Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, Relating to Amendments to the Clearing Rules, 30187-30194 [2023-09903]
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Federal Register / Vol. 88, No. 90 / Wednesday, May 10, 2023 / Notices
Based on publicly available information,
no single equities exchange has more
than 16% of the market share.16
Therefore, no exchange possesses
significant pricing power in the
execution of order flow. Indeed,
participants can readily choose to send
their orders to other exchange and offexchange venues if they deem fee levels
at those other venues to be more
favorable. Moreover, the Commission
has repeatedly expressed its preference
for competition over regulatory
intervention in determining prices,
products, and services in the securities
markets. Specifically, in Regulation
NMS, the Commission highlighted the
importance of market forces in
determining prices and SRO revenues
and, also, recognized that current
regulation of the market system ‘‘has
been remarkably successful in
promoting market competition in its
broader forms that are most important to
investors and listed companies.’’ 17 The
fact that this market is competitive has
also long been recognized by the courts.
In NetCoalition v. Securities and
Exchange Commission, the D.C. Circuit
stated as follows: ‘‘[n]o one disputes
that competition for order flow is
‘fierce.’ . . . As the SEC explained, ‘[i]n
the U.S. national market system, buyers
and sellers of securities, and the brokerdealers that act as their order-routing
agents, have a wide range of choices of
where to route orders for execution’;
[and] ‘no exchange can afford to take its
market share percentages for granted’
because ‘no exchange possesses a
monopoly, regulatory or otherwise, in
the execution of order flow from broker
dealers’. . . .’’.18 Accordingly, the
Exchange does not believe its proposed
fee change imposes any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
16 Supra
note 3.
Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005).
18 NetCoalition v. SEC, 615 F.3d 525, 539 (D.C.
Cir. 2010) (quoting Securities Exchange Act Release
No. 59039 (December 2, 2008), 73 FR 74770, 74782–
83 (December 9, 2008) (SR–NYSEArca–2006–21)).
17 See
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of the Act 19 and paragraph (f) of Rule
19b–4 20 thereunder. At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CboeEDGA–2023–007 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CboeEDGA–2023–007. 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 the
19 15
20 17
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U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
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30187
filing also will be available for
inspection and copying at the principal
office of the Exchange. Do not include
personal identifiable information in
submissions; you should submit only
information that you wish to make
available publicly. We may redact in
part or withhold entirely from
publication submitted material that is
obscene or subject to copyright
protection. All submissions should refer
to File Number SR–CboeEDGA–2023–
007, and should be submitted on or
before May 31, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–09905 Filed 5–9–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97429; File No. SR–ICEEU–
2023–010]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Notice of Filing
of Proposed Rule Change, as Modified
by Amendment No. 1, Relating to
Amendments to the Clearing Rules
May 4, 2023.
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 21,
2023, ICE Clear Europe Limited (‘‘ICE
Clear Europe’’ or the ‘‘Clearing House’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule changes described in
Items I, II and III below, which Items
have been primarily prepared by ICE
Clear Europe. On May 2, 2023, ICE Clear
Europe filed Amendment No. 1 to the
proposed rule change to make certain
changes to the Form 19b–4 and Exhibit
1A.3 The Commission is publishing this
notice to solicit comments on the
proposed rule change, as modified by
Amendment No. 1 (hereafter, ‘‘the
proposed rule change’’) from interested
persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
ICE Clear Europe Limited (‘‘ICE Clear
Europe’’ or the ‘‘Clearing House’’)
21 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Amendment No. 1, amends and restates in its
entirety the Form 19b–4 and Exhibit 1A in order to
correct the narrative description of the proposed
rule change.
1 15
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Federal Register / Vol. 88, No. 90 / Wednesday, May 10, 2023 / Notices
proposes to amend its Clearing Rules
(the ‘‘Rules’’) 4 to address more
consistently the treatment of certain
losses that do not result from Clearing
Member default, including certain
investment losses and custodial losses.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, ICE
Clear Europe 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. ICE
Clear Europe has prepared summaries,
set forth in sections (A), (B), and (C)
below, of the most significant aspects of
such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
(a) Purpose
ICE Clear Europe is proposing to
amend its Rules to address more
consistently the treatment of certain
losses that do not arise from the default
of a Clearing Member, generally referred
to as non-default losses, including
certain investment losses and custodial
losses, as discussed in more detail
herein.
I. Summary of Proposed Amendments 5
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As amended, the Rules would, among
other matters:
• Define several exclusive categories
of relevant losses: (1) Investment Losses,
(2) Custodial Losses, (3) Pledged
Collateral Losses, (4) Title Transfer
Collateral Losses and (5) Non-Default
Losses.
• Specify the resources of the
Clearing House, if applicable, that will
4 Capitalized terms used but not defined herein
have the meanings specified in the Rules.
5 The amendments are intended to
comprehensively and consistently address nondefault losses in a manner consistent with relevant
UK law applicable to the Clearing House and
relevant internationally accepted principles for
clearing organizations. See Financial Services and
Markets Act 2000 (Recognition Requirements for
Investment Exchanges, Clearing Houses and Central
Securities Depositories) Regulations 2001/995,
Schedule, Pt. 5, para. 29A, which requires the
central counterparty to maintain effective
arrangements for ensuring that losses that arise
otherwise than as a result of clearing member
default and threaten the solvency of the central
counterparty are allocated with a view to ensuring
that the central counterparty can continue to
operate. See also CPMI–IOSCO, Principles for
Financial Market Infrastructures (Principles 15 and
16); CPMI–IOSCO, Discussion Paper on Central
Counterparty Practices to Address Non-Default Loss
(Aug. 2022).
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be applied to cover such categories of
losses.
• Specify the responsibility of
Clearing Members, in defined
circumstances, to make contributions
with respect to Investment Losses and
Custodial Losses.
• Specify the responsibility of
Clearing Members for Pledged Collateral
Losses and Title Transfer Collateral
Losses.
• Address the treatment of recoveries
by the Clearing House with respect to
such categories of losses.
discussed herein. Custodial Assets
would be defined as any asset or
property of the Clearing House (or any
person acting on its behalf or holding
assets for it) representing original or
initial margin, variation margin,
guaranty fund contributions or
permitted cover, deliverables or
settlement amounts. As discussed
below, Custodial Losses would be
allocated through the use of Custodial
Loss Assets of the Clearing House and
thereafter contributions of Clearing
Members under Rule 919.
II. Definitions of Relevant Loss
Categories
In Rule 101, new definitions would be
added for ‘‘Custodial Losses,’’ ‘‘Pledged
Collateral Losses,’’ ‘‘Title Transfer
Collateral Loss’’ (and related terms) and
the definitions of ‘‘Investment Losses’’
and ‘‘Non-Default Losses’’ (and related
terms) would be revised, as follows.
Pledged Collateral Losses
The amendments would define
Pledged Collateral Losses as those losses
arising out of or relating to the holding
of Pledged Collateral 6 or the assets in
any Pledged Collateral Account. Such
losses with respect to Pledged Collateral
are addressed in the existing Rules, and
the amendments would not change the
treatments of such losses. (Under the
existing Rules, and as discussed below
for the Rules as proposed to be
amended, such losses would be solely
the responsibility of the relevant
Clearing Member under the Rules.) For
clarity and consistency, a defined term
for Pledged Collateral Losses would be
added in Rule 101 (based on the existing
defined term for ‘‘Custodial Losses’’ in
Rule 502(j), which would be deleted).
Relevant existing provisions addressing
such losses would be moved to Rule
919, as discussed below, so that all nondefault losses are addressed in the same
section of the Rules.
Custodial Losses
Custodial Losses would be defined as
losses suffered by the Clearing House
with respect to Custodial Assets,
including from declines in the value
thereof, arising as a result of or in
connection with (1) a default,
insolvency, system failure, force
majeure event or similar event with
respect to a Custodian or Delivery
Facility, a breach of agreement by the
Custodian or Delivery Facility or
pursuant to any loss allocation or
contribution provisions of the Custodian
or Delivery Facility, or (2) any theft,
cyber attack or similar event with
respect to Custodial Assets by any
person (other than the Clearing House
and its directors, officers or employees).
Custodial Losses are defined to exclude
both Pledged Collateral Losses or Title
Transfer Collateral Losses. Custodial
Losses would also exclude any losses
subject to a power of assessment for
default losses under Rule 909 or any
mechanism that has the effective of
reducing such losses pursuant to
reduced gains distributions under Rule
914, partial tear-up under Rule 915 or
contract termination under Rule 916.
The existing definition of Custodian
would be revised to specifically
reference approved financial
institutions, concentration banks,
intermediary financial institutions,
investment agent banks, system banks
and TARGET2 Concentration Banks, as
defined in the Rules (in additional to
the more general categories of financial
institution currently included). The
changes reflect the currently understood
scope of the Custodian definition in its
existing form but would provide greater
clarity in light of the amendments
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Title Transfer Collateral Losses
Title Transfer Collateral Losses would
be defined as losses resulting from a
reduction in value or change of
exchange rates of initial or original
margin, guaranty fund contributions or
permitted cover, which have been
transferred to the Clearing House (other
than as Pledged Collateral) 7 and which
are not invested or reinvested by the
Clearing House but are held with a
Custodian. Such losses are not currently
subject to an express loss-sharing
mechanism under the Rules.
Accordingly, ICE Clear Europe is
proposing to formally define this
category of loss, and as discussed below,
such losses would be solely the
responsibility of the relevant Clearing
Member under the Rules. In this respect,
the resulting treatment would be
6 Pledged Collateral and Pledged Collateral
Accounts are currently only used in connection
with the Customer Accounts of FCM/BD Clearing
Members.
7 Currently, most collateral received by the
Clearing House is pursuant to a title transfer
collateral arrangement.
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Federal Register / Vol. 88, No. 90 / Wednesday, May 10, 2023 / Notices
generally consistent with that applicable
to Pledged Collateral Losses under the
current and revised Rules.
Investment Losses
Conforming changes would be made
to the definition of Investment Losses,
an existing category of loss identified in
the Rules, to expressly exclude
Custodial Losses, Pledged Collateral
Losses and Title Transfer Collateral
Losses. A sentence excluding losses
from the default of a Custodian would
be deleted as such losses would be
expressly covered by the Custodial Loss
definition (which in turn would be
excluded from the Investment Loss
definition as noted above). For
consistency with the other new
definitions, the definition would also
explicitly reference losses from assets
representing variation margin and
settlement amounts in addition to the
other listed categories.
