving the Recovery Plan. The ICC Board has, in
turn, delegated to the ICC President responsibility for implementing
the Recovery Plan, as well as considering and developing any needed
amendments or modifications to the Recovery Plan over time, and the ICC
President is accountable to the ICC Board with respect to such matters.
Accordingly, ICC management prepared the Recovery Plan under the
direction of the ICC President.
Section 9 also describes how ICC considers feedback from CPs and
customers in developing the Recovery Plan, including through detailed
consultation with CPs as to overall design and implementation.
Moreover, Section 9 describes how ICC considers the interests of CPs
and customers on an ongoing basis, including through the ICC Risk
Committee and CP representation on the ICC Board.
Finally, Section 9 describes the process for reviewing and
approving the Recovery Plan, including changes to the Recovery Plan and
testing. ICC Management, the ICC Risk Committee, and the ICC Board are
responsible for reviewing and approving the Recovery Plan. Annually,
the ICC General Counsel coordinates with ICC management to review and
update the Recovery Plan. Moreover, ICC's General Counsel coordinates
with ICC management to revise the Recovery Plan promptly when warranted
by material changes to ICC's Rules, policies, procedures, or other
circumstances. The ICC Risk Committee reviews the annual update and
ongoing material amendments to the Recovery Plan and make a
recommendation to the ICC Board with respect to Board approval. The ICC
Board considers the Risk Committee's recommendation and is ultimately
responsible for approval of revisions to the Recovery Plan. ICC
notifies its regulatory authorities of changes to the Recovery Plan.
Section 9 notes that ICC tests the Recovery Plan at least annually, as
part of its annual default management drills, and ICC management
provides the results of such testing, as well as any changes it
recommends due to such testing, to the ICC Board and Risk Committee.
Section 10 of the Recovery Plan analyzes the financial resources
that ICC maintains for recovery in compliance with relevant
regulations, including the procedures it follows in case of any
shortfall. This section also discusses the timing for implementing
ICC's recovery tools and ICC's projected estimated recovery and wind-
down costs. Specifically, Section 10 provides that ICC maintains
capital in accordance
[[Page 26563]]
with SEC Rule 17Ad-22(e)(15) \8\ as well as CFTC requirements and, on a
voluntary basis, calculates what its regulatory capital requirement
would be if ICC was subject to EU-based clearing house regulatory
capital requirements. ICC maintains regulatory capital in an amount at
least equal to the highest of these three requirements (Commission,
CFTC, and EU). Section 10 provides that currently the EU regulatory
capital requirement results in the highest capital requirement and
therefore ICC maintains regulatory capital in accordance with this
requirement, which results in ICC maintaining regulatory capital in an
amount materially more than the amounts required by SEC Rule 17Ad-
22(e)(15) \9\ or CFTC requirements. Section 10 then describes how ICC
maintains this regulatory capital as liquid assets funded by equity and
how ICC could raise additional capital from its parent company in the
event of any shortfall in its regulatory capital. Finally, Section 10
describes the estimated costs and time period for implementing the
Recovery Plan and how ICC estimates these figures, and demonstrates how
ICC's regulatory capital exceeds these costs.
---------------------------------------------------------------------------
\8\ 17 CFR 240.17Ad-22(e)(15).
\9\ 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------
The remaining sections provide additional relevant information for
the Recovery Plan. Section 11 provides financial information relevant
to ICC and ICE. Section 12 sets forth key systems used by ICC to
generate reports to monitor and support clearing operations. Section 13
consists of the appendices to the Recovery Plan, including a glossary,
diagrams and charts of clearing processes and financial service
providers, and analyses related to different stress scenarios and
recovery tools. Section 14 is an index of exhibits to the Recovery
Plan.
C. Wind-Down Plan
The Wind-Down Plan establishes how ICC could be wound-down in an
orderly manner. ICC only invokes the Wind-Down Plan where recovery
actions in the proposed Recovery Plan fail to preserve ICC's viability
as a going concern (and therefore recovery is not possible) and
resolution is not triggered. ICC could also use the Wind-Down Plan
where ICC makes a business decision to exit all clearing activities.
The proposed Wind-Down Plan is divided into 12 sections, which are
detailed below.
Similar to the proposed Recovery Plan, the Wind-Down Plan provides
necessary background and context regarding ICC for wind-down planning.
