Notice2021-19727
Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC Exercise Procedures
Primary source
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
September 14, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 175 (Tuesday, September 14, 2021)</title>
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[Federal Register Volume 86, Number 175 (Tuesday, September 14, 2021)]
[Notices]
[Pages 51206-51207]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-19727]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92895; File No. SR-ICC-2021-016]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Exercise Procedures
September 8, 2021.
I. Introduction
On July 8, 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,\2\ a proposed rule change to revise the
Exercise Procedures in connection with the clearing of credit default
index swaptions (``Index Swaptions''). The proposed rule change was
published for comment in the Federal Register on July 28\,\ 2021.\3\
The Commission did not receive comments regarding the proposed rule
change. For the reasons discussed below, the Commission is approving
the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Proposed Rule Change Relating to the ICC Exercise
Procedures; Exchange Act Release No. 92468 (July 28, 2021); 86 FR
40665 (July 28, 2021) (SR-ICC-2021-016) (``Notice'').
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II. Description of the Proposed Rule Change
The Exercise Procedures supplement the provisions of Subchapter 26R
of the ICC Clearing Rules (the ``Rules'') with respect to Index
Swaptions and provide further detail as to the manner in which Index
Swaptions may be exercised by Swaption Buyers, the manner in which ICC
will assign such exercises to Swaption Sellers, and certain actions
that ICC may take in the event of technical issues.\4\ The proposed
rule change would amend two sections of the Exercise Procedures:
Paragraph 2.6 Exercise System Failure and Paragraph 2.8 Automatic
Exercise for Exercise System Failure.\5\
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\4\ Capitalized terms not otherwise defined herein have the
meanings assigned to them in the ICC Rules, as applicable.
\5\ The description of the proposed rule change is excerpted
substantially from the Notice.
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A. Paragraph 2.6 Exercise System Failure
Currently, in the event that ICC's electronic system for the
submission and assignment of Swaption Exercise Notices (ICC's
``Exercise System'') fails to be in operation under certain
circumstances, the Exercise Procedures provide ICC with the following
options: (i) Cancel and reschedule the Exercise Period (i.e., the
period on the expiration date of an Index Swaption during which the
Swaption Buyer may deliver an exercise notice to ICC to exercise all or
part of such Index Swaption); (ii) determine that automatic exercise
will apply; and/or (iii) take such other action as ICC determines to be
appropriate to permit exercising parties to submit exercise notices and
to permit ICC to assign such notices. The proposed rule change would
remove ICC's ability to cancel and reschedule the Exercise Period under
such circumstances and renumber the paragraph. This would facilitate
exercise when there is a system's failure and avoid uncertainty that
could arise if an Exercise Period is rescheduled.
B. Paragraph 2.8 Automatic Exercise for Exercise System Failure
Currently, if automatic exercise applies pursuant to Paragraph 2.6,
Paragraph 2.8 specifies the parameters under which such automatic
exercise will apply. Under Paragraph 2.8, ICC maintains the ability to
effect an automatic exercise on the expiration date on each open
position (of all exercising parties) in an Index Swaption that is
determined by ICC to be ``in the money'' on such date. Currently,
whether an Index Swaption is ``in the money'' is based on the average
of the end-of-day (``EOD'') price of the underlying CDS contract on the
preceding business day and on the expiration date, and where relevant,
also based on the average of the EOD price on the preceding business
day and
[[Page 51207]]
on the expiration date of each single name constituent contract with
respect to which an Existing Restructuring has occurred. In practice,
this could result in an exercise not occurring during a systems failure
if the EOD reference prices are not in the money even if they would
have been in the money based on intra-day pricing. Under the proposed
rule change, whether an Index Swaption is ``in the money'' would be
based on the relevant market-observed prices for the underlying CDS
contract determined by ICC using the intraday market data available to
it at the time of the Expiration Period, or the EOD price of the
underlying CDS contract on the expiration date established at any
Intercontinental Exchange, Inc. (``ICE'') clearinghouse, and where
relevant, also based on the last available ICE EOD price of each single
name constituent contract with respect to which an Existing
Restructuring has occurred. This approach provides ICC more flexibility
to ensure exercise is based on various reference prices.
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.\6\ For the reasons given below, the Commission finds that
the proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act \7\ and Rule 17Ad-22(e)(17)(i).\8\
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\6\ 15 U.S.C. 78s(b)(2)(C).
\7\ 15 U.S.C. 78q-1(b)(3)(F).
\8\ 17 CFR 240.17Ad-22(e)(17)(i).
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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.\9\
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\9\ 15 U.S.C. 78q-1(b)(3)(F).
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As noted above, ICC is proposing to make changes to certain
exercise procedures related to systems failures. The Commission
believes that by removing the option to cancel and reschedule the
Exercise Period under Paragraph 2.6, the proposed rule change would
help to streamline and simplify the Exercise Procedures in the case of
an Exercise System Failure and thereby clarify that cancellations and
rescheduling will not occur and that exercises will take place during
systems failures. The Commission believes that this in turn will
enhance ICC's ability to promptly and accurately clear and settle
transactions during systems failures.
Additionally, automatic exercise applies to an Index Swaption that
is determined by ICC to be in the money. As noted above, under the
proposed rule change, whether an Index Swaption is ``in the money''
will be based on the relevant market-observed prices for the underlying
CDS contract determined by ICC using the intraday market data available
to it at the time or the EOD price of the underlying CDS contract on
the expiration date established at any ICE clearinghouse, and where
relevant, also based on the last available ICE EOD price of each single
name constituent contract with respect to which an Existing
Restructuring has occurred. This will allow ICC additional flexibility
for determining whether an Index Swaption is in the money and
facilitate exercise based on various reference prices, which the
Commission believes provides the ability to reflect accurate prices
thereby enhancing ICC's ability to promptly and accurately settle and
clear transactions during systems failures.
For the reasons stated above, the Commission finds that the
proposed rule changes are consistent with Section 17A(b)(3)(F) of the
Act.\10\
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(17)(i)
Rule 17Ad-22(e)(17) requires, in relevant part, each covered
clearing agency to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to, as applicable, manage
its operational risks by identifying the plausible sources of
operational risk, both internal and external, and mitigating their
impact through the use of appropriate systems, policies, procedures,
and controls.\11\
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\11\ 17 CFR 240.17Ad-22(e)(17)(i).
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The Commission believes that by revising its Index Swaption
Exercise Procedures, as noted above, to remove the ability to cancel or
reschedule exercises and to add flexibility to use various reference
prices for determining if an Index Swaption is in the money during
systems failures, the proposal allows ICC to manage the risks posed by
a systems failure by (i) increasing certainty around the timing of the
Exercise Period and (ii) increasing the likelihood that an Index
Swaption would be categorized as being in-the-money, and therefore
automatically exercised, as expected. The Commission believes that this
in turn supports ICC's ability to mitigate the consequences of a
systems failure and promote systems that have a high degree of
resiliency and operational reliability.
For these reasons, the Commission believes the proposed rule change
is consistent with Rule 17Ad-22(e)(17)(i).\12\
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\12\ Id.
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A(b)(3)(F) of the
Act \13\ and Rules 17Ad-22(e)(17)(i).\14\
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\13\ 15 U.S.C. 78q-1(b)(3)(F).
\14\ 17 CFR 240.17Ad-22(e)(17)(i).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\15\ that the proposed rule change (SR-ICC-2021-016), be, and hereby
is, approved.\16\
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\15\ 15 U.S.C. 78s(b)(2).
\16\ 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).
\17\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-19727 Filed 9-13-21; 8:45 am]
BILLING CODE 8011-01-P
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