Non-Default Losses
Conforming changes to the definition
of Non-Default Losses would be made to
exclude Custodial Losses, Pledged
Collateral Losses and Title Transfer
Collateral Losses. The definition would
also expressly exclude losses
incorporated in the calculation of the
ICE Deposit Rate under the Finance
Procedures (such as arising from
negative interest rates). The
amendments would eliminate a
requirement that the Non-Default Losses
threaten the Clearing House’s solvency
in order to qualify as such. ICE Clear
Europe does not believe the limitation
to losses that threaten solvency is
needed (as all such Non-Default Losses
should be addressed by the Rules).
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Loss Assets and Other Definitions
The amendments would add new
defined terms for Investment Loss
Assets and Custodial Loss Assets, which
are assets of the Clearing House
available to be applied to Investment
Losses or Custodial Losses, respectively,
and Non-Default Losses. The existing
term Loss Assets would be revised
accordingly to refer to Investment Loss
Assets and Custodial Loss Assets. New
defined terms for Investment Loss
Amount and Custodial Loss Amount
would also be added, reflecting the
amount of Investment Losses or
Custodial Losses, as applicable, as
determined under Rule 919 after
application of applicable Loss Assets.
III. Treatment of Losses in Various
Categories
The proposed amendments to Rule
919 would incorporate the concepts of
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Custodial Loss, Pledged Collateral Loss
and Title Transfer Collateral Loss.
Rule 919(b) would be amended to
provide that Non-Default Losses will be
met first by Investment Loss Assets and
Custodial Loss Assets available to the
Clearing House. The amendments
would clarify that the first portion of
any Investment Loss will be met by the
Clearing House applying Investment
Loss Assets available to it at the time of
the relevant event giving rise to the loss.
Similarly, a new provision would be
added that the first portion of any
Custodial Loss would be met by the
Clearing House applying Custodial Loss
Assets available to it at the time of the
relevant event. Rule 919(b) would also
provide that the obligations in the
subsection only apply to the extent the
relevant Loss Assets remain available to
the Clearing House and have not
themselves been subject to an event
similar to a Custodial Loss, Investment
Loss, Pledged Collateral Loss or Title
Transfer Collateral Loss. Rule 919(c)
would be amended to address Custodial
Losses in addition to Investment Losses,
such that if there are Investment Losses
or Custodial Losses exceeding the
available amount of Investment Loss
Assets or Custodial Loss Assets,
respectively, Clearing Members would
be required to pay Collateral Offset
Obligations to the Clearing House. The
relevant formula for calculating
Collateral Offset Obligations under Rule
919(d) would be amended to reflect
Custodial Losses as well as Investment
Losses, as applicable. In addition, the
relevant fraction for purposes of
determining a particular Clearing
Member’s obligation in respect of
Collateral Offsets Obligations would be
revised to take into account amounts
recorded as variation margin,
deliverables and settlement amounts. In
addition, a clarification would be made
that, in the case of a Defaulter, the
calculation would include the
Defaulter’s Guaranty Fund
Contributions only to the extent not
used to offset default losses, an
approach which is consistent with the
treatment of other specified assets of the
Defaulter. Similarly, under Rule 919(e),
the maximum Collateral Offset
Obligation would be amended to
include the variation margin,
deliverables and settlement amounts
transferred (or due to be transferred) to
the Clearing House. Rule 919(f) would
be amended to provide that Collateral
Offset Obligations may be offset or
netted against obligations to pay or
return variation margin, deliverables or
settlement amounts in addition to other
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30189
margin payments and guaranty fund
contributions.
Rule 919(g) would provide that
Collateral Offset Obligations resulting
from an Investment Loss could be
applied solely to Investment Losses, and
Collateral Offset Obligations resulting
from a Custodial Loss could be applied
solely to Custodial Losses. Rule 919(h),
which addresses the allocation by the
Clearing House of recoveries in respect
of Investment Losses, would be
expanded to cover recoveries from
Custodial Losses as well. Certain
additional clarifications in this
subsection would be made to
contemplate recovery and allocation of
assets other than cash and to state that
the Clearing House’s obligation to
reimburse for recoveries only applies to
the extent the relevant assets remain
available to the Clearing House. Rule
919(i), which provides, among other
things, that Clearing Members remain
liable to make margin and guaranty fund
contributions notwithstanding
Collateral Offset Obligations, would be
revised to reference payment of
variation margin, payment of settlement
amounts and delivery of deliverables as
well. A drafting clarification would also
be made regarding Clearing Members’
obligations to make and receive timely
delivery to improve readability of the
provision. Rule 919(j), which provides
for return of excess Collateral Offset
Obligations, would be revised to
account for Collateral Offset Obligations
in respect of Custodial Losses and to
clarify that the obligation to return only
applies to the extent the relevant
amounts remain available to the
Clearing House. Rule 919(k) would
clarify that Collateral Offset Obligations
are independent of obligations in
respect of Assessment Contributions,
Cash Loser Adjustments or Cash Gainer
Adjustments, Partial Tear-Up Prices or
Product Termination Amounts. A
clarifying cross-reference to Rule 209
would be added to an existing statement
that caps on Assessment Contributions
under relevant rules do not limit
liability for Collateral Offset
Obligations. A statement that the
conditions for contract termination
under Rule 916(a)(ii)(B)(2) will not be
met solely because of a Non-Default
Loss or Investment Loss would be
removed as unnecessary in light of the
other amendments to Rule 919(k). A
conforming change would be made in
Rule 919(n), which provides that Rule
919 does not require the Clearing House
is not required to pursue any litigation
against any Person, to specifically
reference Delivery Facilities.
Pursuant to revised Rule 919(p), the
Clearing House would be obligated to
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Federal Register / Vol. 88, No. 90 / Wednesday, May 10, 2023 / Notices
notify Clearing Members by Circular of
the amount of Investment Loss Assets
and Custodial Loss Assets as
determined by ICE Clear Europe from
time to time. ICE Clear Europe has
removed a specific reference to the total
amount of Loss Assets from the Rule.
ICE Clear Europe believes that it is
appropriate for the Clearing House to
have the flexibility to update the
amount of Investment Loss Assets and
Custodial Loss Assets from time to time
in light of its ongoing business and
other relevant factors, without the need
to amend the Rules. Such updates may,
for example, reflect changes in relevant
components of its capital requirements,
in particular the capital requirements
for credit, counterparty and market risks
and operational and legal risks, that ICE
Clear Europe considers in determining
the appropriate level of such loss assets.
Market participants would be notified of
any change through published Circular.
ICE Clear Europe intends that with the
adoption of the amendments, the
amount of Investment Loss Assets
would be increased to USD 195 million
and the initial amount of Custodial Loss
Assets would be set at USD 80 million,
as would be confirmed by Circular.
Such amounts will remain in effect until
a subsequent Circular, and the Clearing
House’s liability under Rule 919(b)
would be limited to the notified amount
of such assets.
Rule 919(q) would be amended to
provide for notification of the amount of
Loss Assets applied in connection with
Non-Default Losses, Investment Losses
or Custodial Losses, as applicable. The
amendments would further clarify that
replenishment of regulatory capital may
be made using the resources of third
parties (in addition to the Clearing
House and its Affiliates). The Clearing
House would be obligated to issue a
new Circular pursuant to Rule 919(p)
following any such replenishment. In
the case of replenishment, the
replenished or new Loss Assets or
capital would not be applied to any preexisting Non-Default Loss, Custodial
Loss or Investment Loss. Various
conforming and clarifying changes
would be made to Rule 919(r), including
to refer to Delivery Facilities and to
remove an unnecessary reference to
Approved Financial Institutions.
Under Rule 919(s), the Clearing House
would not be liable to any Clearing
Member, Customer or other Person for
any Pledged Collateral Losses.
Accordingly, the Clearing Member (or
its Customer) would bear the risks of
Pledged Collateral Losses, except to the
extent directly resulting from fraud, bad
faith, gross negligence or willful
misconduct by the Clearing House or its
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directors, officers, employees or
committees. While a new provision,
Rule 919(s) would essentially be
equivalent in substance to the relevant
part of current Rule 502(j). The
corresponding portions of current Rule
502(j) would be deleted as unnecessary
in light of Rule 919(s). Under Rule
919(t), if the Clearing House recovers
any amount in respect of Pledged
Collateral Losses (less expenses), it
would be obligated to pay such amounts
to the Clearing Members that bore such
losses on a pro rata basis, after
application of any amounts applied by
the Clearing House or other Person to
meet such losses.
For Title Transfer Collateral Losses,
Rule 919(u) would provide that the
Clearing House would not be liable to
any Clearing Member, Customer or other
Person for such losses. The provision
would expressly be without limitation
of the Clearing House’s ability to charge
a negative ICE Deposit Rate under the
Finance Procedures. Rule 919(u) would
further provide that where title transfer
collateral is provided, the Clearing
Member is entitled to the redelivery of
an equivalent asset, without any
compensation for Title Transfer
Collateral Losses or other losses, and
accordingly the Clearing Member (or its
Customer, if applicable) would bear the
risk of Title Transfer Collateral Losses.
Rule 919(v) would clarify that a
negative yield or interest rate on assets
provided as initial or original margin,
guaranty fund contributions, permitted
cover or a deliverable will not constitute
an Investment Loss or Non-Default Loss
and will be for the account of the
Clearing Member (or its Customer, if
applicable). Under Rule 919(w), ICE
Clear Europe would have no liability for
any loss relating to any investment
decision by any Clearing Member,
Customer or other person, including any
choice as between different kinds of
Permitted Cover, or for the results of any
such choices or investments.
