Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change Relating to Amendments to the ICE Clear Europe Counterparty Credit Risk Policy and Counterparty Credit Risk Procedures, 17886-17891 [2023-06057]

Download as PDF 17886 Federal Register / Vol. 88, No. 57 / Friday, March 24, 2023 / Notices takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments [FR Doc. 2023–06056 Filed 3–23–23; 8:45 am] Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– PEARL–2023–13 on the subject line. lotter on DSK11XQN23PROD with NOTICES1 Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–PEARL–2023–13. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–PEARL–2023–13 and should be submitted on or before April 14, 2023. VerDate Sep<11>2014 19:18 Mar 23, 2023 Jkt 259001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.30 Sherry R. Haywood, Assistant Secretary. BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 34861; File No. 812–15329] AGTB Fund Manager, LLC and AG Twin Brook Capital Income Fund March 20, 2023. Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’). ACTION: Notice. AGENCY: Notice of an application under section 6(c) of the Investment Company Act of 1940 (the ‘‘Act’’) for an exemption from sections 18(a)(2), 18(c) and 18(i) and section 61(a) of the Act. SUMMARY OF APPLICATION: Applicants request an order to permit certain closed-end management investment companies that have elected to be regulated as business development companies (‘‘BDCs’’) to issue multiple classes of shares with varying sales loads and asset-based service and/or distribution fees. APPLICANTS: AGTB Fund Manager, LLC and AG Twin Brook Capital Income Fund. FILING DATES: The application was filed on April 29, 2022 and amended on June 2, 2022, June 22, 2022, September 29, 2022, and March 14, 2023. HEARING OR NOTIFICATION OF HEARING: An order granting the requested relief will be issued unless the Commission orders a hearing. Interested persons may request a hearing on any application by emailing the Commission’s Secretary at Secretarys-Office@sec.gov and serving the Applicants with a copy of the request by email, if an email address is listed for the relevant Applicant below, or personally or by mail, if a physical address is listed for the relevant Applicant below. Hearing requests should be received by the Commission by 5:30 p.m. on April 14, 2023, and should be accompanied by proof of service on the Applicants, in the form of an affidavit or, for lawyers, a certificate of service. Pursuant to rule 0– 5 under the Act, hearing requests should state the nature of the writer’s interest, any facts bearing upon the desirability of a hearing on the matter, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by emailing the Commission’s Secretary. ADDRESSES: The Commission: Secretarys-Office@sec.gov. Applicants: Jenny B. Neslin, jneslin@ angelogordon.com. FOR FURTHER INFORMATION CONTACT: Lisa Reid Ragen, Branch Chief, at (202) 551– 6825 (Division of Investment Management, Chief Counsel’s Office). SUPPLEMENTARY INFORMATION: For Applicants’ representations, legal analysis, and conditions, please refer to Applicants’ fourth amended and restated application, dated March 14, 2023, which may be obtained via the Commission’s website by searching for the file number at the top of this document, or for an Applicant using the Company name search field, on the SEC’s EDGAR system. The SEC’s EDGAR system may be searched at https://www.sec.gov/edgar/searchedgar/ legacy/companysearch.html. You may also call the SEC’s Public Reference Room at (202) 551–8090. For the Commission, by the Division of Investment Management, under delegated authority. Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–06062 Filed 3–23–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–97169; File No. SR–ICEEU– 2023–004] Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change Relating to Amendments to the ICE Clear Europe Counterparty Credit Risk Policy and Counterparty Credit Risk Procedures March 20, 2023. I. Introduction On January 20, 2023, ICE Clear Europe Limited (‘‘ICE Clear Europe’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4,2 a proposed rule change to amend its Counterparty Credit Risk Policy (the ‘‘CC Risk Policy’’) and Counterparty Credit Risk Procedures (the ‘‘CC Risk Procedures’’). The proposed rule change was published for comment in the Federal Register on 1 15 30 17 PO 00000 CFR 200.30–3(a)(12). Frm 00105 Fmt 4703 Sfmt 4703 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. E:\FR\FM\24MRN1.SGM 24MRN1 Federal Register / Vol. 88, No. 57 / Friday, March 24, 2023 / Notices February 7, 2023.3 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 lotter on DSK11XQN23PROD with NOTICES1 i. Background ICE Clear Europe is registered with the Commission as a clearing agency for the purpose of clearing security-based swaps. In its role as a clearing agency for clearing security-based swaps, ICE Clear Europe provides services to its Clearing Members and receives banking, investment, custody, and other financial services from its Financial Service Providers (‘‘FSPs’’).4 In providing services to Clearing Members and receiving services from FSPs, ICE Clear Europe is exposed to counterparty risk. Counterparty risk is the risk that ICE Clear Europe suffers financial losses if a Clearing Member or FSP defaults on its obligations to ICE Clear Europe. In 2021, ICE Clear Europe adopted the CC Risk Policy and CC Risk Procedures.5 The CC Risk Policy and CC Risk Procedures describe how ICE Clear Europe identifies, monitors, and mitigates counterparty risk. In addition to the CC Risk Policy and CC Risk Procedures, ICE Clear Europe has also established a Counterparty Credit Risk Parameters document (the ‘‘CC Risk Parameters’’).6 The proposed rule change would amend the CC Risk Policy and the CC Risk Procedures to make a number of improvements to the versions adopted in 2021. As described more fully below, the proposed rule change would: (i) apply both documents to the risks arising from Links; 7 (ii) revise credit 3 Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change Relating to Amendments to the ICE Clear Europe Counterparty Credit Risk Policy and Counterparty Credit Risk Procedures, Exchange Act Release No. 96787 (Feb. 1, 2023); 88 FR 8018 (Feb. 7, 2023) (SR– ICEEU–2023–004) (‘‘Notice’’). 4 Capitalized terms not otherwise defined herein have the meanings assigned to them in the CC Risk Policy and CC Risk Procedures. 5 See Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change Relating to Adoption of the Counterparty Credit Risk Policy and Counterparty Credit Risk Procedures, Exchange Act Release No. 93880 (Dec. 30, 2021), 87 FR 513 (Jan. 5, 2022) (SR–ICEEU– 2021–015) (‘‘2021 Approval Order’’). 6 ICE Clear Europe included the CC Risk Parameters as a confidential Exhibit 3 to this filing and the 2021 Approval Order. The CC Risk Parameters contain details relevant to the processes set out in the CC Risk Policy and CC Risk Procedures. For example, the CC Risk Parameters contain the credit eligibility criteria that ICE Clear Europe uses to assess prospective counterparties. 7 The proposed rule change would adopt the definition of ‘‘Link’’ as found in Rule 17Ad– VerDate Sep<11>2014 19:18 Mar 23, 2023 Jkt 259001 eligibility criteria; (iii) clarify how frequently ICE Clear Europe reviews counterparties; (iv) add a new defined term for Systemically Important Institution; (v) consider the risks arising from cross-exposures and off-boarding; (vi) specify additional mitigating actions ICE Clear Europe may take in certain circumstances; and (vii) revise description of ICE Clear Europe’s Counterparty Rating System.8 ii. Links Currently, both the CC Risk Policy and the CC Risk Procedures define counterparty credit risk in relation to Clearing Members and FSPs. Specifically, both documents define counterparty credit risk as (i) the risk that a Clearing Member misses its next payment to ICE Clear Europe, leaving ICE Clear Europe under-collateralized and therefore increasing the risk of using the Guaranty Fund contributions of other Clearing Members and ICE Clear Europe to manage a potential default of that Clearing Member and (ii) the risk that a FSP defaults without returning cash to ICE Clear Europe, leaving ICE Clear Europe with a loss on its investments or expected return of cash. The proposed rule change would expand the definition of counterparty credit risk, in both the CC Risk Policy and the CC Risk Procedures, to include the risk that a Link defaults, leaving ICE Clear Europe to fund material contractual or operational arrangements associated with that Link. In addition to taking into account the risks arising from Links, the proposed rule change would revise the overall objective of ICE Clear Europe’s counterparty credit risk management to include minimizing the risk arising from a Link defaulting. The current CC Risk Policy provides that the objective of ICE Clear Europe’s counterparty credit risk management is minimizing the risk of ICE Clear Europe being materially under-collateralized as a result of a CM defaulting, or realizing a material loss due to an FSP defaulting. The proposed change would add Links to this objective, such that ICE Clear Europe’s 22(a)(8). Rule 17Ad–22(a)(8) defines a ‘‘Link’’ as ‘‘a set of contractual and operational arrangements between two or more clearing agencies, financial market utilities, or trading markets that connect them directly or indirectly for the purposes of participating in settlement, cross margining, expanding their services to additional instruments or participants, or for any other purposes material to their business.’’ 17 CFR 240.17Ad–22(a)(8). 