Section 1 of the Wind-Down Plan introduces the plan, summarizes key
aspects of the Wind-Down Plan, and explains the plan's purpose. Section
2 provides an overview of ICC and the regulation to which it is
subject, including key information regarding ICC's ownership structure
and regulatory registrations and designations. Section 3 describes the
regulatory requirements and obligations applicable to ICC, including
regulatory guidance that ICC considered in writing the plan.
Section 4 of the Wind-Down Plan describes ICC's CPs and the
governance arrangements that are relevant to wind-down, including the
roles and responsibilities of the Board and Risk Committee. If ICC's
recovery efforts fail, the ICC Board determines whether to implement
the Wind-Down Plan and determines which options to use to achieve an
orderly wind-down, taking into consideration the interests of CPs,
through both the recommendations of the Risk Committee and the
participation of CPs on the Board itself. ICC also regularly takes into
account feedback of customers of CPs, both through its Advisory
Committee and through direct communications with representatives of
customers. Finally, Section 4 describes the ICC committees involved in
the wind-down process, with the Risk Committee the principal committee
involved in the wind-down process.
Next, Section 5 of the Wind-Down Plan describes the potential
stress scenarios that could prevent ICC from meeting obligations and
providing services, resulting in wind-down. Similar to the Recovery
Plan, Section 5 categorizes the stress scenarios as: (i) CP default
stress scenarios, and (ii) severe stress triggered by general business
risks, operational risks, or other risks that may threaten ICC's
viability as a going concern, other than a CP default (``non-CP default
severe stress scenarios''). Appendix D further analyzes each scenario,
including, among other things, the events triggering wind-down under
each scenario. These triggering events fall into two broad categories:
(i) A critical reduction in market participation, and (ii) a critical
reduction in ICC's financial resources below regulatory capital
requirements. With respect to a business decision to wind-down, the
triggering event is the Board's decision to exit the business.
Section 6 examines ICC's options for wind-down, how ICC executes
those options, and the potential obstacles to an orderly wind-down. ICC
has three options for wind-down: (i) A transfer of CDS clearing
activities from ICC to an alternative clearinghouse; (ii) the sale of
ICC to another entity; or (iii) the termination of open positions.
Although Section 6 presents the three options as alternatives, it also
notes that the options could be used in combination with each other.
Section 6 also notes that while the selection of the wind-down option
depends on the circumstances, ICC prefers a transfer or sale and
considers termination only if a transfer or sale cannot be achieved.
Moreover, ICC could use any these options in the event ICC makes a
business decision to exit all clearing activities.
To execute these options, the ICC Board first makes a decision to
wind-down, and as noted above, that is only in the event that recovery
fails to preserve ICC's viability as a going concern and resolution is
not triggered. Section 6 notes that before the Board makes a wind-down
decision, ICC first consults with, among others, market participants,
potential alternative clearing houses, and regulators. Moreover, once
the ICC Board makes the decision to wind-down, ICC informs both the
CFTC and the Commission.
After the ICC Board agrees in principle to a wind-down, ICC staff
undertakes an analysis under the direction of the Board and may consult
with CPs, market participants, alternative clearing houses, swap
execution platforms, and regulators with respect to the options and
approaches to wind-down, to gain their input and relevant information
for consideration by the ICC Board. The ICC Board ultimately decides
which of the options to use. Section 6 notes that, to the extent
possible, ICC's primary determinant of feasibility for wind-down
options is the ability to continue providing centralized clearing of
CDS with as little disruption as possible. If continuation is not
feasible, the primary determinant is the ability to discontinue CDS
clearing services in an orderly manner with minimum negative impact to
the marketplace and stakeholders.
Section 6 sets forth the plans that ICC uses for executing each
wind-down option, including the approach, timeline, potential
impediments, and other considerations. The Board considers and approves
the execution plan prior to implementation. Where the Board makes a
business decision to wind-down, ICC executes wind-down using one or
more of the wind-down options listed above, with an execution plan
based on those provided in the Wind-Down Plan.
Finally, Section 6 discusses the potential obstacles to executing
an orderly wind-down. These obstacles
[[Page 26564]]
include, among others: Staff retention; the ability to continue to
receive key services from affiliates or third party vendors; risk of
litigation; and finding an appropriate buyer.