IV. Additional Amendments
In various locations in the Rules,
clarifications would be made that
obligations of the Clearing House to
return or provide certain funds or
property to Clearing Members apply
only to the extent such assets are
received by and remain available to the
Clearing House, reflecting the
consequences of Rule 919. This includes
Rules 301(f), 908(b)(iii), 908(c)(iii),
908(d)(iii), 908(g)(iii), 913(a)(iv), 914(j)
and 916(n). In the case of Rule 301(f),
914(j) and 916(n), the amendments
would further provide that the relevant
funds or assets must not have been
subject to an event similar to a Custodial
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Loss, Investment Loss, Pledged
Collateral Loss or Title Transfer
Collateral Loss. Similarly, Rule 1102(k)
would provide that the obligation of the
Clearing House to apply amounts
received from the Defaulter to repay
guaranty fund contributions used in the
default, retain assets in respect of
Clearing House Contributions or
reimburse insurers for default insurance
proceeds, as applicable, would be
subject to the Clearing House not having
suffered a loss equivalent to an
Investment Loss, Custodial Loss,
Pledged Collateral Loss or Title Transfer
Collateral Loss in respect of such
amounts. Rule 1103(e) would be
amended to address the potential
situation where amounts received in
respect of default insurance may
themselves be subject to losses similar
to a Custodial Loss, Investment Loss,
Pledged Collateral Loss or Title Transfer
Collateral Loss. Accordingly,
application of such amounts could only
be made to the extent that such amounts
remain available to the Clearing House,
reflecting the consequences of Rule 919.
A number of other non-substantive
drafting and formatting updates would
also be made.
(b) Statutory Basis
ICE Clear Europe believes that the
proposed amendments to the Rules are
consistent with the requirements of
Section 17A of the Act 8 and the
regulations thereunder applicable to it.
In particular, Section 17A(b)(3)(F) of the
Act 9 requires, among other things, that
the rules of a clearing agency be
designed to promote the prompt and
accurate clearance and settlement of
securities transactions and, to the extent
applicable, derivative agreements,
contracts, and transactions, the
safeguarding of securities and funds in
the custody or control of the clearing
agency or for which it is responsible,
and the protection of investors and the
public interest.
As discussed herein, the proposed
rule changes are designed to address the
risks posed to ICE Clear Europe by a
significant loss event not resulting from
a default by one or more Clearing
Members. These events may include
investment, custodial and collateral
losses with respect to margin, guaranty
fund contributions, deliverables and
settlement amounts as well as other
losses resulting from general business
risk, operational risk or other nondefault scenarios. ICE Clear Europe, like
all clearing organizations, faces the risk
that such a loss event could affect its
8 15
9 15
U.S.C. 78q–1.
U.S.C. 78q–1(b)(3)(F).
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ability to continue orderly clearing
operations or otherwise affect its
viability as a going concern. The
amendments are thus intended to
enhance the ability of ICE Clear Europe
to manage those risks by providing for
a comprehensive framework to address
such losses. The amendments enhance
and clarify the existing procedures for
handling Investment Losses and adopt
parallel procedures to address Custodial
Losses. As amended, the Rules would
provide a mechanism for fully allocating
Investment Losses and Custodial Losses,
first to Loss Assets provided by the
Clearing House and thereafter to
Clearing Members by way of Collateral
Offset Obligations. The amendments
would distinguish such losses from
Pledged Collateral Losses and Title
Transfer Collateral Losses, which would
remain the responsibility of the Clearing
Member that provided such assets (or its
customer), consistent with the existing
Rules for Pledged Collateral. The
amendments would also clarify the
responsibility of ICE Clear Europe for
Non-Default Losses. The amendments
thus enhance ICE Clear Europe’s ability
to address general business risk and
other risks that may otherwise threaten
the viability of the clearing house as a
going concern. The amendments also
enhance the ability of ICE Clear Europe
to manage custody and investment risk
(and similar risks from delivery
facilities, settlement systems and the
like) in the remote circumstances where
its ordinary course procedures are
insufficient and a custodian, investment
counterparty, settlement bank, delivery
facility or similar system fails. Overall,
the amendments will strengthen the
ability of the Clearing House to manage
the risks of, and withstand and/or
recover from, significant non-default
loss events.
The amendments also more clearly
allocate certain losses as among ICE
Clear Europe and Clearing Members,
which will provide greater clarity,
consistency and legal certainty. ICE
Clear Europe believes that the
amendments reflect the legitimate
interests of Clearing Members and their
customers. As proposed to be amended,
the Rules would be designed to plan for
remote and unprecedented, but
potentially extreme, types of loss event,
including Investment Losses, Custodial
Losses, Pledged Collateral Losses, Title
Transfer Collateral Losses and NonDefault Losses. In particular, Investment
Losses and Custodial Losses, to the
extent they exceed Loss Assets
dedicated by the Clearing House for
such purposes, will necessarily and
adversely affect some or all Clearing
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17:49 May 09, 2023
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Members, customers or other
stakeholders. ICE Clear Europe believes
that the amendments take a balanced
approach that distributes potential
Investment Losses and Custodial Losses
to both ICE Clear Europe and Clearing
Members. With respect to Pledged
Collateral Losses, by contrast, and
consistent with the existing Rules, ICE
Clear Europe believes it is appropriate
for Clearing Members (or their
customers, if applicable) to continue to
bear such losses. The treatment of
Pledged Collateral Losses reflects the
position that the providing Clearing
Member (or its customer) remains the
beneficial owner of such assets
notwithstanding that they are pledged to
ICE Clear Europe. ICE Clear Europe
believes that such persons, rather than
ICE Clear Europe, should bear such
losses. ICE Clear Europe believes that
Title Transfer Collateral Losses should
be treated similarly. Title Transfer
Collateral Losses reflect a potential
diminution of value of particular noncash assets provided as collateral; the
allocation of the loss to Clearing
Members reflects the fact that the
Clearing Member is entitled only to the
return of an equivalent asset, even if it
has declined in value.
ICE Clear Europe also believes that
the amendments further the interests of
Clearing Members and their customers
in having greater certainty as to the
consequences of such losses, their
potential liability for them and the
resources that would be available to
support clearing operations, to allow
stakeholders to evaluate more fully the
risks and benefits of clearing.
For the foregoing reasons, ICE Clear
Europe believes that the amendments
provide an appropriate and equitable
method to allocate the loss from an
extreme non-default loss scenario. ICE
Clear Europe further believes that the
approach taken will facilitate the ability
of the Clearing House to allocate such
losses so that it can continue clearing
operations. The amendments therefore
further the prompt and accurate
clearance and settlement of cleared
transactions. In so doing, in light of the
importance of clearing houses to the
financial markets they serve, the policy
in favor of clearing of financial
transactions as set out in the Act, and
the potential consequences of a clearing
house failure, the amendments will
support the stability of the broader
financial system and the public interest.
Accordingly, in ICE Clear Europe’s
view, the amendments are consistent
with the prompt and accurate clearance
and settlement of securities
transactions, derivatives agreements,
contracts, and transactions, the
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30191
safeguarding of securities and funds in
the custody or control of ICE Clear
Europe or for which it is responsible,
and the protection of investors and the
public interest, within the meaning of
Section 17A(b)(3)(F) of the Act.10
The amendments are also consistent
with relevant requirements of Rule
17Ad–22,11 as set forth in the following
discussion.
Rule 17Ad–22(b)(3) 12 provides that a
clearing agency ‘‘that performs central
counterparty services shall establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to . . . maintain
sufficient financial resources to
withstand, at a minimum . . . a default
by the two participant families to which
it has the largest exposure in extreme
but plausible market conditions.’’ ICE
Clear Europe does not propose in these
amendments to change the amount or
composition of financial resources
required of Clearing Members as margin
or guaranty fund contributions. ICE
Clear Europe is also not proposing to
change its own resources that it
contributes to default resources. The
amendments are designed, however, to
address and mitigate the risk to the
Clearing House that its financial
resources available to cover Clearing
Member defaults could be lost or
reduced in value as a result of Custodial
Losses, Investment Losses or other types
of non-default loss.
Specifically, under the amendments,
with respect to Custodial Losses, ICE
Clear Europe would be responsible for
losses up to the amount of Custodial
Loss Assets, which is to be determined
by ICE Clear Europe from time to time.
ICE Clear Europe has determined the
initial level of Custodial Loss Assets
taking into account components of its
capital requirements applicable to
central counterparties, in particular the
capital requirements for credit,
counterparty and market risks.
The amendments would provide for
allocation of Custodial Losses in excess
of Custodial Loss Assets to Clearing
Members, who would be obligated to
pay Collateral Offset Obligations to the
extent of such excess. ICE Clear
Europe’s existing policies are intended
to mitigate the risk of Custodian failure
and Custodial Loss through appropriate
selection and ongoing monitoring of
Custodians. These procedures are
designed to permit the Clearing House
to hold assets in a manner that
minimizes the risk of loss or delay in
the access of ICE Clear Europe to such
10 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22.
12 17 CFR 240.17Ad–22(b)(3).
11 17
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assets. Nonetheless, a Custodial Loss
from a custodial failure is ultimately
outside the control of the Clearing
House. ICE Clear Europe is not itself a
depository but is rather an intermediary.
It is ultimately not in a position to
backstop or guarantee performance by
third-party Custodians. If ICE Clear
Europe were responsible for all
Custodial Losses in excess of the
defined resources, a custodial failure
could lead to a clearing house failure or
other interference with clearing
operations. As a result, ICE Clear Europe
believes it is appropriate for Clearing
Members to share in Custodial Losses
that exceed Custodial Loss Assets as set
out in the proposed Rules. Further, as
set forth above, ICE Clear Europe
believes that Title Transfer Collateral
Losses and Pledged Collateral Losses,
given the particular nature of such
losses, are outside the control of the
Clearing House, since they result from
the choice of asset provided by the
Clearing Member, and are appropriately
borne by Clearing Members.
Under the amendments, Custodial
Losses in excess of the amount of
Custodial Loss Assets would be shared
among Clearing Members proportionally
based on their respective aggregate
margin, guaranty fund contributions,
deliverables and settlement amounts
recorded across all account categories.
This approach is largely consistent with
the allocation of Investment Losses
under the current Rules, with certain
clarifications intended to capture
variation margin, deliverable and
settlement amounts in the calculation.
The approach mutualizes both
Investment Losses and Custodial Losses
across all Clearing Members, in these
remote loss scenarios where such losses
exceed applicable Clearing House
resources allocated to such losses.