8 The Counterparty Rating System is the system that ICE Clear Europe uses to model and determine a counterparty’s risk. ICE Clear Europe uses the Counterparty Rating System to calculate a credit score, and this credit score represents a counterparty’s risk, in terms of its overall credit quality. PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 17887 objective would include minimizing the risk of loss due to a Link defaulting. While revising the objective of ICE Clear Europe’s counterparty credit risk management to include Links, the proposed rule change also would revise how ICE Clear Europe achieves this objective to include Links. Currently, ICE Clear Europe minimizes counterparty credit risk through the following actions: (i) setting and monitoring credit criteria for counterparties; (ii) establishing a credit score for each counterparty that represents each counterparty’s credit risk and classifying each counterparty in relation to the risk it poses; (iii) taking mitigating actions to reduce ICE Clear Europe’s exposure; (iv) performing reviews of counterparties; and (v) setting and monitoring exposure limits for counterparties. The proposed rule change would add to this list identifying, monitoring, and managing risks from Links. Thus, in addition to taking the actions set forth above to minimize counterparty risk, under the proposed rule change, ICE Clear Europe also would identify, monitor, and mange risks from Links. Similarly, the proposed rule change would add to ICE Clear Europe’s mitigating actions certain actions specific to Links. The CC Risk Policy lists certain mitigating actions that ICE Clear Europe may take to reduce its exposure to a counterparty. These actions include, among other things, requiring a Clearing Member to reduce its positions and changing ICE Clear Europe’s usage of a FSP. The proposed rule change would add to this list of mitigating actions changing ICE Clear Europe’s usage of a Link, which ICE Clear Europe could undertake to reduce its exposure to a Link. In addition to revising the definition of counterparty risk, the counterparty risk management objective, and the list of mitigating actions, the proposed rule change also would revise how ICE Clear Europe monitors counterparties to account for Links. As mentioned above, currently ICE Clear Europe uses its Counterparty Rating System to calculate a credit score that represents a counterparty’s risk, in terms of the overall credit quality of the counterparty. Under the proposed rule change, ICE Clear Europe would continue to use its Counterparty Rating System to calculate credit scores. The proposed rule change would add language to the CC Risk Policy and CC Risk Parameters, however, to note that ICE Clear Europe may use its Counterparty Rating System or related credit criteria to represent the credit quality of counterparties. The new E:\FR\FM\24MRN1.SGM 24MRN1 17888 Federal Register / Vol. 88, No. 57 / Friday, March 24, 2023 / Notices reference to related credit criteria captures the fact that ICE Clear Europe may need to consider additional credit criteria to fully consider the risks of Links. This additional credit criteria could include, for example, the nature of a Link’s operational arrangement with ICE Clear Europe. Similarly, the proposed rule change would add language to the Counterparty Credit Risk Procedures to note that, in addition to monitoring counterparties through credit scores, ICE Clear Europe may monitor counterparties through public news sources. Public news sources could provide insight into events affecting the financial standing of Links. lotter on DSK11XQN23PROD with NOTICES1 iii. Credit Eligibility Criteria ICE Clear Europe assesses prospective counterparties against certain credit eligibility criteria. The criteria that ICE Clear Europe uses for this assessment are set out in the CC Risk Parameters. Overall, ICE Clear Europe uses this assessment against the credit eligibility criteria to assess the financial stability of Clearing Members and FSPs.9 The current CC Risk Procedures note that, as part of this assessment, FSPs must be legal entities in approved jurisdictions and comply with the credit eligibility criteria and Unsecured Credit Limits found in the CC Risk Parameters. The proposed rule change would revise this language to state that in addition to complying with the credit eligibility criteria and Unsecured Credit Limits found in CC Risk Parameters, ICE Clear Europe screens FSPs for Know-YourCustomer (‘‘KYC’’) and Anti-Money Laundering (‘‘AML’’) purposes to confirm they are not registered in countries subject to monitoring by the Financial Action Task Force 10 and to confirm that they have appropriate KYC processes. ICE Clear Europe is making this change to codify in the CC Risk Procedures its current practice of screening FSPs with respect to KYC and AML requirements.11 Moreover, the proposed rule change would add language to note that agreements with FSPs are subject to review by ICE Clear Europe’s legal team, and this review includes consideration of legal risk associated with the governing law of the relevant agreement and the jurisdiction of the FSP. This new language would replace the statement, found in the current CC Risk 9 See 2021 Approval Order, 87 FR at 514. Financial Action Task Force is an intergovernmental organization founded in 1989 on the initiative of the G7. It develops policies and international standards to prevent money laundering and terrorist financing. See https:// www.fatf-gafi.org/en/home.html. 11 Notice, 88 FR at 8018. 10 The VerDate Sep<11>2014 19:18 Mar 23, 2023 Jkt 259001 Procedures, that FSPs must be legal entities in approved jurisdictions. Rather than only requiring FSPs be legal entities in approved jurisdictions, in practice ICE Clear Europe’s legal team analyzes each agreement ICE Clear Europe has with its FSPs and considers the legal risk arising from the governing law of the agreement and the jurisdiction of the FSP. Thus, the new language would better describe ICE Clear Europe’s current practice and codify this practice in the CC Risk Procedures.12 Finally, the proposed rule change would note that all of the credit eligibility criteria, which ICE Clear Europe uses in assessing prospective counterparties, would be reviewed periodically. This change to the CC Risk Procedures would codify a periodic review requirement that is currently set out the CC Risk Parameters. That document sets out the frequency of reviews of the credit eligibility criteria as well as the ICE Clear Europe personnel responsible for conducting and approving such reviews. Specifically, the CC Risk Parameters contain a list of various minimum credit ratings that counterparties should meet, and provide that this criteria will be reviewed annually by ICE Clear Europe’s Executive Risk Committee. iv. Frequency of Reviews The proposed rule change would remove certain duplicative requirements from the CC Risk Procedures. As part of its monitoring of counterparty risk, ICE Clear Europe reviews prospective and current counterparties. These reviews consist of, among other actions, calculating credit scores for each counterparty and reviewing limits on ICE Clear Europe’s financial exposure to a counterparty.13 The current CC Risk Procedures contain duplicative requirements concerning credit scores, continuous monitoring, the watch list, and exposure limits. The current CC Risk Procedures provide, in Section 2.3.1, that ICE Clear Europe uses its Counterparty Rating System to calculate credit scores for each counterparty on each day. The current CC Risk Procedures provide, in Section 2.4, that continuous monitoring is conducted daily and the Watch List and exposure limits are reviewed weekly, monthly and quarterly. With respect to Section 2.3.1, the proposed rule change would delete ‘‘on each day’’ and replace it with ‘‘periodically.’’ As amended, Section 2.3.1 would therefore state that ICE Clear Europe uses its Counterparty Rating System to calculate credit scores for each Counterparty periodically as set out in the Parameters. With respect to Section 2.4, the proposed rule change would delete ‘‘weekly.’’ As amended, Section 2.4 would state that continuous monitoring is conducted daily and the Watch List and exposure limits are reviewed monthly and quarterly. With respect to both changes, ICE Clear Europe maintains that it is not decreasing the frequency of its reviews.14 Rather, ICE Clear Europe is amending Section 2.3.1 to rely instead on the general statement in Section 2.4 that continuous monitoring is conducted daily. Thus, Section 2.4 would control, and ICE Clear Europe would still calculate credit scores on a daily basis, despite replacing ‘‘on each day’’ with ‘‘periodically’’ in Section 2.3.1. Moreover, ICE Clear Europe maintains that under amended Section 2.4, it would still conduct continuous monitoring and risk reviews on a daily basis.15 ICE Clear Europe is deleting ‘‘weekly’’ because it maintains that it would conduct the risk reviews daily, rather than weekly. Finally, the CC Risk Procedures currently state that ICE Clear Europe’s findings and recommendations from its reviews of counterparties are approved based on the CC Risk Parameters. The proposed rule change would amend this statement in the CC Risk Procedures to provide that the review frequency and criteria, in addition to ICE Clear Europe’s findings and recommendations from its reviews of counterparties, are approved based on the CC Risk Parameters. This change would better align the CC Risk Procedures with the CC Risk Parameters. Specifically, the CC Risk Parameters make certain ICE Clear Europe personnel responsible for reviewing and approving findings and recommendations from risk reviews, and sets out the frequency and criteria for the risk reviews. v. Systemically Important Institution As part of mitigating its counterparty credit risk, ICE Clear Europe sets and monitors limits on its financial exposures to its counterparties. These exposure limits effectively cap ICE Clear Europe’s risk of loss arising from a particular counterparty and therefore act as an overall mitigation of counterparty risk.16 As explained in the current CC Risk Procedures, ICE Clear Europe sets an exposure limit for each Clearing 14 Notice, 12 Notice, 88 FR at 8018. 