Section 7 describes the interconnections and interdependencies
between ICC and other entities. Similar to the Recovery Plan, Section 7
analyzes the legal entities that are material to ICC for the Wind-Down
Plan, the critical services provided to ICC by ICE or external third
parties, and ICC's operational and financial interconnections. This
analysis identifies ICE as ICC's sole MLE for the purpose of wind-down
and explains the interconnection between ICE and ICC, including through
services provided to ICC by ICE, such as accounting, human resources,
audit, and facilities.
Again, similar to the Recovery Plan, Section 7 also (i) details the
critical services that are necessary to continue daily operations of
CDS clearing services; (ii) categorizes the critical services by those
that are provided to ICC by ICE and those that are provided to ICC by
external third parties; (iii) describes the IT systems and applications
critical to ICC's clearing operations; and (iv) explains how ICC uses
financial service providers and how ICC monitors entities that have
multiple roles and relationships with ICC (such as a CP that also
provides financial services to ICC).
Section 8 of the Wind-Down Plan analyzes ICC's contractual
arrangements in the context of continuing services during wind-down.
Section 9 of the Wind-Down Plan analyzes the financial resources
maintained by ICC to support wind-down in compliance with relevant
regulations, including the procedures to follow in case of any
shortfall. This section also discusses the timing for executing the
wind-down options and ICC's projected estimated recovery and wind-down
costs. As with the Recovery Plan, this section of the Wind-Down Plan
notes that ICC maintains capital in accordance with SEC Rule 17Ad-
22(e)(15) \10\ as well as CFTC requirements and, on a voluntary basis,
calculates what its regulatory capital requirement would be if ICC was
subject to EU-based clearing house regulatory capital requirements. ICC
maintains regulatory capital in an amount at least equal to the highest
of these three requirements (Commission, CFTC, and EU). Section 9
provides that currently the EU regulatory capital requirement results
in the highest capital requirement and therefore ICC maintains
regulatory capital in accordance with this requirement, which results
in ICC maintaining regulatory capital in an amount materially more than
the amounts required by SEC Rule 17Ad-22(e)(15) \11\ or CFTC
requirements. Section 9 then describes how ICC maintains this
regulatory capital as liquid assets funded by equity and how ICC could
raise additional capital from its parent company in the event of any
shortfall in its regulatory capital. Section 9 describes the estimated
costs and time period for implementing the Wind-Down Plan and how ICC
estimates these figures, and demonstrates how ICC's regulatory capital
exceeds these costs.
---------------------------------------------------------------------------
\10\ 17 CFR 240.17Ad-22(e)(15).
\11\ 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------
Section 10 of the Wind-Down Plan describes the governance
arrangements that provide oversight and direction in respect of the
Wind-Down Plan, including design, implementation, testing, review, and
on-going maintenance. Specifically, overall responsibility for the
Wind-Down Plan rests with the ICC Board. The ICC Board reviews and
approves the Wind-Down Plan. As explained in Section 10, the ICC Board
has delegated to the ICC President responsibility for implementing the
Wind-Down Plan, as well as considering and developing any needed
amendments or modifications to the Wind-Down Plan over time, and the
ICC President is accountable to the ICC Board with respect to such
matters. Accordingly, ICC management prepared the Wind-Down Plan under
the direction of the ICC President.
Section 10 also notes that in developing and approving the Wind-
Down Plan, ICC management and the ICC Board consider the legitimate
interests of CPs, customers of CPs, and other relevant stakeholders,
and that ICC considers the legitimate interests of such stakeholders in
the execution and implementation of the Wind-Down Plan.
Section 10 describes the process for reviewing and approving the
Wind-Down Plan, including changes to the Wind-Down Plan and testing.
ICC Management, the ICC Risk Committee, and the ICC Board review and
approve the Wind-Down Plan. Annually, the ICC General Counsel
coordinates with ICC management to review and update the Wind-Down
Plan. Moreover, ICC's General Counsel coordinates with ICC management
to revise the Wind-Down Plan promptly when warranted by material
changes to ICC's Rules, policies, procedures, or other circumstances.
The ICC Risk Committee reviews the annual update and ongoing material
amendments to the Wind-Down Plan and makes a recommendation to the ICC
Board with respect to Board approval. The ICC Board considers the Risk
Committee's recommendation and is ultimately responsible for approval
of revisions to the Wind-Down Plan. ICC notifies its regulatory
authorities of changes to the Wind-Down Plan. Section 10 notes that ICC
tests the Recovery Plan at least annually, as part of its annual
default management drills, and ICC management provides the results of
such testing, as well as any changes it recommends due to such testing,
to the ICC Board and Risk Committee.