While Clearing Members may be
required to make Collateral Offset
Obligations that are independent of the
particular mix of cash and securities
provided by the Clearing Member as
margin or guaranty fund contributions,
ICE Clear Europe believes that the
approach is appropriate in light of the
remote nature of the potential losses, the
fact that margin and guaranty fund
assets are invested and custodied
collectively in accordance with
investment policies that are reviewed by
the applicable risk committee and are
transparent to Clearing Members, and
the practical and operational
considerations that would be required
for an approach that attempted to
allocate losses based on a Clearing
Member’s particular assets and
elections. All Clearing Member assets
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17:49 May 09, 2023
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are held and invested on an aggregate
basis (such that investments cannot be
allocated to particular Clearing
Member), and all Clearing Members
receive a blended rate of return on cash
assets based on aggregate clearing house
investment activity. As a result, ICE
Clear Europe does not believe it would
be operationally feasible, or beneficial to
Clearing Members, to attempt to allocate
Investment Losses or Custodial Losses
based on the particular mix of assets
provided by individual Clearing
Members. Instead, ICE Clear Europe
believes it is more appropriate, in light
of these operational and other
considerations, to allocate Investment
Losses and Custodial Losses, if any, to
Clearing Members based on their
respective aggregate amount of margin
and guaranty fund contributions and
deliverables and settlement amounts
recorded in its accounts at the Clearing
House.
As a result, the amendments clarify
the resources available to address
Investment Losses, Custodial Losses and
other losses not resulting from Clearing
Member default. The provisions relating
to Investment and Custodial Losses, in
effect, provide protection against the
loss of the financial resources provided
by Clearing Members to support the
default waterfall. The amendments thus
enhance the ability of ICE Clear Europe
to manage the risk of certain losses that
do not arise from Clearing Member
default or defaults, thereby ensuring
that ICE Clear Europe continues to
maintain sufficient financial resources
to withstand, at a minimum, a default
by the two participant families to which
it has the largest exposures in extreme
but plausible market conditions,
consistent with the requirements of Rule
17Ad–22(b)(3).13
Rule 17Ad–22(e)(3)(ii) provides that
the ‘‘covered clearing agency shall
establish, implement, maintain and
enforce written policies and procedures
reasonable designed to, as applicable
. . . maintain a sound risk management
framework that . . . 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. . . .’’ 14 Specifically, the
amendments are intended to address,
and to fully cover, Investment Losses,
Custodial Losses, Pledged Collateral
Losses, Title Transfer Collateral Losses
and Non-Default Losses. The
amendments will thus facilitate
recovery from such potential losses,
even if extreme, and permit the
13 17
14 17
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CFR 240.17Ad–22(b)(3).
CFR 240.17Ad–22(e)(3)(ii).
Frm 00123
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continued operation of the Clearing
House. In ICE Clear Europe’s view, the
amendments are therefore consistent
with the requirements of Rule 17Ad–
22(e)(3)(ii).15
Rule 17Ad–22(e)(9) provides that a
‘‘covered clearing agency shall establish,
implement, maintain and enforce
written policies and procedures
reasonable designed to, as applicable
[. . .] minimize and manage credit and
liquidity risk arising from conducting its
money settlements in commercial bank
money if central bank money is not used
by the covered clearing agency.’’ 16 The
new provisions relating to Custodial
Losses would, among other matters,
protect against the risk of losses relating
to a failure of a settlement bank, and
provide a means for allocating such
losses to the Clearing House, to the
extent of Custodial Loss Assets, and
thereafter to Clearing Members through
Collateral Offset Obligations. As such,
the amendments will help the Clearing
House manage and mitigate the risks of
settlement bank failure, consistent with
the requirements of Rule 17Ad–
22(e)(9).17
Rule 17Ad–22(e)(15) requires that a
‘‘covered clearing agency shall establish,
implement, maintain and enforce
written policies and procedures
reasonable designed to, as applicable
[. . .] identify, monitor and manage the
covered clearing agency’s general
business risk and hold sufficient liquid
net assets funded by equity to cover
potential general business losses so that
the covered clearing agency can
continue operations and services as a
going concern if those losses
materialize. . . .’’ 18 Under the
amended Rules, Loss Assets (including
both Investment Loss Assets and
Custodial Loss Assets) will be available
to cover Non-Default Losses, which
include losses from general business
risk. Such losses will thereafter be
covered by the Clearing House’s capital
and other assets. ICE Clear Europe does
not propose to change the level of its
own equity capital, which supports its
operations and covers general business
losses. As a result, in ICE Clear Europe’s
view, the amendments are consistent
with the requirements of Rule 17Ad–
22(e)(15).19
Rule 17A–22(e)(16) provides that the
‘‘covered clearing agency shall establish,
implement, maintain and enforce
written policies and procedures
reasonable designed to, as applicable
15 17
CFR 240.17Ad–22(e)(3)(ii).
CFR 240.17Ad–22(e)(9).
17 17 CFR 240.17Ad–22(e)(9).
18 17 CFR 240.17Ad–22(e)(15).
19 17 CFR 240.17Ad–22(e)(15).
16 17
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[. . .] safeguard [its] own and its
participants’ assets, minimize the risk of
loss and delay in access to these assets,
and invest such assets in instruments
with minimal credit, market and
liquidity risks.’’ 20 ICE Clear Europe’s
existing investment policies and
procedures provide for the investment
of cash provided by Clearing Members
as margin or guaranty fund
contributions in investments with
minimal credit, market and liquidity
risks. Similarly, the policies provide for
the use by ICE Clear Europe of
Custodians to hold cash and securities
in a manner designed to minimize the
risk of loss or delay in access to such
assets. ICE Clear Europe is not
proposing to change such policies and
procedures in connection with these
amendments. Rather, the amendments
address the remote scenario where,
despite the protections under such
procedures, there is a failure by an
investment issuer or counterparty or
custodian resulting in an Investment
Loss or Custodial Loss. Such a
circumstance would be remote in ICE
Clear Europe’s view, and in any event,
outside its control. In such
circumstances, the amendments would
allocate the loss as between ICE Clear
Europe and Clearing Members, with ICE
Clear Europe being responsible for a
first loss position up to the amount of
defined Loss Assets and with Clearing
Members being responsible for the
remaining loss, in proportion to their
margin, guaranty fund and other
relevant deposits to the Clearing House.
The amendments would thus enhance
the protection of funds and assets
provided to ICE Clear Europe as margin
or guaranty fund contributions and are
therefore consistent with the
requirements of Rule 17Ad–22(e)(16).21
(B) Clearing Agency’s Statement on
Burden on Competition
ICE Clear Europe does not believe the
proposed amendments would have any
impact, or impose any burden, on
competition not necessary or
appropriate in furtherance of the
purposes of the Act. The amendments
are designed to allocate Investment
Losses and Custodial Losses between
ICE Clear Europe and Clearing
Members, to allocate Pledged Collateral
Losses and Title Transfer Collateral
Losses to Clearing Members, and to
allocate Non-Default Losses to the
Clearing House. Although the
amendments may thus impose certain
potential losses and costs upon Clearing
Members, ICE Clear Europe believes that
20 17
21 17
CFR 240.17Ad–22(e)(16).
CFR 240.17Ad–22(e)(16).
VerDate Sep<11>2014
17:49 May 09, 2023
such result is appropriate in the case of
significant investment, custodial and
other non-default loss events in order to
permit the continued operation of the
Clearing House. The amendments to the
Rules will apply uniformly across
Clearing Members. ICE Clear Europe
does not believe that the proposed
amendments will impact competition
among Clearing Members or other
market participants or affect the ability
of market participants to access clearing
generally. Therefore, ICE Clear Europe
does not believe the proposed rule
change imposes any burden on
competition that is inappropriate or
unnecessary in furtherance of the
purposes of the Act.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants or Others
ICE Clear Europe conducted a public
consultation with respect to the
proposed amendments.22 ICE Clear
Europe did not receive any written
responses to the public consultation. In
addition, prior to the consultation, ICE
Clear Europe engaged in a number of
discussions concerning the proposed
amendments with an industry group
representing numerous market
participants. Through this process,
market participants raised a number of
questions concerning the amount of
resources being allocated as Investment
Loss Assets and Custodial Loss Assets
and the basis for the determination of
such amounts. Market participants also
raised questions about the scope of
Custodial Losses subject to allocation
under the proposed Rules and the
overall approach to the treatment of
Custodial Losses in light of the manner
in which ICE Clear Europe holds assets.
As discussed with market participants,
ICE Clear Europe believes that the
approach taken is appropriate in light of
the fact that assets are generally held
either with relevant central banks or
central securities depositories. The
Clearing House also believes that the
definition of Custodial Losses is
appropriate to cover the appropriate
range of risks of custodian failure,
which are inherently fact- and situationspecific and may be difficult to predict
in advance. ICE Clear Europe further
explained in these discussions the basis
for determination of relevant amounts,
in light of the applicable capital
requirements for credit, counterparty
and market risks and operational and
legal risks under relevant UK and EU
law. ICE Clear Europe did not ultimately
22 See ICE Clear Europe Circular No. C22143 (Dec.
15, 2022).
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30193
change the approach to Custodial Losses
or the amount specified as Loss Assets
in connection with these discussions.
ICE Clear Europe will notify the
Commission of any additional written
comments received with respect to the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) by order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change 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–
ICEEU–2023–010 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ICEEU–2023–010. 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
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available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filings will also be available for
inspection and copying at the principal
office of ICE Clear Europe and on ICE
Clear Europe’s website at https://
www.theice.com/clear-europe/
regulation.
Do not include personal identifiable
information in submissions; you should
submit only information that you wish
to make available publicly. We may
redact in part or withhold entirely from
publication submitted material that is
obscene or subject to copyright
protection. All submissions should refer
to File Number SR–ICEEU–2023–010
and should be submitted on or before
May 31, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–09903 Filed 5–9–23; 8:45 am]
BILLING CODE 8011–01–P
Self-Regulatory Organizations; Cboe
EDGA Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend Its
Fee Schedule
May 4, 2023.
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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 21,
2023, Cboe EDGA Exchange, Inc.
(‘‘Exchange’’ or ‘‘EDGA’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III 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
Cboe EDGA Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGA’’ or ‘‘EDGA
Equities’’) is filing with the Securities
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
VerDate Sep<11>2014
17:49 May 09, 2023
Jkt 259001
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.
