Notice2021-13102
Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC End-of-Day Price Discovery Policies and Procedures
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Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 23, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 118 (Wednesday, June 23, 2021)</title>
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[Federal Register Volume 86, Number 118 (Wednesday, June 23, 2021)]
[Notices]
[Pages 32994-32997]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-13102]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92197; File No. SR-ICC-2021-013]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC End-of-Day Price
Discovery Policies and Procedures
June 16, 2021.
I. Introduction
On April 23, 2021, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (the
``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
revise and update ICC's End-of-Day Price Discovery Policies and
Procedures (the ``Pricing Policy''). The Pricing Policy formalizes
ICC's end-of-day (``EOD'') price discovery process that provides prices
for cleared credit default
[[Page 32995]]
swap (``CDS'') contracts based on submissions from ICC's Clearing
Participants.\3\ The proposed rule change was published for comment in
the Federal Register on May 6, 2021.\4\ The Commission did not receive
comments regarding the proposed rule change. For the reasons discussed
below, the Commission is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Capitalized terms used but not defined herein have the
meanings specified in the Pricing Policy.
\4\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Proposed Rule Change Relating to the ICC End-of-Day
Price Discovery Policies and Procedures, Exchange Act Release No.
91733 (April 30, 2021); 86 FR 24425 (May 6, 2021) (SR-ICC-2021-013)
(``Notice'').
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II. Description of the Proposed Rule Change
ICC proposes updates related to firm trade obligations and certain
clarifications under the Pricing Policy.\5\ As part of ICC's current
EOD price discovery process, ICC Clearing Participants (``CPs'') are
required to submit daily EOD prices for cleared CDS instruments related
to their open positions at ICC in accordance with the Pricing Policy.
To encourage CPs to provide the best possible EOD submissions, ICC
selects a subset of the potential trades generated and designates them
as firm trades, which ICC then enters CPs into as cleared transactions.
ICC selects specific dates on which it can require CPs to execute firm
trades (``firm trade days''). For each firm trade day, ICC specifies
the instruments that may become firm-trade eligible, subject to certain
specified criteria. As described in more detail below, ICC proposes
additional criteria in the Pricing Policy for EOD firm trades with the
express purpose of maintaining the robustness of the established price
discovery process and ensuring that on-market firm trades (i.e., firm
trades resulting from price submissions close to EOD levels that
reflect market expectations and thus do not provide any value-additive
market information) do not incentivize CPs to correct their outlying
submissions (i.e., off-market price submissions outside the proposed
EOD range).\6\ By subjecting potential trades to its proposed new
criteria for designating firm trades, ICC would avoid creating a high
number of firm trades around its EOD levels that may unnecessarily
introduce operational risks and inefficiencies into ICC's EOD price
discovery process.
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\5\ The description herein is substantially excerpted from the
Notice.
\6\ Notice, 86 FR at 24426.
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Specifically, ICC proposes to amend Section 2.4.1 of the Pricing
Policy (Selecting Firm-Trade Days and Firm-Trade Eligible Instruments)
by adding a new subsection (d) (Trade Price Deviation Constraint) to
Section 2.4.1. As proposed, new Section 2.4.1.d of the Pricing Policy
would incorporate additional criteria that must be met for ICC to
generate firm trades, which ICC refers to as the trade price deviation
constraint (the ``constraint''). In addition to new subsection (d), the
proposed rule change would add references to the constraint throughout
the existing subsections of Section 2.4.1, specifically in subsection
(a) with respect to firm trade days for index instruments, subsection
(b) with respect to firm trade days for single name instruments, and
subsection (c) with respect to firm trade days for index option
instruments. The proposed rule change would describe the constraint in
subsection (d) of Section 2.4.1 as follows. Under the proposed
constraint, ICC would avoid creating a high number of trades around its
EOD levels by not designating potential trades as firm trades if the
magnitude of the hypothetical profit/loss is smaller in magnitude than
the absolute value of the difference between the EOD level and either
the bid price or offer price. To achieve the stated purpose of the
constraint, ICC would only designate a potential trade as a firm trade
if the trade level fell outside the EOD level plus/minus one half the
EOD bid-offer width (``BOW'') for the given instrument. Such constraint
would not apply when the potential firm trade is formed by crossing two
outlying submission trades.