13 See 2021 Approval Order, 87 FR at 514. PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 88 FR at 8019. 88 FR at 8019. 16 See 2021 Approval Order, 87 FR at 514. 15 Notice, E:\FR\FM\24MRN1.SGM 24MRN1 Federal Register / Vol. 88, No. 57 / Friday, March 24, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 Member as a percentage of that Clearing Member’s capital. As further explained in the current CC Risk Procedures, the capital that ICE Clear Europe considers for this purpose can include the balance sheet of a Clearing Member’s parent company. ICE Clear Europe would consider the balance sheet of a Clearing Member’s parent company if: (i) it considers the Clearing Member to be an integral part of a large systemically important institution headquartered in a robust legal jurisdiction; or (ii) it has a formal and enforceable recourse to the Clearing Member’s parent company via a guarantee or equivalent undertaking. The proposed rule change would amend the first consideration, so that ICE Clear Europe would consider the balance sheet of a Clearing Member’s parent company if it considers the Clearing Member to be an integral part of a large group that is a Systemically Important Institution. The proposed rule change would define a Systemically Important Institution as an institution with assets greater than 200 billion Euros that is treated as a Globally Systemically Important Institution by the European Banking Authority. These changes are aimed at objectively defining when ICE Clear Europe should consider the balance sheet of a parent company in eligible capital for the purposes of the exposure limit.17 vi. Cross-Exposures and Off-Boarding As discussed above, ICE Clear Europe monitors counterparties daily. This monitoring includes a number of items, such as daily credit scores and reviews of public news.18 The proposed rule change would expand the CC Risk Procedures to include monitoring for cross-exposures, which are exposures that a counterparty may have to its affiliates that are also ICE Clear Europe counterparties, and the risks that could arise when off-boarding counterparties. Specifically, the proposed rule change would add language to Section 2.4 to note that ICE Clear Europe’s monitoring of counterparty credit risk includes monitoring of cross-exposures among a Clearing Member and its affiliates. The proposed rule change also would add language to Section 3.1.1 of the CC Risk Procedures stating that ICE Clear Europe monitors at least monthly credit CrossExposures among counterparties and their affiliates in all their capacities as counterparties to ICE Clear Europe. The proposed rule change also would expand the CC Risk Procedures to consider the potential risks to ICE Clear Europe that could arise when it vii. Mitigating Actions In addition to assessing and monitoring counterparties, ICE Clear Europe also has the authority to take actions with respect to counterparties to mitigate risks presented by those counterparties.19 For example, ICE Clear Europe may subject a counterparty to additional monitoring or reduce its usage of an FSP. ICE Clear Europe may also add counterparties to the Watch List, which is a list of counterparties that ICE Clear Europe subjects to enhanced monitoring and mitigating action if necessary. The proposed rule change would amend the CC Risk Procedures to note two additional mitigating actions that ICE Clear Europe could take against counterparties in certain circumstances. First, the proposed rule change would add a statement to Section 2.3.2 of the CC Risk Procedures that Clearing Members are added automatically to the Watch List if they reach the Watch List Criteria. Specifically, Clearing Members whose credit scores meet certain thresholds indicating financial weakness are automatically added to the Watch List. This criteria is set out in the CC Risk Parameters. Second, the proposed rule change would add language to Section 2.3.1 to note that submissions of quarterly financial statements by counterparties later than the days mandated by ICE Clear Europe’s Rules will be communicated and escalated as set out in the CC Risk Parameters. The CC Risk Parameters require communication with counterparties and escalation to ICE Clear Europe’s Head of Regulation and Compliance of late quarterly financial submissions. viii. Counterparty Rating System Finally, the proposed rule change would clarify the description of ICE Clear Europe’s Counterparty Rating System found in the CC Risk Procedures. As mentioned above, the Counterparty Rating System is the system that ICE Clear Europe uses to model and determine a counterparty’s credit risk. ICE Clear Europe uses the Counterparty Rating System to calculate 17 Notice, 18 See 88 FR at 8019. 2021 Approval Order, 87 FR at 514. terminates its relationship with a counterparty. These risks could include, for example, open contractual obligations or money owed to ICE Clear Europe. The proposed rule change would add language to Section 2.1 of the CC Risk Procedures stating that ICE Clear Europe ensures all counterparty risks are eliminated prior to off-boarding counterparties. VerDate Sep<11>2014 19:18 Mar 23, 2023 Jkt 259001 19 See PO 00000 2021 Approval Order, 87 FR at 514. Frm 00108 Fmt 4703 Sfmt 4703 17889 a credit score, and this credit score represents a counterparty’s credit risk. The proposed rule change would delete a statement in the CC Risk Procedures that ICE Clear Europe’s Counterparty Rating System may incorporate exposure information reflecting the risk of the Clearing Member’s portfolio held with ICE Clear Europe. The proposed rule change is deleting this statement because ICE Clear Europe is revising its relevant risk model to consider the credit quality of a Clearing Member, rather than the risk associated with a Clearing Member’s portfolio. ICE Clear Europe is making this change to better align the credit scores with the credit quality of Clearing Members.20 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.21 For the reasons discussed below, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act,22 and Rules 17Ad–22(e)(3)(i) and (e)(20) thereunder.23 i. Consistency With Section 17A(b)(3)(F) of the Act Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of ICE Clear Europe be designed to promote the prompt and accurate clearance and settlement of securities transactions and, to the extent applicable, derivative agreements, contracts, and transactions.24 Based on its review of the record, and for the reasons discussed below, the Commission believes the proposed changes to the CC Risk Policy and CC Risk Procedures are consistent with the promotion of the prompt and accurate clearance and settlement of securities transactions. The Commission believes the proposed rule change overall would improve ICE Clear Europe’s ability to manage counterparty risk using the CC Risk Policy and CC Risk Procedures. One way the proposed rule change would do that is by expanding the risks 20 ICE Clear Europe manages the risk associated with a Clearing Member’s portfolio through its margin and guaranty fund requirements. 21 15 U.S.C. 78s(b)(2)(C). 22 15 U.S.C. 78q–1(b)(3)(F). 23 17 CFR 240.17Ad–22(e)(3)(i) and (e)(20). 24 15 U.S.C. 78q–1(b)(3)(F). E:\FR\FM\24MRN1.SGM 24MRN1 lotter on DSK11XQN23PROD with NOTICES1 17890 Federal Register / Vol. 88, No. 57 / Friday, March 24, 2023 / Notices that ICE Clear Europe considers when it is evaluating counterparties. For example, the proposed rule change would require that ICE Clear Europe consider the risks arising from Links and consider the risks associated with KYC and Anti-Money Laundering requirements when evaluating FSPs. Similarly, the proposed rule change would require that ICE Clear Europe consider the risks arising from its agreements with FSPs, specifically legal risk associated with the governing law of the agreement and the jurisdiction of the FSP, rather than only requiring FSPs be legal entities in approved jurisdictions. Finally, the proposed rule change would require ICE Clear Europe to monitor counterparties’ cross exposures and the risks created when off-boarding a counterparty. The Commission believes all of these changes would expand ICE Clear Europe’s counterparty risk monitoring and management to include risks that are not currently considered by ICE Clear Europe. The Commission believes that the proposed rule change would improve ICE Clear Europe’s counterparty risk management by establishing actions ICE Clear Europe would take to monitor and mitigate counterparties that present increased risk, such as requiring that ICE Clear Europe add a counterparty to the Watch List if it meets criteria set out in the CC Risk Parameters. Moreover, the proposed rule change would require ICE Clear Europe to internally escalate a counterparty’s late submission of quarterly financial statements for further review and action. The Commission believes requiring these actions would help ensure that ICE Clear Europe takes immediate steps to monitor counterparties that present additional risk, either by meeting the criteria for inclusion on the Watch List or failing to timely file the required quarterly financial statements. In addition to expanding the risks that ICE Clear Europe considers and establishing actions to take with respect to counterparties that present increased risk, the Commission believes the proposed rule change would improve ICE Clear Europe’s counterparty risk management by clarifying the frequency of the various reviews conducted by ICE Clear Europe. Specifically, the proposed rule change would require that ICE Clear Europe review all credit eligibility criteria periodically and that review frequency and criteria be approved based on the CC Risk Parameters. Similarly, the proposed rule change would clarify that ICE Clear Europe calculates credit scores, looks at public news, conducts continuous monitoring, VerDate Sep<11>2014 19:18 Mar 23, 2023 Jkt 259001 and completes risk reviews daily. The Commission believes these changes would help ensure ICE Clear Europe is