Finally, Section 10 describes the governance for implementation of
the Wind-Down Plan. As discussed elsewhere in the Wind-Down Plan, the
ICC Board decides whether to wind-down and selects the option to use to
achieve an orderly wind-down. ICC informs both the Commission and the
CFTC of the decision to wind-down. The ICC President is responsible for
implementing and overseeing the execution of the wind-down option
chosen by the ICC Board.
The remaining sections provide additional relevant information for
the Wind-Down Plan. Section 11 contains appendices, including a
glossary, diagrams and charts of both clearing processes and financial
service providers, and analyses related to different stress scenarios.
Lastly, Section 12 is an index of exhibits to the Wind-Down Plan.
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.\12\ After careful review, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to ICC. In particular,
the Commission finds that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act; \13\ Rules 17Ad-22(e)(2)(i), (iii),
and (v); \14\ Rule 17Ad-22(e)(3)(ii); \15\ and Rules 17Ad-22(e)(15)(i)
and (ii).\16\
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\12\ 15 U.S.C. 78s(b)(2)(C).
\13\ 15 U.S.C. 78q-1(b)(3)(F).
\14\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
\15\ 17 CFR 240.17Ad-22(e)(3)(ii).
\16\ 17 CFR 240.17Ad-22(e)(15)(i) and (ii).
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[[Page 26565]]
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) 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.\17\
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As discussed in greater detail below, the Commission believes that
the Recovery Plan, generally, is designed to help ICC promote the
prompt and accurate clearance and settlement of securities transactions
and assure the safeguarding of securities and funds which are in the
custody or control of ICC or for which it is responsible, by providing
a roadmap for actions it may employ to monitor and manage its risks,
and, as needed, to stabilize its financial condition in the event those
risks materialize. Specifically, as described above, the Recovery Plan
establishes triggers for the potential application of the recovery
tools described in the Recovery Plan. The Commission believes that
establishing such triggers alongside a list of available recovery tools
helps ICC more promptly determine when and how it may need to manage a
significant stress event, and, as needed, stabilize its financial
condition.
Moreover, as described above, the Recovery Plan specifies the steps
that ICC takes in recovery and the governance framework applicable to
taking such steps. It analyzes the anticipated impact of the recovery
tools, the incentives created by such tools, and the risks associated
with using such tools. It also explains how the tools are transparent,
measurable, manageable, and controllable. The Commission believes that
by identifying the steps ICC takes and the tools it uses to bring about
recovery in the face of losses, the Recovery Plan increases the
likelihood that recovery is orderly, efficient, and successful. By
increasing the likelihood of an orderly, efficient, and successful
recovery, the Commission believes that the Recovery Plan enhances ICC's
ability to maintain the continuity of its CDS clearing service during,
through, and following periods of extreme stress giving rise to the
need for recovery, thereby promoting the prompt and accurate settlement
of CDS transactions. The Commission also believes that the Recovery
Plan helps assure the safeguarding of securities or funds in the
custody or control of ICC by reducing the likelihood of a disorderly or
unsuccessful recovery that could disrupt access to such securities or
funds.
Further, the Commission believes that the Wind-Down Plan,
generally, is designed to help ICC to promote the prompt and accurate
clearance and settlement of securities transactions and to assure the
safeguarding of securities and funds which are in the custody or
control of ICC or for which it is responsible by providing a roadmap to
wind-down designed to ensure the availability of ICC's services to the
marketplace, while reducing disruption to the operations of CPs and
financial markets. For example, as described above, the Wind-Down Plan
provides for the wind-down of ICC's operations as well as addressing
transfer of membership and critical services in the case that recovery
tools fail to return ICC to financial viability. Moreover, under the
Wind-Down Plan, the ICC Board seeks a wind-down option that allows the
continuance of centralized clearing of CDS with as little disruption as
possible. Further to that end, the Wind-Down Plan notes that while the
selection of the wind-down option depends on the circumstances, ICC
prefers a transfer or sale and considers termination only if a transfer
or sale cannot be achieved. By establishing the Wind-Down Plan to
enable continuity in ICC's critical services and membership in an
orderly manner while winding down its services, the Commission believes
that the proposed rule change promotes the prompt and accurate
clearance and settlement of securities transactions and assures the
safeguarding of securities and funds in the custody or control of ICC
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 or control or for which it is responsible,
consistent with Section 17A(b)(3)(F) of the Act.\18\
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\18\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rules 17Ad-22(e)(2)(i), (iii), and (v)
Rules 17Ad-22(e)(2)(i), (iii), and (v) require that ICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for governance arrangements that are
clear and transparent; that support the public interest requirements in
17A of the Act \19\ applicable to clearing agencies, and the objectives
of owners and participants; and that specify clear and direct lines of
responsibility.\20\
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78q-1.