With respect to credit default index swaptions (``Index Options''),
ICC proposes additional language in amended subsection 2.4.1.c (Index
Option Firm Trade Days) concerning the designation of a potential trade
as a firm trade by subjecting strips of puts and/or calls to the CP
open interest and ICC open interest requirements. The Pricing Policy
currently incorporates similar open interest requirements for indices
and single names. Under the proposed CP open interest requirement in
amended subsection 2.4.1.c, for ICC to designate a potential trade as a
firm trade, both parties must have a cleared open interest, as of the
designated times, in one or more Index Option instrument sharing the
same underlying index instrument, expiration date, strike convention,
exercise style and transaction type. Under the proposed ICC open
interest requirement, ICC would only designate a potential trade in a
given Index Option instrument as a firm trade if ICC has a cleared open
interest in that instrument.
In addition, ICC proposes several clarifications to the Pricing
Policy. In Section 2.2.2 (Non-Submission Assessments), ICC proposes to
abbreviate the term ``ICC Board of Managers'' to ``Board.'' In Section
2.6 (CP's Use of Third-Party Providers), ICC proposes revisions to
clarify the circumstances under which a CP may participate in the EOD
price discovery process on behalf of another CP. Section 2.6 currently
provides that, subject to the prior consent of ICC, a CP may designate
another CP to participate in the EOD price discovery process on its
behalf. Amended Section 2.6 would remove ICC's prior consent and
specify that a CP ``may allow an affiliated CP (CP B) to participate in
the EOD price discovery process on its behalf.'' In Section 3
(Governance), ICC proposes to memorialize its existing practice by
adding a new sentence stating that the Pricing Policy document is
subject to review by the Risk Committee and review and approval by the
Board at least annually.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\7\ For the reasons given below, the Commission finds that
the proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act and Rules 17Ad-22(e)(2)(i) and (v) \8\ and 17Ad-22(e)(6)(iv)
thereunder.\9\
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\7\ 15 U.S.C. 78s(b)(2)(C).
\8\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
\9\ 17 CFR 240.17Ad-22(e)(6)(iv).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, as well
as to assure the safeguarding of securities and funds which are in the
custody or control of ICC or for which it is responsible.\10\
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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As noted above, the proposed rule change would amend Section 2.4.1
of the Pricing Policy by adding new subsection (d) to incorporate a new
trade price deviation constraint as additional criteria that must be
met for the generation of firm trades for each type of cleared CDS
instrument at ICC and to amend the existing subsections of
[[Page 32996]]
Section 2.4.1 to include references to the constraint where
appropriate; namely, index instruments or indices in subsection (a),
single name instruments in subsection (b), and Index Options in
subsection (c). The Commission believes that by amending its Pricing
Policy to include the proposed constraint in subsection (d) as
described above, ICC would enhance its ability to maintain the
accuracy, integrity, and effectiveness of the EOD price discovery
process by not designating potential trades as firm trades if the
magnitude of the hypothetical profit/loss is smaller in magnitude than
the absolute value of the difference between the EOD level and either
the bid price or offer price. This in turn could incentivize CPs to
make EOD price submissions that help ICC maintain the robustness of its
price discovery process and help ensure that on-market firm trades do
not incentivize CPs to correct their outlying submissions. By
subjecting potential trades to the proposed constraint, ICC would
promote the prompt and accurate clearance and settlement of CDS
contracts by avoiding the creation of an unnecessarily high number of
firm trades around its EOD levels that could increase operational risks
and inefficiencies in ICC's EOD price discovery process.
The Commission also believes that the proposed amendments to
subsection 2.4.1.c (Index Option Firm Trade Days), as described above,
would ensure that the firm trade obligations for Index Options are
subject to similar CP open interest and ICC open interest requirements
as those that currently apply to indices and single names. These
aspects of the proposed rule change should further enhance the
consistency and integrity of ICC's EOD price discovery process across
all three types of CDS instruments that ICC clears. Consequently, the
Commission believes that all of the proposed changes to Section 2.4.1
should promote the prompt and accurate clearance and settlement of CDS
transactions by ICC.
As noted above, ICC proposes other revisions to clarify that a CP
may allow an affiliated CP to participate in the EOD price discovery
process on its behalf without ICC's prior consent, to memorialize that
the Pricing Policy is subject to review by the Risk Committee and
review and approval by the Board at least annually, and to include the
shorthand reference to the ``Board'' instead of the longer reference to
the ICC Board of Managers in the Pricing Policy document. The
Commission finds that these proposed drafting clarifications and
improvements would enhance the clarity, transparency, and readability
of the Pricing Policy for ICC management, employees, and CPs that, in
turn, should help them understand their respective authorities, rights,
and obligations regarding ICC's EOD price discovery process and its
role in the clearance and settlement of CDS transactions.