using correct and current criteria to evaluate counterparties and reviewing and monitoring counterparties daily. Finally, the Commission believes that two other changes discussed above would clarify important aspects of ICE Clear Europe’s counterparty risk management. First, the Commission believes that adding a definition for Systemically Important Institution and no longer considering whether a Systemically Important Institution is in a robust legal jurisdiction would define objective criteria for considering the balance sheet of a Clearing Member’s parent company in setting the exposure limit for that Clearing Member. Defining objective criteria with regard to the setting of exposure limits, in turn, would improve the consistency with which ICE Clear Europe applies such limits to control the potential loss that could arise out of a Clearing Member default. Second, the proposed rule change would clarify the description of ICE Clear Europe’s Counterparty Rating System because it considers the credit quality of a Clearing Member, rather than the risk associated with a Clearing Member’s portfolio. The proposed change would better align the measurement (credit ratings) with what it seeks to measure (a member’s credit quality). The Commission believes counterparty risk poses a risk to ICE Clear Europe’s financial resources. For example, default by a Clearing Member could leave ICE Clear Europe undercollateralized, and default by an FSP could cause ICE Clear Europe to lose its investments or expected return of cash. Similarly, default by a Link could require ICE Clear Europe to fund material contractual or operational arrangements associated with that Link. The Commission believes that such losses could threaten ICE Clear Europe’s ability to operate and clear and settle transactions. Thus, the Commission believes that effective management of ICE Clear Europe’s counterparty risk could help ICE Clear Europe mitigate risks to the financial resources needed to continue clearing and settling transactions. The Commission therefore believes that, by improving ICE Clear Europe’s ability to manage and mitigate counterparty risk, the proposed rule change would thereby promote the prompt and accurate clearance and settlement of securities transactions. PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 Therefore, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act.25 ii. Consistency With Rule 17Ad– 22(e)(3)(i) Under the Act Rule 17Ad–22(e)(3)(i) requires that ICE Clear Europe establish, implement, maintain, and enforce written policies and procedures reasonably designed to, among other things, 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 ICE Clear Europe, which includes risk management policies, procedures, and systems designed to identify, measure, monitor, and manage the range of risks that arise in or are borne by ICE Clear Europe, that are subject to review on a specified periodic basis and approved by the board of directors annually.26 As discussed above, the proposed rule change would make a number of improvements to the CC Risk Policy and the CC Risk Procedures. The Commission believes these improvements would enhance ICE Clear Europe’s ability to comprehensively measure and manage the risks posed by counterparties. With respect to measuring counterparty risks, the Commission believes that requiring ICE Clear Europe to consider KYC and AML requirements when reviewing prospective and existing FSPs would enable ICE Clear Europe to consider the risks arising from compliance with these requirements. The Commission further believes that requiring ICE Clear Europe to consider legal risk associated with the governing law of the agreement and the jurisdiction of the FSP would help ensure that ICE Clear Europe considers this associated risk. Similarly, the Commission believes that taking into consideration counterparties’ crossexposures, and the risks that arise when terminating a relationship with a counterparty, would enable ICE Clear Europe to identify and manage the risks posed by counterparties’ affiliates and the risks that could arise when ICE Clear Europe terminates a counterparty. With respect to managing counterparty risks, the Commission believes that requiring ICE Clear Europe to add counterparties to the Watch List when meeting certain criteria and to escalate late submission of quarterly financial statements for further review and action would help ICE Clear Europe to identify at-risk counterparties for 25 15 26 17 E:\FR\FM\24MRN1.SGM U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(3)(i). 24MRN1 Federal Register / Vol. 88, No. 57 / Friday, March 24, 2023 / Notices further monitoring and mitigating action. Therefore, the Commission finds that the proposed rule change is consistent with Rule 17Ad–22(e)(3)(i).27 iii. Consistency With Rule 17Ad– 22(e)(20) Under the Act 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 and Rules 17Ad–22(e)(3)(i) and (e)(20) thereunder.31 It is therefore ordered pursuant to Section 19(b)(2) of the Act 32 that the proposed rule change (SR–ICEEU–2023– 004), be, and hereby is, approved.33 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.34 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–06057 Filed 3–23–23; 8:45 am] BILLING CODE 8011–01–P 27 17 CFR 240.17Ad–22(e)(3)(i). CFR 240.17Ad–22(e)(20). 29 17 CFR 240.17Ad–22(e)(20). 30 15 U.S.C. 78q–1(b)(3)(F). 31 17 CFR 240.17Ad–22(e)(3)(i) and (e)(20). 32 15 U.S.C. 78s(b)(2). 33 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). 34 17 CFR 200.30–3(a)(12). lotter on DSK11XQN23PROD with NOTICES1 28 17 19:18 Mar 23, 2023 solicit comments on the proposed rule change from interested persons. Sunshine Act Meetings I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FEDERAL REGISTER CITATION OF PREVIOUS ANNOUNCEMENT: 88 FR 16687, March 20, PREVIOUSLY ANNOUNCED TIME AND DATE OF THE MEETING: Wednesday, March 22, 2023 at 10:00 a.m. The following item will not be considered during the Open Meeting on Wednesday, March 22, 2023: • The Commission will consider whether to adopt amendments to Form PF, the confidential reporting form for certain Commission registered investment advisers to private funds, to require current reporting for certain private fund advisers and revise certain reporting requirements. CONTACT PERSON FOR MORE INFORMATION: For further information, please contact Vanessa A. Countryman from the Office of the Secretary at (202) 551–5400. Authority: 5 U.S.C. 552b. CHANGES IN THE MEETING: Dated: March 21, 2023. J. Matthew DeLesDernier, Deputy Secretary. [FR Doc. 2023–06208 Filed 3–22–23; 11:15 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION IV. Conclusion VerDate Sep<11>2014 SECURITIES AND EXCHANGE COMMISSION 2023. Rule 17Ad–22(e)(20) requires that ICE Clear Europe establish, implement, maintain, and enforce written policies and procedures reasonably designed to identify, monitor, and manage risks related to any link ICE Clear Europe establishes with one or more other clearing agencies, financial market utilities, or trading markets.28 As discussed above, the proposed rule change would amend the CC Risk Policy and the CC Risk Procedures to account for the risks arising from Links. Among other things, ICE Clear Europe would consider as a counterparty credit risk the risk that a Link defaults; take steps to minimize the risk of loss due to a Link defaulting; and identify, monitor, and mange risks arising from Links. The Commission believes these actions are reasonably designed to identify, monitor, and manage risks related to any Link that ICE Clear Europe may establish. Therefore, the Commission finds that the proposed rule change is consistent with Rule 17Ad–22(e)(20).29 Jkt 259001 17891 [Release No. 34–97160; File No. SR–BX– 2023–007] Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify Equity 4, Rule 4120 To Establish Common Criteria and Procedures for Halting and Resuming Trading in Equity Securities in the Event of Regulatory or Operational Issues, Reorganize the Text of the Rule, and Make Conforming Changes to Related Rules March 20, 2023. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 8, 2023, 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 self-regulatory organization. The Commission is publishing this notice to 1 15 2 17 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00110 Fmt 4703 Sfmt 4703 The Exchange proposes to modify Equity 4, Rule 4120 to establish common criteria and procedures for halting and resuming trading in equity securities in the event of regulatory or operational issues, reorganize the text of the rule, and make conforming changes to related rules. 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. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose In conjunction with adoption of an amended Nasdaq UTP Plan proposed by its participants (‘‘Amended Nasdaq UTP Plan’’),3 the Exchange is amending Rule 3 On February 11, 2021, the Nasdaq UTP Plan participants filed Amendment 50 to the Plan, to revise provisions governing regulatory and operational halts. See Letter from Robert Brooks, Chairman, UTP Operating Committee, Nasdaq UTP Plan, to Vanessa Countryman, Secretary, Securities and Exchange Commission, dated February 11, 2021. The Nasdaq UTP Plan subsequently filed two partial amendments to the 50th Amendment, on March 31, 2021 and on April 7, 2021. The SEC approved the amendments on May 28, 2021. See Securities Exchange Act Release No. 34–92071 (May 28, 2021), 86 FR 29846 (June 3, 2021) (S7–24– 89). The Amended Nasdaq UTP Plan includes provisions requiring participant self-regulatory organizations (‘‘SROs’’) to honor a Regulatory Halt declared by the Primary Listing Market. The provisions in the Nasdaq UTP Plan, and the plan for consolidation of data for non-Nasdaq-listed securities, the Consolidated Tape System and Consolidated Quotations System (collectively, the ‘‘CTA/CQS Plan’’), include provisions similar to the changes proposed by the Exchange in this filing. E:\FR\FM\24MRN1.SGM 24MRN1