\20\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
---------------------------------------------------------------------------
As described above, the Plans are designed to identify clear lines
of responsibility concerning the recovery and wind-down of ICC
including (i) the ongoing development of the Plans; (ii) the ongoing
maintenance and testing of the Plans; (iii) reviews and approvals of
the Plans and updates to the Plans; and (iv) the functioning and
implementation of the Plans. As described above, the ICC General
Counsel coordinates with ICC management to review and update the Plans
annually, or more frequently when warranted by material changes to
ICC's Rules, policies, procedures, or other circumstances. The ICC Risk
Committee reviews the annual update and ongoing material amendments to
the Plans and makes a recommendation to the ICC Board with respect to
Board approval. The ICC Board considers the Risk Committee's
recommendation and is responsible for approving revisions to the Plans.
Moreover, the Plans describe the governance for implementation of
recovery and wind-down, including the parties responsible for execution
of recovery tools and wind-down options. The Plans also explain how ICC
receives input from relevant stakeholders, including CPs through the
ICC Risk Committee and CP representation on the ICC Board, and
customers of CPs through ICC's Advisory Committee and direct
communications with customer representatives.
In considering the above, the Commission believes that the Plans
help contribute to establishing, implementing, maintaining, and
enforcing written policies and procedures reasonably designed to
provide for governance arrangements that are clear and transparent by
specifying lines of control and responsibility. The Commission also
believes that the Plans help contribute to establishing, implementing,
maintaining, and enforcing written policies and procedures reasonably
designed to provide for governance arrangements that support the public
interest requirements in Section 17A of the Act \21\ applicable to
clearing agencies, and the objectives of owners and participants,
because they specify the process ICC takes to receive input from
various ICC stakeholders. In addition, the Commission believes that the
Plans help contribute to
[[Page 26566]]
establishing, implementing, maintaining, and enforcing written policies
and procedures reasonably designed to provide for governance
arrangements that specify clear and direct lines of responsibility
because they identify who is responsible for the ongoing development,
maintenance, reviews, approval, functioning, and implementation of the
Plans.
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
Therefore, the Commission finds that the proposed rule change is
consistent with Rules 17Ad-22(e)(2)(i), (iii), and (v).\22\
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\22\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
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C. Consistency With Rule 17Ad-22(e)(3)(ii)
Rule 17Ad-22(e)(3)(ii) requires that ICC establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to maintain a sound risk management framework for
comprehensively managing legal, credit, liquidity, operational, general
business, investment, custody, and other risks that arise in or are
borne by ICC, which includes plans for the recovery and orderly wind-
down of ICC necessitated by credit losses, liquidity shortfalls, losses
from general business risk, or any other losses.\23\
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\23\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
As described above, the Recovery Plan provides a plan for ICC's
recovery necessitated by credit losses, liquidity shortfalls, losses
from general business risk, or any other losses by defining the
recovery tools that ICC may use to address stress scenarios that could
eventually prevent ICC from being able to provide its critical services
as a going concern. For example, the Recovery Plan describes (i) the
potential stress scenarios that may prevent ICC from being able to meet
obligations and provide services; (ii) the mechanisms ICC uses to
monitor for the occurrence of such scenarios; and (iii) the tools ICC
uses to recover from those stress scenarios, including when and how ICC
uses those tools. Moreover, the Recovery Plan discusses the tools that
are available to ICC to address a situation where ICC experiences
liquidity shortfalls triggered by a default of one or more CPs and has
insufficient liquid resources in the proper currency to meet payments
obligations. Therefore, the Commission believes the Recovery Plan helps
ICC establish, implement, maintain, and enforce written policies and
procedures reasonably designed to maintain a sound risk management
framework for comprehensively managing legal, credit, liquidity,
operational, general business, investment, custody, and other risks
that arise in or are borne by ICC, which includes a plan for the
recovery of ICC necessitated by credit losses, liquidity shortfalls,
losses from general business risk, or any other losses.