1. Purpose
[Release No. 34–97431; File No. SR–
CboeEDGA–2023–006]
1 15
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
23 17
and Exchange Commission
(‘‘Commission’’) a proposed rule change
to amend its Fee Schedule. The text of
the proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/edga/),
at the Exchange’s Office of the
Secretary, and at the Commission’s
Public Reference Room.
The Exchange proposes to amend its
Fee Schedule to adopt monthly fees
assessed to Users 3 that elect to
subscribe to the US Equity Short
Volume & Trades Report, effective,
April 21, 2023.
The Exchange recently adopted a new
data product known as the US Equity
Short Volume & Trades Report (the,
‘‘Report’’).4 The Report, which will be
available on April 21, 2023, contains (i)
an end-of-day report that provides
certain equity trading activity on the
Exchange, and includes trade date, total
volume, sell short volume, and sell
short exempt volume, by symbol; 5 and
(ii) an end-of-month report that provides
a record of all short sale transactions for
3 A ‘‘User’’ of an Exchange Market Data product
is a natural person, a proprietorship, corporation,
partnership, or entity, or device (computer or other
automated service), that is entitled to receive
Exchange data. See the EDGA Equities Exchange
Fee Schedule at https://www.cboe.com/us/equities/
membership/fee_schedule/EDGA/.
4 See Securities and Exchange Act No. 97301
(April 13, 2023) (SR–CboeEDGA–2023–005).
5 The end-of-day report was originally titled
‘‘Short Volume Report’’ and was displayed as an
individual product on the Exchange’s Fee Schedule.
The end-of-day report is now being incorporated
into the Report and as such, the Exchange seeks to
amend its Fee Schedule to display the applicable
fees for the Report, which will contain both the
end-of-day report and an end-of-month report.
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the month, and includes trade date and
time, trade size, trade price, and type of
short sale execution, by symbol and
exchange.6 In addition to a monthly or
annual subscription, a Member 7 or nonMember may purchase the Report on a
historical monthly basis, which
provides the end-of-day reports for each
day and the corresponding end-ofmonth report for a given calendar
month.
The Exchange proposes to adopt fees
applicable to Users that subscribe to the
Report. As proposed, the Exchange
would assess a monthly 8 fee of $750 per
month to an Internal Distributor 9 of the
Report, and a fee of $1,250 per month
to an External Distributor 10 of the
Report. These fees may be paid on a
monthly basis or on an annual basis.11
External Distributors, unlike Internal
Distributors, are typically compensated
for the distribution of short sale data
through subscription fees or other
mechanisms. Some External Distributors
incorporate short sale data into their
own proprietary products, which they
sell to downstream users. These
distributors may not charge separately
for data included in the Report, but
nevertheless gain value from the data by
incorporating it into their product. The
higher price for External Distributors
reflects the additional value these
distributors gain from the product.
The Exchange also proposes to adopt
fees for the Report provided on a
historical basis. The Report will be
available for each calendar month
dating back to January 2015, and Users
of such data will be assessed a fee of
$500 per historical monthly Report for
which they subscribe.12 Data provided
6 See
Exchange Rule 13.8(h).
Exchange Rule 1.5(n).
8 The monthly fees for the Report are assessed on
a rolling period based on the original subscription
date. For example, if a User subscribes to the Report
on April 24, 2023, the monthly fee will cover the
period of April 24, 2023, through May 23, 2023. If
the User cancels its subscription prior to May 23,
2023, and no refund is issued, the User will
continue to receive both the end-of-day and end-ofmonth components of the Report for the
subscription period.
9 An ‘‘Internal Distributor’’ of an Exchange Market
Data product is a Distributor that receives the
Exchange Market Data product and then distributes
that data to one or more Users within the
Distributor’s own entity. Supra note 3.
10 An ‘‘External Distributor’’ of an Exchange
Market Data product is a Distributor that receives
the Exchange Market Data product and then
distributes that data to a third party or one or more
Users outside the Distributor’s own entity. Supra
note 3.
11 Users who subscribe to the US Equity Short
Volume & Trades Report during the middle of a
month will receive the end-of-day report for each
day beginning on the date of subscription.
12 Users who purchase the US Equity Short
Volume & Trades report on an annual basis will
receive 12 months of historical data free of charge,
7 See
E:\FR\FM\10MYN1.SGM
10MYN1
]]>Agencies
[Federal Register Volume 88, Number 90 (Wednesday, May 10, 2023)]
[Notices]
[Pages 30187-30194]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-09903]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97429; File No. SR-ICEEU-2023-010]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing of Proposed Rule Change, as Modified by Amendment No. 1,
Relating to Amendments to the Clearing Rules
May 4, 2023.
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 21, 2023, ICE Clear Europe Limited (``ICE Clear Europe'' or
the ``Clearing House'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule changes described in
Items I, II and III below, which Items have been primarily prepared by
ICE Clear Europe. On May 2, 2023, ICE Clear Europe filed Amendment No.
1 to the proposed rule change to make certain changes to the Form 19b-4
and Exhibit 1A.\3\ The Commission is publishing this notice to solicit
comments on the proposed rule change, as modified by Amendment No. 1
(hereafter, ``the proposed rule change'') from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1, amends and restates in its entirety the
Form 19b-4 and Exhibit 1A in order to correct the narrative
description of the proposed rule change.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
ICE Clear Europe Limited (``ICE Clear Europe'' or the ``Clearing
House'')
[[Page 30188]]
proposes to amend its Clearing Rules (the ``Rules'') \4\ to address
more consistently the treatment of certain losses that do not result
from Clearing Member default, including certain investment losses and
custodial losses.
---------------------------------------------------------------------------
\4\ Capitalized terms used but not defined herein have the
meanings specified in the Rules.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, ICE Clear Europe 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. ICE Clear Europe has prepared summaries,
set forth in sections (A), (B), and (C) below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(a) Purpose
ICE Clear Europe is proposing to amend its Rules to address more
consistently the treatment of certain losses that do not arise from the
default of a Clearing Member, generally referred to as non-default
losses, including certain investment losses and custodial losses, as
discussed in more detail herein.
I. Summary of Proposed Amendments \5\
---------------------------------------------------------------------------
\5\ The amendments are intended to comprehensively and
consistently address non-default losses in a manner consistent with
relevant UK law applicable to the Clearing House and relevant
internationally accepted principles for clearing organizations. See
Financial Services and Markets Act 2000 (Recognition Requirements
for Investment Exchanges, Clearing Houses and Central Securities
Depositories) Regulations 2001/995, Schedule, Pt. 5, para. 29A,
which requires the central counterparty to maintain effective
arrangements for ensuring that losses that arise otherwise than as a
result of clearing member default and threaten the solvency of the
central counterparty are allocated with a view to ensuring that the
central counterparty can continue to operate. See also CPMI-IOSCO,
Principles for Financial Market Infrastructures (Principles 15 and
16); CPMI-IOSCO, Discussion Paper on Central Counterparty Practices
to Address Non-Default Loss (Aug. 2022).
---------------------------------------------------------------------------
As amended, the Rules would, among other matters:
Define several exclusive categories of relevant losses:
(1) Investment Losses, (2) Custodial Losses, (3) Pledged Collateral
Losses, (4) Title Transfer Collateral Losses and (5) Non-Default
Losses.
Specify the resources of the Clearing House, if
applicable, that will be applied to cover such categories of losses.
Specify the responsibility of Clearing Members, in defined
circumstances, to make contributions with respect to Investment Losses
and Custodial Losses.
Specify the responsibility of Clearing Members for Pledged
Collateral Losses and Title Transfer Collateral Losses.
Address the treatment of recoveries by the Clearing House
with respect to such categories of losses.
II. Definitions of Relevant Loss Categories
In Rule 101, new definitions would be added for ``Custodial
Losses,'' ``Pledged Collateral Losses,'' ``Title Transfer Collateral
Loss'' (and related terms) and the definitions of ``Investment Losses''
and ``Non-Default Losses'' (and related terms) would be revised, as
follows.
Custodial Losses
Custodial Losses would be defined as losses suffered by the
Clearing House with respect to Custodial Assets, including from
declines in the value thereof, arising as a result of or in connection
with (1) a default, insolvency, system failure, force majeure event or
similar event with respect to a Custodian or Delivery Facility, a
breach of agreement by the Custodian or Delivery Facility or pursuant
to any loss allocation or contribution provisions of the Custodian or
Delivery Facility, or (2) any theft, cyber attack or similar event with
respect to Custodial Assets by any person (other than the Clearing
House and its directors, officers or employees). Custodial Losses are
defined to exclude both Pledged Collateral Losses or Title Transfer
Collateral Losses. Custodial Losses would also exclude any losses
subject to a power of assessment for default losses under Rule 909 or
any mechanism that has the effective of reducing such losses pursuant
to reduced gains distributions under Rule 914, partial tear-up under
Rule 915 or contract termination under Rule 916. The existing
definition of Custodian would be revised to specifically reference
approved financial institutions, concentration banks, intermediary
financial institutions, investment agent banks, system banks and
TARGET2 Concentration Banks, as defined in the Rules (in additional to
the more general categories of financial institution currently
included). The changes reflect the currently understood scope of the
Custodian definition in its existing form but would provide greater
clarity in light of the amendments discussed herein. Custodial Assets
would be defined as any asset or property of the Clearing House (or any
person acting on its behalf or holding assets for it) representing
original or initial margin, variation margin, guaranty fund
contributions or permitted cover, deliverables or settlement amounts.
As discussed below, Custodial Losses would be allocated through the use
of Custodial Loss Assets of the Clearing House and thereafter
contributions of Clearing Members under Rule 919.
Pledged Collateral Losses
The amendments would define Pledged Collateral Losses as those
losses arising out of or relating to the holding of Pledged Collateral
\6\ or the assets in any Pledged Collateral Account. Such losses with
respect to Pledged Collateral are addressed in the existing Rules, and
the amendments would not change the treatments of such losses. (Under
the existing Rules, and as discussed below for the Rules as proposed to
be amended, such losses would be solely the responsibility of the
relevant Clearing Member under the Rules.) For clarity and consistency,
a defined term for Pledged Collateral Losses would be added in Rule 101
(based on the existing defined term for ``Custodial Losses'' in Rule
502(j), which would be deleted). Relevant existing provisions
addressing such losses would be moved to Rule 919, as discussed below,
so that all non-default losses are addressed in the same section of the
Rules.