Agencies

[Federal Register Volume 88, Number 57 (Friday, March 24, 2023)]
[Notices]
[Pages 17886-17891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-06057]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97169; File No. SR-ICEEU-2023-004]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to Amendments to the ICE Clear 
Europe Counterparty Credit Risk Policy and Counterparty Credit Risk 
Procedures

March 20, 2023.

I. Introduction

    On January 20, 2023, ICE Clear Europe Limited (``ICE Clear 
Europe'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4,\2\ a proposed 
rule change to amend its Counterparty Credit Risk Policy (the ``CC Risk 
Policy'') and Counterparty Credit Risk Procedures (the ``CC Risk 
Procedures''). The proposed rule change was published for comment in 
the Federal Register on

[[Page 17887]]

February 7, 2023.\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 Europe Limited; 
Notice of Filing of Proposed Rule Change Relating to Amendments to 
the ICE Clear Europe Counterparty Credit Risk Policy and 
Counterparty Credit Risk Procedures, Exchange Act Release No. 96787 
(Feb. 1, 2023); 88 FR 8018 (Feb. 7, 2023) (SR-ICEEU-2023-004) 
(``Notice'').
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II. Description of the Proposed Rule Change

i. Background

    ICE Clear Europe is registered with the Commission as a clearing 
agency for the purpose of clearing security-based swaps. In its role as 
a clearing agency for clearing security-based swaps, ICE Clear Europe 
provides services to its Clearing Members and receives banking, 
investment, custody, and other financial services from its Financial 
Service Providers (``FSPs'').\4\ In providing services to Clearing 
Members and receiving services from FSPs, ICE Clear Europe is exposed 
to counterparty risk. Counterparty risk is the risk that ICE Clear 
Europe suffers financial losses if a Clearing Member or FSP defaults on 
its obligations to ICE Clear Europe.
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    \4\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in the CC Risk Policy and CC Risk 
Procedures.
---------------------------------------------------------------------------

    In 2021, ICE Clear Europe adopted the CC Risk Policy and CC Risk 
Procedures.\5\ The CC Risk Policy and CC Risk Procedures describe how 
ICE Clear Europe identifies, monitors, and mitigates counterparty risk. 
In addition to the CC Risk Policy and CC Risk Procedures, ICE Clear 
Europe has also established a Counterparty Credit Risk Parameters 
document (the ``CC Risk Parameters'').\6\
---------------------------------------------------------------------------

    \5\ See Self-Regulatory Organizations; ICE Clear Europe Limited; 
Order Approving Proposed Rule Change Relating to Adoption of the 
Counterparty Credit Risk Policy and Counterparty Credit Risk 
Procedures, Exchange Act Release No. 93880 (Dec. 30, 2021), 87 FR 
513 (Jan. 5, 2022) (SR-ICEEU-2021-015) (``2021 Approval Order'').
    \6\ ICE Clear Europe included the CC Risk Parameters as a 
confidential Exhibit 3 to this filing and the 2021 Approval Order. 
The CC Risk Parameters contain details relevant to the processes set 
out in the CC Risk Policy and CC Risk Procedures. For example, the 
CC Risk Parameters contain the credit eligibility criteria that ICE 
Clear Europe uses to assess prospective counterparties.
---------------------------------------------------------------------------

    The proposed rule change would amend the CC Risk Policy and the CC 
Risk Procedures to make a number of improvements to the versions 
adopted in 2021. As described more fully below, the proposed rule 
change would: (i) apply both documents to the risks arising from Links; 
\7\ (ii) revise credit eligibility criteria; (iii) clarify how 
frequently ICE Clear Europe reviews counterparties; (iv) add a new 
defined term for Systemically Important Institution; (v) consider the 
risks arising from cross-exposures and off-boarding; (vi) specify 
additional mitigating actions ICE Clear Europe may take in certain 
circumstances; and (vii) revise description of ICE Clear Europe's 
Counterparty Rating System.\8\
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    \7\ The proposed rule change would adopt the definition of 
``Link'' as found in Rule 17Ad-22(a)(8). Rule 17Ad-22(a)(8) defines 
a ``Link'' as ``a set of contractual and operational arrangements 
between two or more clearing agencies, financial market utilities, 
or trading markets that connect them directly or indirectly for the 
purposes of participating in settlement, cross margining, expanding 
their services to additional instruments or participants, or for any 
other purposes material to their business.'' 17 CFR 240.17Ad-
22(a)(8).
    \8\ The Counterparty Rating System is the system that ICE Clear 
Europe uses to model and determine a counterparty's risk. ICE Clear 
Europe uses the Counterparty Rating System to calculate a credit 
score, and this credit score represents a counterparty's risk, in 
terms of its overall credit quality.
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ii. Links