As discussed above, the Wind-Down Plan provides a plan for orderly
wind-down of ICC in the event the actions described in the Recovery
Plan fail to preserve ICC's viability as a going concern and resolution
is not triggered. Once triggered, the Wind-Down Plan is designed to
maintain continued access to ICC's critical services and minimize
market impacts while ICC seeks to ultimately wind-down its services.
Moreover, the Wind-Down Plan provides options for wind-down and
describes plans for executing those options, as well as the
responsibilities of various groups at ICC. The ICC Board seeks a wind-
down option that allows the continuance of centralized clearing of CDS
with as little disruption as possible and gives preference to a
transfer or sale, to minimize the disruption to the marketplace and
ICC's CDS clearing service. Therefore, the Commission believes that the
Wind-Down Plan helps ICC establish, implement, maintain, and enforce
written policies and procedures reasonably designed to maintain a sound
risk management framework for comprehensively managing legal, credit,
liquidity, operational, general business, investment, custody, and
other risks that arise in or are borne by ICC, which includes a plan
for the orderly wind-down of ICC necessitated by credit losses,
liquidity shortfalls, losses from general business risk, or any other
losses.
For these reasons, the Commission finds that the proposed rule
change is consistent with Rule 17Ad-22(e)(3)(ii).\24\
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\24\ 17 CFR 240.17Ad-22(e)(3)(ii).
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D. Consistency With Rules 17Ad-22(e)(15)(i) and (ii)
Rules 17Ad-22(e)(15)(i) and (ii) \25\ require that ICC establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to identify, monitor, and manage ICC's general
business risk and hold sufficient liquid net assets funded by equity to
cover potential general business losses so that ICC can continue
operations and services as a going concern if those losses materialize,
including by (i) determining the amount of liquid net assets funded by
equity based upon its general business risk profile and the length of
time required to achieve a recovery or orderly wind-down, as
appropriate, of its critical operations and services if such action is
taken and (ii) holding liquid net assets funded by equity equal to the
greater of either (x) six months of ICC's current operating expenses,
or (y) the amount determined by the board of directors to be sufficient
to ensure a recovery or orderly wind-down of critical operations and
services of ICC, as contemplated by the plans established under Rule
17Ad-22(e)(3)(ii).\26\
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\25\ 17 CFR 240.17Ad-22(e)(15)(i) and (ii).
\26\ 17 CFR 240.17Ad-22(e)(3)(ii).
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As discussed above, both of the Plans describe how ICC maintains
capital in accordance with SEC Rule 17Ad-22(e)(15).\27\ ICC does so by
maintaining regulatory capital as if it was subject to EU-based
clearing house regulatory capital requirements, which results in ICC
maintaining an amount of capital exceeding what is required by Rule
17Ad-22(e)(15).\28\ Moreover, the Plans describe how ICC ensures that
it maintains this amount, including through monthly calculations of
ICC's net assets and its regulatory capital requirements. The Plans
also describe how ICC maintains this regulatory capital as liquid
assets funded by equity and how ICC could raise additional capital from
its parent company in the event of any shortfall in its regulatory
capital. Finally, the Plans describes the estimated costs and time
period for implementing recovery and wind-down and how ICC estimates
these figures, and demonstrate how ICC's regulatory capital exceeds
these costs.
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\27\ 17 CFR 240.17Ad-22(e)(15).
\28\ 17 CFR 240.17Ad-22(e)(15).
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Therefore, the Commission finds that the proposed rule change is
consistent with Rules 17Ad-22(e)(15)(i) and (ii).\29\
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\29\ 17 CFR 240.17Ad-22(e)(15)(i) and (ii).
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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,\30\ Rules 17Ad-22(e)(2)(i), (iii), and (v),\31\ Rule 17Ad-
22(e)(3)(ii),\32\ and Rules 17Ad-22(e)(15)(i) and (ii).\33\
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\30\ 15 U.S.C. 78q-1(b)(3)(F).
\31\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
\32\ 17 CFR 240.17Ad-22(e)(3)(ii).
\33\ 17 CFR 240.17Ad-22(e)(15)(i) and (ii).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\34\ that the proposed rule change (SR-ICC-2021-005) be, and hereby is,
approved.\35\
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\34\ 15 U.S.C. 78s(b)(2).
\35\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
[[Page 26567]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-10173 Filed 5-13-21; 8:45 am]
BILLING CODE 8011-01-P