---------------------------------------------------------------------------
\6\ Pledged Collateral and Pledged Collateral Accounts are
currently only used in connection with the Customer Accounts of FCM/
BD Clearing Members.
---------------------------------------------------------------------------
Title Transfer Collateral Losses
Title Transfer Collateral Losses would be defined as losses
resulting from a reduction in value or change of exchange rates of
initial or original margin, guaranty fund contributions or permitted
cover, which have been transferred to the Clearing House (other than as
Pledged Collateral) \7\ and which are not invested or reinvested by the
Clearing House but are held with a Custodian. Such losses are not
currently subject to an express loss-sharing mechanism under the Rules.
Accordingly, ICE Clear Europe is proposing to formally define this
category of loss, and as discussed below, such losses would be solely
the responsibility of the relevant Clearing Member under the Rules. In
this respect, the resulting treatment would be
[[Page 30189]]
generally consistent with that applicable to Pledged Collateral Losses
under the current and revised Rules.
---------------------------------------------------------------------------
\7\ Currently, most collateral received by the Clearing House is
pursuant to a title transfer collateral arrangement.
---------------------------------------------------------------------------
Investment Losses
Conforming changes would be made to the definition of Investment
Losses, an existing category of loss identified in the Rules, to
expressly exclude Custodial Losses, Pledged Collateral Losses and Title
Transfer Collateral Losses. A sentence excluding losses from the
default of a Custodian would be deleted as such losses would be
expressly covered by the Custodial Loss definition (which in turn would
be excluded from the Investment Loss definition as noted above). For
consistency with the other new definitions, the definition would also
explicitly reference losses from assets representing variation margin
and settlement amounts in addition to the other listed categories.
Non-Default Losses
Conforming changes to the definition of Non-Default Losses would be
made to exclude Custodial Losses, Pledged Collateral Losses and Title
Transfer Collateral Losses. The definition would also expressly exclude
losses incorporated in the calculation of the ICE Deposit Rate under
the Finance Procedures (such as arising from negative interest rates).
The amendments would eliminate a requirement that the Non-Default
Losses threaten the Clearing House's solvency in order to qualify as
such. ICE Clear Europe does not believe the limitation to losses that
threaten solvency is needed (as all such Non-Default Losses should be
addressed by the Rules).
Loss Assets and Other Definitions
The amendments would add new defined terms for Investment Loss
Assets and Custodial Loss Assets, which are assets of the Clearing
House available to be applied to Investment Losses or Custodial Losses,
respectively, and Non-Default Losses. The existing term Loss Assets
would be revised accordingly to refer to Investment Loss Assets and
Custodial Loss Assets. New defined terms for Investment Loss Amount and
Custodial Loss Amount would also be added, reflecting the amount of
Investment Losses or Custodial Losses, as applicable, as determined
under Rule 919 after application of applicable Loss Assets.
III. Treatment of Losses in Various Categories
The proposed amendments to Rule 919 would incorporate the concepts
of Custodial Loss, Pledged Collateral Loss and Title Transfer
Collateral Loss.
Rule 919(b) would be amended to provide that Non-Default Losses
will be met first by Investment Loss Assets and Custodial Loss Assets
available to the Clearing House. The amendments would clarify that the
first portion of any Investment Loss will be met by the Clearing House
applying Investment Loss Assets available to it at the time of the
relevant event giving rise to the loss. Similarly, a new provision
would be added that the first portion of any Custodial Loss would be
met by the Clearing House applying Custodial Loss Assets available to
it at the time of the relevant event. Rule 919(b) would also provide
that the obligations in the subsection only apply to the extent the
relevant Loss Assets remain available to the Clearing House and have
not themselves been subject to an event similar to a Custodial Loss,
Investment Loss, Pledged Collateral Loss or Title Transfer Collateral
Loss. Rule 919(c) would be amended to address Custodial Losses in
addition to Investment Losses, such that if there are Investment Losses
or Custodial Losses exceeding the available amount of Investment Loss
Assets or Custodial Loss Assets, respectively, Clearing Members would
be required to pay Collateral Offset Obligations to the Clearing House.
The relevant formula for calculating Collateral Offset Obligations
under Rule 919(d) would be amended to reflect Custodial Losses as well
as Investment Losses, as applicable. In addition, the relevant fraction
for purposes of determining a particular Clearing Member's obligation
in respect of Collateral Offsets Obligations would be revised to take
into account amounts recorded as variation margin, deliverables and
settlement amounts. In addition, a clarification would be made that, in
the case of a Defaulter, the calculation would include the Defaulter's
Guaranty Fund Contributions only to the extent not used to offset
default losses, an approach which is consistent with the treatment of
other specified assets of the Defaulter. Similarly, under Rule 919(e),
the maximum Collateral Offset Obligation would be amended to include
the variation margin, deliverables and settlement amounts transferred
(or due to be transferred) to the Clearing House. Rule 919(f) would be
amended to provide that Collateral Offset Obligations may be offset or
netted against obligations to pay or return variation margin,
deliverables or settlement amounts in addition to other margin payments
and guaranty fund contributions.
Rule 919(g) would provide that Collateral Offset Obligations
resulting from an Investment Loss could be applied solely to Investment
Losses, and Collateral Offset Obligations resulting from a Custodial
Loss could be applied solely to Custodial Losses. Rule 919(h), which
addresses the allocation by the Clearing House of recoveries in respect
of Investment Losses, would be expanded to cover recoveries from
Custodial Losses as well. Certain additional clarifications in this
subsection would be made to contemplate recovery and allocation of
assets other than cash and to state that the Clearing House's
obligation to reimburse for recoveries only applies to the extent the
relevant assets remain available to the Clearing House. Rule 919(i),
which provides, among other things, that Clearing Members remain liable
to make margin and guaranty fund contributions notwithstanding
Collateral Offset Obligations, would be revised to reference payment of
variation margin, payment of settlement amounts and delivery of
deliverables as well. A drafting clarification would also be made
regarding Clearing Members' obligations to make and receive timely
delivery to improve readability of the provision. Rule 919(j), which
provides for return of excess Collateral Offset Obligations, would be
revised to account for Collateral Offset Obligations in respect of
Custodial Losses and to clarify that the obligation to return only
applies to the extent the relevant amounts remain available to the
Clearing House. Rule 919(k) would clarify that Collateral Offset
Obligations are independent of obligations in respect of Assessment
Contributions, Cash Loser Adjustments or Cash Gainer Adjustments,
Partial Tear-Up Prices or Product Termination Amounts. A clarifying
cross-reference to Rule 209 would be added to an existing statement
that caps on Assessment Contributions under relevant rules do not limit
liability for Collateral Offset Obligations. A statement that the
conditions for contract termination under Rule 916(a)(ii)(B)(2) will
not be met solely because of a Non-Default Loss or Investment Loss
would be removed as unnecessary in light of the other amendments to
Rule 919(k). A conforming change would be made in Rule 919(n), which
provides that Rule 919 does not require the Clearing House is not
required to pursue any litigation against any Person, to specifically
reference Delivery Facilities.
Pursuant to revised Rule 919(p), the Clearing House would be
obligated to
[[Page 30190]]
notify Clearing Members by Circular of the amount of Investment Loss
Assets and Custodial Loss Assets as determined by ICE Clear Europe from
time to time. ICE Clear Europe has removed a specific reference to the
total amount of Loss Assets from the Rule. ICE Clear Europe believes
that it is appropriate for the Clearing House to have the flexibility
to update the amount of Investment Loss Assets and Custodial Loss
Assets from time to time in light of its ongoing business and other
relevant factors, without the need to amend the Rules. Such updates
may, for example, reflect changes in relevant components of its capital
requirements, in particular the capital requirements for credit,
counterparty and market risks and operational and legal risks, that ICE
Clear Europe considers in determining the appropriate level of such
loss assets. Market participants would be notified of any change
through published Circular. ICE Clear Europe intends that with the
adoption of the amendments, the amount of Investment Loss Assets would
be increased to USD 195 million and the initial amount of Custodial
Loss Assets would be set at USD 80 million, as would be confirmed by
Circular. Such amounts will remain in effect until a subsequent
Circular, and the Clearing House's liability under Rule 919(b) would be
limited to the notified amount of such assets.
Rule 919(q) would be amended to provide for notification of the
amount of Loss Assets applied in connection with Non-Default Losses,
Investment Losses or Custodial Losses, as applicable. The amendments
would further clarify that replenishment of regulatory capital may be
made using the resources of third parties (in addition to the Clearing
House and its Affiliates). The Clearing House would be obligated to
issue a new Circular pursuant to Rule 919(p) following any such
replenishment. In the case of replenishment, the replenished or new
Loss Assets or capital would not be applied to any pre-existing Non-
Default Loss, Custodial Loss or Investment Loss. Various conforming and
clarifying changes would be made to Rule 919(r), including to refer to
Delivery Facilities and to remove an unnecessary reference to Approved
Financial Institutions.
Under Rule 919(s), the Clearing House would not be liable to any
Clearing Member, Customer or other Person for any Pledged Collateral
Losses. Accordingly, the Clearing Member (or its Customer) would bear
the risks of Pledged Collateral Losses, except to the extent directly
resulting from fraud, bad faith, gross negligence or willful misconduct
by the Clearing House or its directors, officers, employees or
committees. While a new provision, Rule 919(s) would essentially be
equivalent in substance to the relevant part of current Rule 502(j).
The corresponding portions of current Rule 502(j) would be deleted as
unnecessary in light of Rule 919(s). Under Rule 919(t), if the Clearing
House recovers any amount in respect of Pledged Collateral Losses (less
expenses), it would be obligated to pay such amounts to the Clearing
Members that bore such losses on a pro rata basis, after application of
any amounts applied by the Clearing House or other Person to meet such
losses.