    Currently, both the CC Risk Policy and the CC Risk Procedures 
define counterparty credit risk in relation to Clearing Members and 
FSPs. Specifically, both documents define counterparty credit risk as 
(i) the risk that a Clearing Member misses its next payment to ICE 
Clear Europe, leaving ICE Clear Europe under-collateralized and 
therefore increasing the risk of using the Guaranty Fund contributions 
of other Clearing Members and ICE Clear Europe to manage a potential 
default of that Clearing Member and (ii) the risk that a FSP defaults 
without returning cash to ICE Clear Europe, leaving ICE Clear Europe 
with a loss on its investments or expected return of cash. The proposed 
rule change would expand the definition of counterparty credit risk, in 
both the CC Risk Policy and the CC Risk Procedures, to include the risk 
that a Link defaults, leaving ICE Clear Europe to fund material 
contractual or operational arrangements associated with that Link.
    In addition to taking into account the risks arising from Links, 
the proposed rule change would revise the overall objective of ICE 
Clear Europe's counterparty credit risk management to include 
minimizing the risk arising from a Link defaulting. The current CC Risk 
Policy provides that the objective of ICE Clear Europe's counterparty 
credit risk management is minimizing the risk of ICE Clear Europe being 
materially under-collateralized as a result of a CM defaulting, or 
realizing a material loss due to an FSP defaulting. The proposed change 
would add Links to this objective, such that ICE Clear Europe's 
objective would include minimizing the risk of loss due to a Link 
defaulting.
    While revising the objective of ICE Clear Europe's counterparty 
credit risk management to include Links, the proposed rule change also 
would revise how ICE Clear Europe achieves this objective to include 
Links. Currently, ICE Clear Europe minimizes counterparty credit risk 
through the following actions: (i) setting and monitoring credit 
criteria for counterparties; (ii) establishing a credit score for each 
counterparty that represents each counterparty's credit risk and 
classifying each counterparty in relation to the risk it poses; (iii) 
taking mitigating actions to reduce ICE Clear Europe's exposure; (iv) 
performing reviews of counterparties; and (v) setting and monitoring 
exposure limits for counterparties. The proposed rule change would add 
to this list identifying, monitoring, and managing risks from Links. 
Thus, in addition to taking the actions set forth above to minimize 
counterparty risk, under the proposed rule change, ICE Clear Europe 
also would identify, monitor, and mange risks from Links.
    Similarly, the proposed rule change would add to ICE Clear Europe's 
mitigating actions certain actions specific to Links. The CC Risk 
Policy lists certain mitigating actions that ICE Clear Europe may take 
to reduce its exposure to a counterparty. These actions include, among 
other things, requiring a Clearing Member to reduce its positions and 
changing ICE Clear Europe's usage of a FSP. The proposed rule change 
would add to this list of mitigating actions changing ICE Clear 
Europe's usage of a Link, which ICE Clear Europe could undertake to 
reduce its exposure to a Link.
    In addition to revising the definition of counterparty risk, the 
counterparty risk management objective, and the list of mitigating 
actions, the proposed rule change also would revise how ICE Clear 
Europe monitors counterparties to account for Links. As mentioned 
above, currently ICE Clear Europe uses its Counterparty Rating System 
to calculate a credit score that represents a counterparty's risk, in 
terms of the overall credit quality of the counterparty. Under the 
proposed rule change, ICE Clear Europe would continue to use its 
Counterparty Rating System to calculate credit scores. The proposed 
rule change would add language to the CC Risk Policy and CC Risk 
Parameters, however, to note that ICE Clear Europe may use its 
Counterparty Rating System or related credit criteria to represent the 
credit quality of counterparties. The new

[[Page 17888]]

reference to related credit criteria captures the fact that ICE Clear 
Europe may need to consider additional credit criteria to fully 
consider the risks of Links. This additional credit criteria could 
include, for example, the nature of a Link's operational arrangement 
with ICE Clear Europe. Similarly, the proposed rule change would add 
language to the Counterparty Credit Risk Procedures to note that, in 
addition to monitoring counterparties through credit scores, ICE Clear 
Europe may monitor counterparties through public news sources. Public 
news sources could provide insight into events affecting the financial 
standing of Links.

iii. Credit Eligibility Criteria

    ICE Clear Europe assesses prospective counterparties against 
certain credit eligibility criteria. The criteria that ICE Clear Europe 
uses for this assessment are set out in the CC Risk Parameters. 
Overall, ICE Clear Europe uses this assessment against the credit 
eligibility criteria to assess the financial stability of Clearing 
Members and FSPs.\9\
---------------------------------------------------------------------------

    \9\ See 2021 Approval Order, 87 FR at 514.
---------------------------------------------------------------------------

    The current CC Risk Procedures note that, as part of this 
assessment, FSPs must be legal entities in approved jurisdictions and 
comply with the credit eligibility criteria and Unsecured Credit Limits 
found in the CC Risk Parameters. The proposed rule change would revise 
this language to state that in addition to complying with the credit 
eligibility criteria and Unsecured Credit Limits found in CC Risk 
Parameters, ICE Clear Europe screens FSPs for Know-Your-Customer 
(``KYC'') and Anti-Money Laundering (``AML'') purposes to confirm they 
are not registered in countries subject to monitoring by the Financial 
Action Task Force \10\ and to confirm that they have appropriate KYC 
processes. ICE Clear Europe is making this change to codify in the CC 
Risk Procedures its current practice of screening FSPs with respect to 
KYC and AML requirements.\11\
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    \10\ The Financial Action Task Force is an intergovernmental 
organization founded in 1989 on the initiative of the G7. It 
develops policies and international standards to prevent money 
laundering and terrorist financing. See https://www.fatf-gafi.org/en/home.html.
    \11\ Notice, 88 FR at 8018.
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    Moreover, the proposed rule change would add language to note that 
agreements with FSPs are subject to review by ICE Clear Europe's legal 
team, and this review includes consideration of legal risk associated 
with the governing law of the relevant agreement and the jurisdiction 
of the FSP. This new language would replace the statement, found in the 
current CC Risk Procedures, that FSPs must be legal entities in 
approved jurisdictions. Rather than only requiring FSPs be legal 
entities in approved jurisdictions, in practice ICE Clear Europe's 
legal team analyzes each agreement ICE Clear Europe has with its FSPs 
and considers the legal risk arising from the governing law of the 
agreement and the jurisdiction of the FSP. Thus, the new language would 
better describe ICE Clear Europe's current practice and codify this 
practice in the CC Risk Procedures.\12\
---------------------------------------------------------------------------

    \12\ Notice, 88 FR at 8018.
---------------------------------------------------------------------------

    Finally, the proposed rule change would note that all of the credit 
eligibility criteria, which ICE Clear Europe uses in assessing 
prospective counterparties, would be reviewed periodically. This change 
to the CC Risk Procedures would codify a periodic review requirement 
that is currently set out the CC Risk Parameters. That document sets 
out the frequency of reviews of the credit eligibility criteria as well 
as the ICE Clear Europe personnel responsible for conducting and 
approving such reviews. Specifically, the CC Risk Parameters contain a 
list of various minimum credit ratings that counterparties should meet, 
and provide that this criteria will be reviewed annually by ICE Clear 
Europe's Executive Risk Committee.

iv. Frequency of Reviews

    The proposed rule change would remove certain duplicative 
requirements from the CC Risk Procedures. As part of its monitoring of 
counterparty risk, ICE Clear Europe reviews prospective and current 
counterparties. These reviews consist of, among other actions, 
calculating credit scores for each counterparty and reviewing limits on 
ICE Clear Europe's financial exposure to a counterparty.\13\
---------------------------------------------------------------------------

    \13\ See 2021 Approval Order, 87 FR at 514.
---------------------------------------------------------------------------

    The current CC Risk Procedures contain duplicative requirements 
concerning credit scores, continuous monitoring, the watch list, and 
exposure limits. The current CC Risk Procedures provide, in Section 
2.3.1, that ICE Clear Europe uses its Counterparty Rating System to 
calculate credit scores for each counterparty on each day. The current 
CC Risk Procedures provide, in Section 2.4, that continuous monitoring 
is conducted daily and the Watch List and exposure limits are reviewed 
weekly, monthly and quarterly.
    With respect to Section 2.3.1, the proposed rule change would 
delete ``on each day'' and replace it with ``periodically.'' As 
amended, Section 2.3.1 would therefore state that ICE Clear Europe uses 
its Counterparty Rating System to calculate credit scores for each 
Counterparty periodically as set out in the Parameters. With respect to 
Section 2.4, the proposed rule change would delete ``weekly.'' As 
amended, Section 2.4 would state that continuous monitoring is 
conducted daily and the Watch List and exposure limits are reviewed 
monthly and quarterly.
    With respect to both changes, ICE Clear Europe maintains that it is 
not decreasing the frequency of its reviews.\14\ Rather, ICE Clear 
Europe is amending Section 2.3.1 to rely instead on the general 
statement in Section 2.4 that continuous monitoring is conducted daily. 
Thus, Section 2.4 would control, and ICE Clear Europe would still 
calculate credit scores on a daily basis, despite replacing ``on each 
day'' with ``periodically'' in Section 2.3.1. Moreover, ICE Clear 
Europe maintains that under amended Section 2.4, it would still conduct 
continuous monitoring and risk reviews on a daily basis.\15\ ICE Clear 
Europe is deleting ``weekly'' because it maintains that it would 
conduct the risk reviews daily, rather than weekly.
---------------------------------------------------------------------------