The Commission believes that the proposed changes, taken as a
whole, should enhance ICC's ability to manage the overall EOD price
discovery process and the risks of clearing CDS instruments, including
the calculation and collection of margin requirements that will account
for each type of specific instrument as part of its overall risk-based
margin system and risk management processes which rely, in part, on the
EOD prices submitted by ICC's CPs.\11\ Moreover, the Commission
believes these risks, if mismanaged, could threaten ICC's ability to
operate and therefore its ability to clear and settle transactions and
safeguard funds. As a result, the Commission believes that these
proposed changes should promote ICC's ability to assure the
safeguarding of securities and funds which are in the custody or
control of ICC or for which it is responsible.
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\11\ See SEC Release No. 34-82960 (Mar. 28, 2018), 83 FR 14300,
14302 (Apr. 3, 2018) (SR-ICC-2018-002) (finding improvements to
ICC's end-of-day pricing process would improve ``ICC's risk
management processes related to the end-of-day pricing process,
including the calculation and collection of certain margin
requirements'' and would ``promote the prompt and accurate clearance
and settlement of the products cleared by ICC, and . . . enhance
ICC's ability to assure the safeguarding of securities and funds
which are in the custody or control of ICC or for which it is
responsible'').
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Therefore, the Commission believes that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act.\12\
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\12\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(2)(i) and (v) Under the Act
Rules 17Ad-22(e)(2)(i) and (v) \13\ require each covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to, among other things, provide for
governance arrangements that are clear and transparent and specify
clear and direct lines of responsibility, respectively. As noted above,
the proposed amendments to Section 3 (Governance) would memorialize
that the Pricing Policy is subject to review by the Risk Committee and
review and approval by ICC's Board of Managers at least annually. The
Commission believes this aspect of the proposed rule change would
improve the clarity and transparency of the Pricing Policy document and
its governance processes by specifying relevant roles and lines of
responsibility within ICC. The Commission believes that the proposed
rule change is therefore consistent with Rules 17Ad-22(e)(2)(i) and
(v).\14\
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\13\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
\14\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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C. Consistency With Rule 17Ad-22(e)(6)(iv) Under the Act
Rule 17Ad-22(e)(6)(iv) \15\ requires each covered clearing agency
to establish, implement, maintain, and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, uses reliable sources of timely price data and uses procedures
and sound valuation models for addressing circumstances in which
pricing data are not readily available or reliable. The Commission
believes the proposed changes to Section 2.4.1 to incorporate the
proposed constraint in the firm trade provisions governing each type of
cleared CDS instrument should help ICC manage the quality and quantity
of EOD price submissions from CPs by only designating a potential trade
as a firm trade if the trade level falls outside the proposed EOD range
for the given CDS instrument. This, in turn, should help ICC establish
and maintain accurate margin requirements that will account for the
risks posed by each type of CDS instrument as part of its overall risk-
based margin system and risk management processes.
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\15\ 17 CFR 240.17Ad-22(e)(6)(iv).
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Further, the proposed changes to subsection 2.4.1.c that would
designate a potential trade as a firm trade by subjecting strips of
puts and/or calls to both the CP open interest and ICC open interest
requirements would help ensure that the firm trade obligations for
Index Options are subject to similar open interest requirements as
those that currently apply to indices and single names. The Commission
believes these proposed changes should help ICC maintain the integrity
and effectiveness of its EOD price discovery process for the provision
of reliable prices for Index Options, which could, in turn, be used to
further enhance ICC's ability to establish and maintain risk-based
margin requirements for such instruments which rely, in part, on the
EOD prices provided by CPs. The Commission believes that the proposed
rule change is therefore consistent with Rule 17Ad-22(e)(6)(iv).\16\
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\16\ 17 CFR 240.17Ad-22(e)(6)(iv).
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[[Page 32997]]
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A(b)(3)(F) of the
Act and Rules 17Ad-22(e)(2)(i) and (v) and 17Ad-22(e)(6)(iv)
thereunder.\17\
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\17\ 17 CFR 240.17Ad-22(e)(6)(iv).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\18\ that the proposed rule change (SR-ICC-2021-013), be, and hereby
is, approved.\19\
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\18\ 15 U.S.C. 78s(b)(2).
\19\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13102 Filed 6-22-21; 8:45 am]
BILLING CODE 8011-01-P
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