For Title Transfer Collateral Losses, Rule 919(u) would provide
that the Clearing House would not be liable to any Clearing Member,
Customer or other Person for such losses. The provision would expressly
be without limitation of the Clearing House's ability to charge a
negative ICE Deposit Rate under the Finance Procedures. Rule 919(u)
would further provide that where title transfer collateral is provided,
the Clearing Member is entitled to the redelivery of an equivalent
asset, without any compensation for Title Transfer Collateral Losses or
other losses, and accordingly the Clearing Member (or its Customer, if
applicable) would bear the risk of Title Transfer Collateral Losses.
Rule 919(v) would clarify that a negative yield or interest rate on
assets provided as initial or original margin, guaranty fund
contributions, permitted cover or a deliverable will not constitute an
Investment Loss or Non-Default Loss and will be for the account of the
Clearing Member (or its Customer, if applicable). Under Rule 919(w),
ICE Clear Europe would have no liability for any loss relating to any
investment decision by any Clearing Member, Customer or other person,
including any choice as between different kinds of Permitted Cover, or
for the results of any such choices or investments.
IV. Additional Amendments
In various locations in the Rules, clarifications would be made
that obligations of the Clearing House to return or provide certain
funds or property to Clearing Members apply only to the extent such
assets are received by and remain available to the Clearing House,
reflecting the consequences of Rule 919. This includes Rules 301(f),
908(b)(iii), 908(c)(iii), 908(d)(iii), 908(g)(iii), 913(a)(iv), 914(j)
and 916(n). In the case of Rule 301(f), 914(j) and 916(n), the
amendments would further provide that the relevant funds or assets must
not have been subject to an event similar to a Custodial Loss,
Investment Loss, Pledged Collateral Loss or Title Transfer Collateral
Loss. Similarly, Rule 1102(k) would provide that the obligation of the
Clearing House to apply amounts received from the Defaulter to repay
guaranty fund contributions used in the default, retain assets in
respect of Clearing House Contributions or reimburse insurers for
default insurance proceeds, as applicable, would be subject to the
Clearing House not having suffered a loss equivalent to an Investment
Loss, Custodial Loss, Pledged Collateral Loss or Title Transfer
Collateral Loss in respect of such amounts. Rule 1103(e) would be
amended to address the potential situation where amounts received in
respect of default insurance may themselves be subject to losses
similar to a Custodial Loss, Investment Loss, Pledged Collateral Loss
or Title Transfer Collateral Loss. Accordingly, application of such
amounts could only be made to the extent that such amounts remain
available to the Clearing House, reflecting the consequences of Rule
919.
A number of other non-substantive drafting and formatting updates
would also be made.
(b) Statutory Basis
ICE Clear Europe believes that the proposed amendments to the Rules
are consistent with the requirements of Section 17A of the Act \8\ and
the regulations thereunder applicable to it. In particular, Section
17A(b)(3)(F) of the Act \9\ requires, among other things, that the
rules of a clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions and, to
the extent applicable, derivative agreements, contracts, and
transactions, the safeguarding of securities and funds in the custody
or control of the clearing agency or for which it is responsible, and
the protection of investors and the public interest.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78q-1.
\9\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As discussed herein, the proposed rule changes are designed to
address the risks posed to ICE Clear Europe by a significant loss event
not resulting from a default by one or more Clearing Members. These
events may include investment, custodial and collateral losses with
respect to margin, guaranty fund contributions, deliverables and
settlement amounts as well as other losses resulting from general
business risk, operational risk or other non-default scenarios. ICE
Clear Europe, like all clearing organizations, faces the risk that such
a loss event could affect its
[[Page 30191]]
ability to continue orderly clearing operations or otherwise affect its
viability as a going concern. The amendments are thus intended to
enhance the ability of ICE Clear Europe to manage those risks by
providing for a comprehensive framework to address such losses. The
amendments enhance and clarify the existing procedures for handling
Investment Losses and adopt parallel procedures to address Custodial
Losses. As amended, the Rules would provide a mechanism for fully
allocating Investment Losses and Custodial Losses, first to Loss Assets
provided by the Clearing House and thereafter to Clearing Members by
way of Collateral Offset Obligations. The amendments would distinguish
such losses from Pledged Collateral Losses and Title Transfer
Collateral Losses, which would remain the responsibility of the
Clearing Member that provided such assets (or its customer), consistent
with the existing Rules for Pledged Collateral. The amendments would
also clarify the responsibility of ICE Clear Europe for Non-Default
Losses. The amendments thus enhance ICE Clear Europe's ability to
address general business risk and other risks that may otherwise
threaten the viability of the clearing house as a going concern. The
amendments also enhance the ability of ICE Clear Europe to manage
custody and investment risk (and similar risks from delivery
facilities, settlement systems and the like) in the remote
circumstances where its ordinary course procedures are insufficient and
a custodian, investment counterparty, settlement bank, delivery
facility or similar system fails. Overall, the amendments will
strengthen the ability of the Clearing House to manage the risks of,
and withstand and/or recover from, significant non-default loss events.
The amendments also more clearly allocate certain losses as among
ICE Clear Europe and Clearing Members, which will provide greater
clarity, consistency and legal certainty. ICE Clear Europe believes
that the amendments reflect the legitimate interests of Clearing
Members and their customers. As proposed to be amended, the Rules would
be designed to plan for remote and unprecedented, but potentially
extreme, types of loss event, including Investment Losses, Custodial
Losses, Pledged Collateral Losses, Title Transfer Collateral Losses and
Non-Default Losses. In particular, Investment Losses and Custodial
Losses, to the extent they exceed Loss Assets dedicated by the Clearing
House for such purposes, will necessarily and adversely affect some or
all Clearing Members, customers or other stakeholders. ICE Clear Europe
believes that the amendments take a balanced approach that distributes
potential Investment Losses and Custodial Losses to both ICE Clear
Europe and Clearing Members. With respect to Pledged Collateral Losses,
by contrast, and consistent with the existing Rules, ICE Clear Europe
believes it is appropriate for Clearing Members (or their customers, if
applicable) to continue to bear such losses. The treatment of Pledged
Collateral Losses reflects the position that the providing Clearing
Member (or its customer) remains the beneficial owner of such assets
notwithstanding that they are pledged to ICE Clear Europe. ICE Clear
Europe believes that such persons, rather than ICE Clear Europe, should
bear such losses. ICE Clear Europe believes that Title Transfer
Collateral Losses should be treated similarly. Title Transfer
Collateral Losses reflect a potential diminution of value of particular
non-cash assets provided as collateral; the allocation of the loss to
Clearing Members reflects the fact that the Clearing Member is entitled
only to the return of an equivalent asset, even if it has declined in
value.
ICE Clear Europe also believes that the amendments further the
interests of Clearing Members and their customers in having greater
certainty as to the consequences of such losses, their potential
liability for them and the resources that would be available to support
clearing operations, to allow stakeholders to evaluate more fully the
risks and benefits of clearing.
For the foregoing reasons, ICE Clear Europe believes that the
amendments provide an appropriate and equitable method to allocate the
loss from an extreme non-default loss scenario. ICE Clear Europe
further believes that the approach taken will facilitate the ability of
the Clearing House to allocate such losses so that it can continue
clearing operations. The amendments therefore further the prompt and
accurate clearance and settlement of cleared transactions. In so doing,
in light of the importance of clearing houses to the financial markets
they serve, the policy in favor of clearing of financial transactions
as set out in the Act, and the potential consequences of a clearing
house failure, the amendments will support the stability of the broader
financial system and the public interest. Accordingly, in ICE Clear
Europe's view, the amendments are consistent with the prompt and
accurate clearance and settlement of securities transactions,
derivatives agreements, contracts, and transactions, the safeguarding
of securities and funds in the custody or control of ICE Clear Europe
or for which it is responsible, and the protection of investors and the
public interest, within the meaning of Section 17A(b)(3)(F) of the
Act.\10\
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The amendments are also consistent with relevant requirements of
Rule 17Ad-22,\11\ as set forth in the following discussion.
---------------------------------------------------------------------------
\11\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------
Rule 17Ad-22(b)(3) \12\ provides that a clearing agency ``that
performs central counterparty services shall establish, implement,
maintain and enforce written policies and procedures reasonably
designed to . . . maintain sufficient financial resources to withstand,
at a minimum . . . a default by the two participant families to which
it has the largest exposure in extreme but plausible market
conditions.'' ICE Clear Europe does not propose in these amendments to
change the amount or composition of financial resources required of
Clearing Members as margin or guaranty fund contributions. ICE Clear
Europe is also not proposing to change its own resources that it
contributes to default resources. The amendments are designed, however,
to address and mitigate the risk to the Clearing House that its
financial resources available to cover Clearing Member defaults could
be lost or reduced in value as a result of Custodial Losses, Investment
Losses or other types of non-default loss.
---------------------------------------------------------------------------
\12\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------
Specifically, under the amendments, with respect to Custodial
Losses, ICE Clear Europe would be responsible for losses up to the
amount of Custodial Loss Assets, which is to be determined by ICE Clear
Europe from time to time. ICE Clear Europe has determined the initial
level of Custodial Loss Assets taking into account components of its
capital requirements applicable to central counterparties, in
particular the capital requirements for credit, counterparty and market
risks.
The amendments would provide for allocation of Custodial Losses in
excess of Custodial Loss Assets to Clearing Members, who would be
obligated to pay Collateral Offset Obligations to the extent of such
excess. ICE Clear Europe's existing policies are intended to mitigate
the risk of Custodian failure and Custodial Loss through appropriate
selection and ongoing monitoring of Custodians. These procedures are
designed to permit the Clearing House to hold assets in a manner that
minimizes the risk of loss or delay in the access of ICE Clear Europe
to such
[[Page 30192]]
assets. Nonetheless, a Custodial Loss from a custodial failure is
ultimately outside the control of the Clearing House. ICE Clear Europe
is not itself a depository but is rather an intermediary. It is
ultimately not in a position to backstop or guarantee performance by
third-party Custodians. If ICE Clear Europe were responsible for all
Custodial Losses in excess of the defined resources, a custodial
failure could lead to a clearing house failure or other interference
with clearing operations. As a result, ICE Clear Europe believes it is
appropriate for Clearing Members to share in Custodial Losses that
exceed Custodial Loss Assets as set out in the proposed Rules. Further,
as set forth above, ICE Clear Europe believes that Title Transfer
Collateral Losses and Pledged Collateral Losses, given the particular
nature of such losses, are outside the control of the Clearing House,
since they result from the choice of asset provided by the Clearing
Member, and are appropriately borne by Clearing Members.