    \14\ Notice, 88 FR at 8019.
    \15\ Notice, 88 FR at 8019.
---------------------------------------------------------------------------

    Finally, the CC Risk Procedures currently state that ICE Clear 
Europe's findings and recommendations from its reviews of 
counterparties are approved based on the CC Risk Parameters. The 
proposed rule change would amend this statement in the CC Risk 
Procedures to provide that the review frequency and criteria, in 
addition to ICE Clear Europe's findings and recommendations from its 
reviews of counterparties, are approved based on the CC Risk 
Parameters. This change would better align the CC Risk Procedures with 
the CC Risk Parameters. Specifically, the CC Risk Parameters make 
certain ICE Clear Europe personnel responsible for reviewing and 
approving findings and recommendations from risk reviews, and sets out 
the frequency and criteria for the risk reviews.

v. Systemically Important Institution

    As part of mitigating its counterparty credit risk, ICE Clear 
Europe sets and monitors limits on its financial exposures to its 
counterparties. These exposure limits effectively cap ICE Clear 
Europe's risk of loss arising from a particular counterparty and 
therefore act as an overall mitigation of counterparty risk.\16\
---------------------------------------------------------------------------

    \16\ See 2021 Approval Order, 87 FR at 514.
---------------------------------------------------------------------------

    As explained in the current CC Risk Procedures, ICE Clear Europe 
sets an exposure limit for each Clearing

[[Page 17889]]

Member as a percentage of that Clearing Member's capital. As further 
explained in the current CC Risk Procedures, the capital that ICE Clear 
Europe considers for this purpose can include the balance sheet of a 
Clearing Member's parent company. ICE Clear Europe would consider the 
balance sheet of a Clearing Member's parent company if: (i) it 
considers the Clearing Member to be an integral part of a large 
systemically important institution headquartered in a robust legal 
jurisdiction; or (ii) it has a formal and enforceable recourse to the 
Clearing Member's parent company via a guarantee or equivalent 
undertaking. The proposed rule change would amend the first 
consideration, so that ICE Clear Europe would consider the balance 
sheet of a Clearing Member's parent company if it considers the 
Clearing Member to be an integral part of a large group that is a 
Systemically Important Institution. The proposed rule change would 
define a Systemically Important Institution as an institution with 
assets greater than 200 billion Euros that is treated as a Globally 
Systemically Important Institution by the European Banking Authority. 
These changes are aimed at objectively defining when ICE Clear Europe 
should consider the balance sheet of a parent company in eligible 
capital for the purposes of the exposure limit.\17\
---------------------------------------------------------------------------

    \17\ Notice, 88 FR at 8019.
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vi. Cross-Exposures and Off-Boarding

    As discussed above, ICE Clear Europe monitors counterparties daily. 
This monitoring includes a number of items, such as daily credit scores 
and reviews of public news.\18\ The proposed rule change would expand 
the CC Risk Procedures to include monitoring for cross-exposures, which 
are exposures that a counterparty may have to its affiliates that are 
also ICE Clear Europe counterparties, and the risks that could arise 
when off-boarding counterparties.
---------------------------------------------------------------------------

    \18\ See 2021 Approval Order, 87 FR at 514.
---------------------------------------------------------------------------

    Specifically, the proposed rule change would add language to 
Section 2.4 to note that ICE Clear Europe's monitoring of counterparty 
credit risk includes monitoring of cross-exposures among a Clearing 
Member and its affiliates. The proposed rule change also would add 
language to Section 3.1.1 of the CC Risk Procedures stating that ICE 
Clear Europe monitors at least monthly credit Cross-Exposures among 
counterparties and their affiliates in all their capacities as 
counterparties to ICE Clear Europe.
    The proposed rule change also would expand the CC Risk Procedures 
to consider the potential risks to ICE Clear Europe that could arise 
when it terminates its relationship with a counterparty. These risks 
could include, for example, open contractual obligations or money owed 
to ICE Clear Europe. The proposed rule change would add language to 
Section 2.1 of the CC Risk Procedures stating that ICE Clear Europe 
ensures all counterparty risks are eliminated prior to off-boarding 
counterparties.

vii. Mitigating Actions

    In addition to assessing and monitoring counterparties, ICE Clear 
Europe also has the authority to take actions with respect to 
counterparties to mitigate risks presented by those counterparties.\19\ 
For example, ICE Clear Europe may subject a counterparty to additional 
monitoring or reduce its usage of an FSP. ICE Clear Europe may also add 
counterparties to the Watch List, which is a list of counterparties 
that ICE Clear Europe subjects to enhanced monitoring and mitigating 
action if necessary. The proposed rule change would amend the CC Risk 
Procedures to note two additional mitigating actions that ICE Clear 
Europe could take against counterparties in certain circumstances.
---------------------------------------------------------------------------

    \19\ See 2021 Approval Order, 87 FR at 514.
---------------------------------------------------------------------------

    First, the proposed rule change would add a statement to Section 
2.3.2 of the CC Risk Procedures that Clearing Members are added 
automatically to the Watch List if they reach the Watch List Criteria. 
Specifically, Clearing Members whose credit scores meet certain 
thresholds indicating financial weakness are automatically added to the 
Watch List. This criteria is set out in the CC Risk Parameters.
    Second, the proposed rule change would add language to Section 
2.3.1 to note that submissions of quarterly financial statements by 
counterparties later than the days mandated by ICE Clear Europe's Rules 
will be communicated and escalated as set out in the CC Risk 
Parameters. The CC Risk Parameters require communication with 
counterparties and escalation to ICE Clear Europe's Head of Regulation 
and Compliance of late quarterly financial submissions.

viii. Counterparty Rating System

    Finally, the proposed rule change would clarify the description of 
ICE Clear Europe's Counterparty Rating System found in the CC Risk 
Procedures. As mentioned above, the Counterparty Rating System is the 
system that ICE Clear Europe uses to model and determine a 
counterparty's credit risk. ICE Clear Europe uses the Counterparty 
Rating System to calculate a credit score, and this credit score 
represents a counterparty's credit risk.
    The proposed rule change would delete a statement in the CC Risk 
Procedures that ICE Clear Europe's Counterparty Rating System may 
incorporate exposure information reflecting the risk of the Clearing 
Member's portfolio held with ICE Clear Europe. The proposed rule change 
is deleting this statement because ICE Clear Europe is revising its 
relevant risk model to consider the credit quality of a Clearing 
Member, rather than the risk associated with a Clearing Member's 
portfolio. ICE Clear Europe is making this change to better align the 
credit scores with the credit quality of Clearing Members.\20\
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    \20\ ICE Clear Europe manages the risk associated with a 
Clearing Member's portfolio through its margin and guaranty fund 
requirements.
---------------------------------------------------------------------------

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.\21\ For the reasons discussed below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act,\22\ and Rules 17Ad-22(e)(3)(i) and (e)(20) thereunder.\23\
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    \21\ 15 U.S.C. 78s(b)(2)(C).
    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ 17 CFR 240.17Ad-22(e)(3)(i) and (e)(20).
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i. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of ICE Clear Europe be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and, to 
the extent applicable, derivative agreements, contracts, and 
transactions.\24\ Based on its review of the record, and for the 
reasons discussed below, the Commission believes the proposed changes 
to the CC Risk Policy and CC Risk Procedures are consistent with the 
promotion of the prompt and accurate clearance and settlement of 
securities transactions.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes the proposed rule change overall would 
improve ICE Clear Europe's ability to manage counterparty risk using 
the CC Risk Policy and CC Risk Procedures. One way the proposed rule 
change would do that is by expanding the risks

[[Page 17890]]

that ICE Clear Europe considers when it is evaluating counterparties. 
For example, the proposed rule change would require that ICE Clear 
Europe consider the risks arising from Links and consider the risks 
associated with KYC and Anti-Money Laundering requirements when 
evaluating FSPs. Similarly, the proposed rule change would require that 
ICE Clear Europe consider the risks arising from its agreements with 
FSPs, specifically legal risk associated with the governing law of the 
agreement and the jurisdiction of the FSP, rather than only requiring 
FSPs be legal entities in approved jurisdictions. Finally, the proposed 
rule change would require ICE Clear Europe to monitor counterparties' 
cross exposures and the risks created when off-boarding a counterparty. 
The Commission believes all of these changes would expand ICE Clear 
Europe's counterparty risk monitoring and management to include risks 
that are not currently considered by ICE Clear Europe.
    The Commission believes that the proposed rule change would improve 
ICE Clear Europe's counterparty risk management by establishing actions 
ICE Clear Europe would take to monitor and mitigate counterparties that 
present increased risk, such as requiring that ICE Clear Europe add a 
counterparty to the Watch List if it meets criteria set out in the CC 
Risk Parameters. Moreover, the proposed rule change would require ICE 
Clear Europe to internally escalate a counterparty's late submission of 
quarterly financial statements for further review and action. The 
Commission believes requiring these actions would help ensure that ICE 
Clear Europe takes immediate steps to monitor counterparties that 
present additional risk, either by meeting the criteria for inclusion 
on the Watch List or failing to timely file the required quarterly 
financial statements.
    In addition to expanding the risks that ICE Clear Europe considers 
and establishing actions to take with respect to counterparties that 
present increased risk, the Commission believes the proposed rule 
change would improve ICE Clear Europe's counterparty risk management by 
clarifying the frequency of the various reviews conducted by ICE Clear 
Europe. Specifically, the proposed rule change would require that ICE 
Clear Europe review all credit eligibility criteria periodically and 
that review frequency and criteria be approved based on the CC Risk 
Parameters. Similarly, the proposed rule change would clarify that ICE 
Clear Europe calculates credit scores, looks at public news, conducts 
continuous monitoring, and completes risk reviews daily. The Commission 
believes these changes would help ensure ICE Clear Europe is using 
correct and current criteria to evaluate counterparties and reviewing 
and monitoring counterparties daily.
    Finally, the Commission believes that two other changes discussed 
above would clarify important aspects of ICE Clear Europe's 
counterparty risk management. First, the Commission believes that 
adding a definition for Systemically Important Institution and no 
longer considering whether a Systemically Important Institution is in a 
robust legal jurisdiction would define objective criteria for 
considering the balance sheet of a Clearing Member's parent company in 
setting the exposure limit for that Clearing Member. Defining objective 
criteria with regard to the setting of exposure limits, in turn, would 
improve the consistency with which ICE Clear Europe applies such limits 
to control the potential loss that could arise out of a Clearing Member 
default. Second, the proposed rule change would clarify the description 
of ICE Clear Europe's Counterparty Rating System because it considers 
the credit quality of a Clearing Member, rather than the risk 
associated with a Clearing Member's portfolio. The proposed change 
would better align the measurement (credit ratings) with what it seeks 
to measure (a member's credit quality).
    The Commission believes counterparty risk poses a risk to ICE Clear 
Europe's financial resources. For example, default by a Clearing Member 
could leave ICE Clear Europe under-collateralized, and default by an 
FSP could cause ICE Clear Europe to lose its investments or expected 
return of cash. Similarly, default by a Link could require ICE Clear 
Europe to fund material contractual or operational arrangements 
associated with that Link. The Commission believes that such losses 
could threaten ICE Clear Europe's ability to operate and clear and 
settle transactions. Thus, the Commission believes that effective 
management of ICE Clear Europe's counterparty risk could help ICE Clear 
Europe mitigate risks to the financial resources needed to continue 
clearing and settling transactions. The Commission therefore believes 
that, by improving ICE Clear Europe's ability to manage and mitigate 
counterparty risk, the proposed rule change would thereby promote the 
prompt and accurate clearance and settlement of securities 
transactions.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act.\25\
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
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ii. Consistency With Rule 17Ad-22(e)(3)(i) Under the Act

    Rule 17Ad-22(e)(3)(i) requires that ICE Clear Europe establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to, among other things, 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 ICE Clear Europe, which 
includes risk management policies, procedures, and systems designed to 
identify, measure, monitor, and manage the range of risks that arise in 
or are borne by ICE Clear Europe, that are subject to review on a 
specified periodic basis and approved by the board of directors 
annually.\26\ As discussed above, the proposed rule change would make a 
number of improvements to the CC Risk Policy and the CC Risk 
Procedures. The Commission believes these improvements would enhance 
ICE Clear Europe's ability to comprehensively measure and manage the 
risks posed by counterparties.
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    \26\ 17 CFR 240.17Ad-22(e)(3)(i).
---------------------------------------------------------------------------

    With respect to measuring counterparty risks, the Commission 
believes that requiring ICE Clear Europe to consider KYC and AML 
requirements when reviewing prospective and existing FSPs would enable 
ICE Clear Europe to consider the risks arising from compliance with 
these requirements. The Commission further believes that requiring ICE 
Clear Europe to consider legal risk associated with the governing law 
of the agreement and the jurisdiction of the FSP would help ensure that 
ICE Clear Europe considers this associated risk. Similarly, the 
Commission believes that taking into consideration counterparties' 
cross-exposures, and the risks that arise when terminating a 
relationship with a counterparty, would enable ICE Clear Europe to 
identify and manage the risks posed by counterparties' affiliates and 
the risks that could arise when ICE Clear Europe terminates a 
counterparty.
    With respect to managing counterparty risks, the Commission 
believes that requiring ICE Clear Europe to add counterparties to the 
Watch List when meeting certain criteria and to escalate late 
submission of quarterly financial statements for further review and 
action would help ICE Clear Europe to identify at-risk counterparties 
for

[[Page 17891]]

further monitoring and mitigating action.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Rule 17Ad-22(e)(3)(i).\27\
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    \27\ 17 CFR 240.17Ad-22(e)(3)(i).
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iii. Consistency With Rule 17Ad-22(e)(20) Under the Act

    Rule 17Ad-22(e)(20) requires that ICE Clear Europe establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to identify, monitor, and manage risks related to 
any link ICE Clear Europe establishes with one or more other clearing 
agencies, financial market utilities, or trading markets.\28\ As 
discussed above, the proposed rule change would amend the CC Risk 
Policy and the CC Risk Procedures to account for the risks arising from 
Links. Among other things, ICE Clear Europe would consider as a 
counterparty credit risk the risk that a Link defaults; take steps to 
minimize the risk of loss due to a Link defaulting; and identify, 
monitor, and mange risks arising from Links. The Commission believes 
these actions are reasonably designed to identify, monitor, and manage 
risks related to any Link that ICE Clear Europe may establish.
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    \28\ 17 CFR 240.17Ad-22(e)(20).
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    Therefore, the Commission finds that the proposed rule change is 
consistent with Rule 17Ad-22(e)(20).\29\
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    \29\ 17 CFR 240.17Ad-22(e)(20).
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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\ and Rules 17Ad-22(e)(3)(i) and (e)(20) thereunder.\31\
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    \30\ 15 U.S.C. 78q-1(b)(3)(F).
    \31\ 17 CFR 240.17Ad-22(e)(3)(i) and (e)(20).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\32\ that the proposed rule change (SR-ICEEU-2023-004), be, and hereby 
is, approved.\33\
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    \32\ 15 U.S.C. 78s(b)(2).
    \33\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-06057 Filed 3-23-23; 8:45 am]
BILLING CODE 8011-01-P
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