Under the amendments, Custodial Losses in excess of the amount of
Custodial Loss Assets would be shared among Clearing Members
proportionally based on their respective aggregate margin, guaranty
fund contributions, deliverables and settlement amounts recorded across
all account categories. This approach is largely consistent with the
allocation of Investment Losses under the current Rules, with certain
clarifications intended to capture variation margin, deliverable and
settlement amounts in the calculation. The approach mutualizes both
Investment Losses and Custodial Losses across all Clearing Members, in
these remote loss scenarios where such losses exceed applicable
Clearing House resources allocated to such losses. While Clearing
Members may be required to make Collateral Offset Obligations that are
independent of the particular mix of cash and securities provided by
the Clearing Member as margin or guaranty fund contributions, ICE Clear
Europe believes that the approach is appropriate in light of the remote
nature of the potential losses, the fact that margin and guaranty fund
assets are invested and custodied collectively in accordance with
investment policies that are reviewed by the applicable risk committee
and are transparent to Clearing Members, and the practical and
operational considerations that would be required for an approach that
attempted to allocate losses based on a Clearing Member's particular
assets and elections. All Clearing Member assets are held and invested
on an aggregate basis (such that investments cannot be allocated to
particular Clearing Member), and all Clearing Members receive a blended
rate of return on cash assets based on aggregate clearing house
investment activity. As a result, ICE Clear Europe does not believe it
would be operationally feasible, or beneficial to Clearing Members, to
attempt to allocate Investment Losses or Custodial Losses based on the
particular mix of assets provided by individual Clearing Members.
Instead, ICE Clear Europe believes it is more appropriate, in light of
these operational and other considerations, to allocate Investment
Losses and Custodial Losses, if any, to Clearing Members based on their
respective aggregate amount of margin and guaranty fund contributions
and deliverables and settlement amounts recorded in its accounts at the
Clearing House.
As a result, the amendments clarify the resources available to
address Investment Losses, Custodial Losses and other losses not
resulting from Clearing Member default. The provisions relating to
Investment and Custodial Losses, in effect, provide protection against
the loss of the financial resources provided by Clearing Members to
support the default waterfall. The amendments thus enhance the ability
of ICE Clear Europe to manage the risk of certain losses that do not
arise from Clearing Member default or defaults, thereby ensuring that
ICE Clear Europe continues to maintain sufficient financial resources
to withstand, at a minimum, a default by the two participant families
to which it has the largest exposures in extreme but plausible market
conditions, consistent with the requirements of Rule 17Ad-22(b)(3).\13\
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\13\ 17 CFR 240.17Ad-22(b)(3).
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Rule 17Ad-22(e)(3)(ii) provides that the ``covered clearing agency
shall establish, implement, maintain and enforce written policies and
procedures reasonable designed to, as applicable . . . maintain a sound
risk management framework that . . . 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. . . .'' \14\ Specifically, the amendments are
intended to address, and to fully cover, Investment Losses, Custodial
Losses, Pledged Collateral Losses, Title Transfer Collateral Losses and
Non-Default Losses. The amendments will thus facilitate recovery from
such potential losses, even if extreme, and permit the continued
operation of the Clearing House. In ICE Clear Europe's view, the
amendments are therefore consistent with the requirements of Rule 17Ad-
22(e)(3)(ii).\15\
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\14\ 17 CFR 240.17Ad-22(e)(3)(ii).
\15\ 17 CFR 240.17Ad-22(e)(3)(ii).
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Rule 17Ad-22(e)(9) provides that a ``covered clearing agency shall
establish, implement, maintain and enforce written policies and
procedures reasonable designed to, as applicable [. . .] minimize and
manage credit and liquidity risk arising from conducting its money
settlements in commercial bank money if central bank money is not used
by the covered clearing agency.'' \16\ The new provisions relating to
Custodial Losses would, among other matters, protect against the risk
of losses relating to a failure of a settlement bank, and provide a
means for allocating such losses to the Clearing House, to the extent
of Custodial Loss Assets, and thereafter to Clearing Members through
Collateral Offset Obligations. As such, the amendments will help the
Clearing House manage and mitigate the risks of settlement bank
failure, consistent with the requirements of Rule 17Ad-22(e)(9).\17\
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\16\ 17 CFR 240.17Ad-22(e)(9).
\17\ 17 CFR 240.17Ad-22(e)(9).
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Rule 17Ad-22(e)(15) requires that a ``covered clearing agency shall
establish, implement, maintain and enforce written policies and
procedures reasonable designed to, as applicable [. . .] identify,
monitor and manage the covered clearing agency's general business risk
and hold sufficient liquid net assets funded by equity to cover
potential general business losses so that the covered clearing agency
can continue operations and services as a going concern if those losses
materialize. . . .'' \18\ Under the amended Rules, Loss Assets
(including both Investment Loss Assets and Custodial Loss Assets) will
be available to cover Non-Default Losses, which include losses from
general business risk. Such losses will thereafter be covered by the
Clearing House's capital and other assets. ICE Clear Europe does not
propose to change the level of its own equity capital, which supports
its operations and covers general business losses. As a result, in ICE
Clear Europe's view, the amendments are consistent with the
requirements of Rule 17Ad-22(e)(15).\19\
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\18\ 17 CFR 240.17Ad-22(e)(15).
\19\ 17 CFR 240.17Ad-22(e)(15).
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Rule 17A-22(e)(16) provides that the ``covered clearing agency
shall establish, implement, maintain and enforce written policies and
procedures reasonable designed to, as applicable
[[Page 30193]]
[. . .] safeguard [its] own and its participants' assets, minimize the
risk of loss and delay in access to these assets, and invest such
assets in instruments with minimal credit, market and liquidity
risks.'' \20\ ICE Clear Europe's existing investment policies and
procedures provide for the investment of cash provided by Clearing
Members as margin or guaranty fund contributions in investments with
minimal credit, market and liquidity risks. Similarly, the policies
provide for the use by ICE Clear Europe of Custodians to hold cash and
securities in a manner designed to minimize the risk of loss or delay
in access to such assets. ICE Clear Europe is not proposing to change
such policies and procedures in connection with these amendments.
Rather, the amendments address the remote scenario where, despite the
protections under such procedures, there is a failure by an investment
issuer or counterparty or custodian resulting in an Investment Loss or
Custodial Loss. Such a circumstance would be remote in ICE Clear
Europe's view, and in any event, outside its control. In such
circumstances, the amendments would allocate the loss as between ICE
Clear Europe and Clearing Members, with ICE Clear Europe being
responsible for a first loss position up to the amount of defined Loss
Assets and with Clearing Members being responsible for the remaining
loss, in proportion to their margin, guaranty fund and other relevant
deposits to the Clearing House. The amendments would thus enhance the
protection of funds and assets provided to ICE Clear Europe as margin
or guaranty fund contributions and are therefore consistent with the
requirements of Rule 17Ad-22(e)(16).\21\
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\20\ 17 CFR 240.17Ad-22(e)(16).
\21\ 17 CFR 240.17Ad-22(e)(16).
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(B) Clearing Agency's Statement on Burden on Competition
ICE Clear Europe does not believe the proposed amendments would
have any impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purposes of the Act. The amendments
are designed to allocate Investment Losses and Custodial Losses between
ICE Clear Europe and Clearing Members, to allocate Pledged Collateral
Losses and Title Transfer Collateral Losses to Clearing Members, and to
allocate Non-Default Losses to the Clearing House. Although the
amendments may thus impose certain potential losses and costs upon
Clearing Members, ICE Clear Europe believes that such result is
appropriate in the case of significant investment, custodial and other
non-default loss events in order to permit the continued operation of
the Clearing House. The amendments to the Rules will apply uniformly
across Clearing Members. ICE Clear Europe does not believe that the
proposed amendments will impact competition among Clearing Members or
other market participants or affect the ability of market participants
to access clearing generally. Therefore, ICE Clear Europe does not
believe the proposed rule change imposes any burden on competition that
is inappropriate or unnecessary in furtherance of the purposes of the
Act.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
ICE Clear Europe conducted a public consultation with respect to
the proposed amendments.\22\ ICE Clear Europe did not receive any
written responses to the public consultation. In addition, prior to the
consultation, ICE Clear Europe engaged in a number of discussions
concerning the proposed amendments with an industry group representing
numerous market participants. Through this process, market participants
raised a number of questions concerning the amount of resources being
allocated as Investment Loss Assets and Custodial Loss Assets and the
basis for the determination of such amounts. Market participants also
raised questions about the scope of Custodial Losses subject to
allocation under the proposed Rules and the overall approach to the
treatment of Custodial Losses in light of the manner in which ICE Clear
Europe holds assets. As discussed with market participants, ICE Clear
Europe believes that the approach taken is appropriate in light of the
fact that assets are generally held either with relevant central banks
or central securities depositories. The Clearing House also believes
that the definition of Custodial Losses is appropriate to cover the
appropriate range of risks of custodian failure, which are inherently
fact- and situation-specific and may be difficult to predict in
advance. ICE Clear Europe further explained in these discussions the
basis for determination of relevant amounts, in light of the applicable
capital requirements for credit, counterparty and market risks and
operational and legal risks under relevant UK and EU law. ICE Clear
Europe did not ultimately change the approach to Custodial Losses or
the amount specified as Loss Assets in connection with these
discussions. ICE Clear Europe will notify the Commission of any
additional written comments received with respect to the proposed rule
change.
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\22\ See ICE Clear Europe Circular No. C22143 (Dec. 15, 2022).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml) or
Send an email to [email protected]. Please include
File Number SR-ICEEU-2023-010 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-ICEEU-2023-010. 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
[[Page 30194]]
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
such filings will also be available for inspection and copying at the
principal office of ICE Clear Europe and on ICE Clear Europe's website
at https://www.theice.com/clear-europe/regulation.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-ICEEU-2023-010 and
should be submitted on or before May 31, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-09903 Filed 5-9-23; 8:45 am]
BILLING CODE 8011-01-P
