Notice2021-21616
Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change, as Modified by Partial Amendment No. 1, Relating to the ICE Clear Europe Clearing Membership Policy and Clearing Membership Procedures
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Published
October 5, 2021
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 86 Issue 190 (Tuesday, October 5, 2021)</title>
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[Federal Register Volume 86, Number 190 (Tuesday, October 5, 2021)]
[Notices]
[Pages 55045-55049]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-21616]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93178; File No. SR-ICEEU-2021-014]
Self-Regulatory Organizations; ICE Clear Europe Limited; Order
Approving Proposed Rule Change, as Modified by Partial Amendment No. 1,
Relating to the ICE Clear Europe Clearing Membership Policy and
Clearing Membership Procedures
September 29, 2021.
I. Introduction
On August 2, 2021, ICE Clear Europe Limited (``ICE Clear Europe'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities
[[Page 55046]]
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt a new Clearing Membership Policy (the
``Policy'') and new Clearing Membership Procedures (the ``Procedures,''
and together with the Policy, the ``Documents''). The proposed
Documents would consolidate and summarize ICE Clear Europe's existing
clearing membership criteria and document certain existing processes
and procedures concerning the membership application process. On August
11, 2021, ICE Clear Europe filed Partial Amendment No. 1 to the
proposed rule change.\3\ Notice of the proposed rule change, as
modified by Partial Amendment No. 1, was published in the Federal
Register on August 18, 2021.\4\ The Commission did not receive comments
on the proposed rule change, as modified by Partial Amendment No. 1.
For the reasons discussed below, the Commission is approving the
proposed rule change, as modified by Partial Amendment No. 1 (hereafter
referred to as the ``proposed rule change'').
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ ICE Clear Europe filed Partial Amendment No. 1 to delete
from the filed Exhibit 5B, Clearing Membership Procedures, certain
statements in sections 2.4.1 and 2.4.2 of such Procedures concerning
the termination of clearing membership by a Clearing Member.
Specifically, ICE Clear Europe proposes to remove the statements
that it will define a minimum notice period and may publish a
Circular confirming that a Termination Notice has been issued,
because the appropriate minimum notice period and requirements for
publishing a Circular are set forth in existing Clearing Rule 209,
which is not proposed to be amended. Partial Amendment No. 1 did not
otherwise make any changes to the substance of the filing or the
text of the proposed rule change.
\4\ Self-Regulatory Organizations; ICE Clear Europe Limited;
Notice of Filing of Proposed Rule Change, as Modified by Partial
Amendment No. 1, Relating to the ICE Clear Europe Clearing
Membership Policy and Clearing Membership Procedures, Exchange Act
Release No. 92652 (August 12, 2021), 86 FR 46290 (August 18, 2021)
(SR-ICEEU-2021-014) (``Notice'').
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II. Description of the Proposed Rule Change
As described in more detail below, ICE Clear Europe proposes to
adopt the Documents to consolidate and summarize its existing clearing
membership criteria and to document certain existing processes and
procedures concerning its membership application and monitoring
processes to ensure that Clearing Members meet admission criteria upon
initial membership and continue to meet such criteria throughout their
membership.\5\
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\5\ Capitalized terms used but not defined herein have the
meanings specified in the ICE Clear Europe Clearing Rules (the
``Rules''). The description herein of the proposed rule change is
substantially excerpted from the Notice.
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A. Clearing Membership Policy
The proposed new Policy would consolidate and summarize ICE Clear
Europe's existing clearing membership criteria, which are set forth in
full detail in the Rules, and its related processes for assessing
applicants for membership, variations of permissions concerning
membership class, and termination of membership, all of which would be
documented in more detail in the proposed Procedures as described
below.
The Policy would describe ICE Clear Europe's membership risks and
state the objectives of the Policy to ensure that such risks are
properly managed, and that clearing membership admission criteria are
non-discriminatory, transparent, and objective to ensure fair and open
access, and designed to meet relevant regulatory requirements. The
Policy also would describe how such objectives are met by ICE Clear
Europe through setting and monitoring appropriate membership criteria,
establishing a due diligence process, and requiring prompt
notifications from Clearing Members of any changes to their businesses
that may impact a Clearing Member's ability to meet the membership
criteria. The core clearing membership criteria, including holding
sufficient capital, being a party to a Clearing Membership Agreement,
and other financial and operational criteria, would be summarized in
the Policy, with the full criteria set out in Rule 201 and the CDS
Procedures.
In addition to a summary of the core clearing membership criteria,
the Policy would provide that ICE Clear Europe has established
processes for clearing membership application, permission variations,
and clearing membership termination which are described in further
detail in the Procedures. The Policy also would address the ongoing
monitoring of membership criteria, including periodic in-depth
counterparty reviews, periodic review of financial positions, updates
to ICE Clear Europe's counterparty rating system, the maintenance of a
watch list, requiring an annual member return from Clearing Members,
and other operational monitoring processes such as daily margin calls
and CDS end-of-day (``EOD'') price submissions.
Proposed section 5 of the Policy would provide document governance
arrangements for breach management, ongoing reviews, and exception
handling. Consistent with the document governance arrangements for
other ICE Clear Europe policies and procedures, proposed section 5
would state that (i) the document owner is responsible for ensuring
that documents remain up-to-date and are reviewed in accordance with
ICE Clear Europe's governance processes, (ii) the document owner will
report material breaches or unapproved deviations from the Policy
document to the document owner's Head of Department, the Chief Risk
Officer, and the Head of Compliance (or their delegates), who together
will determine if further escalation should be made to relevant senior
executives, the Board, and/or competent authorities, and (iii)
exceptions to the Policy are approved in accordance with ICE Clear
Europe's governance process for the approval of changes to the Policy
document.
B. Clearing Membership Procedures
The proposed new Procedures would describe in further detail the
processes for reviewing and approving applications for clearing
membership, variations of membership permissions, ongoing monitoring,
and membership termination. The stated objective of the Procedures
would be to establish a due diligence process to ensure applicants meet
ICE Clear Europe's membership criteria at the time of application and
on an ongoing basis, and also provide notifications of any changes to
their businesses that could impact their ability to meet the membership
criteria.
The Procedures would describe each phase of the Clearing Member
application process, starting with the Membership Department providing
applicants with all relevant application documentation; the internal
due diligence of applications by relevant ICE Clear Europe departments,
including Operations, Risk, Treasury, Membership, AML/KYC, Risk
Oversight, Compliance, and Legal; the process for approval or rejection
of applications by the Executive Risk Committee under authority
delegated by the Board, and the right to appeal to the Board;
notifications of new applications for clearing membership to the
relevant Product Risk Committees after their approval by the Executive
Risk Committee; additional membership conditions or criteria that ICE
Clear Europe may, in its discretion, require prior to approval; and
additional information requests that ICE Clear Europe may make during
the application process. The Procedures also would describe the process
for a Clearing Member to obtain membership to a different membership
class at ICE Clear Europe (i.e., a CDS Clearing Member authorized to
clear credit default swap (``CDS'') contracts, or an F&O Clearing
Member authorized to become party to Energy Contracts or Financials &
Softs Contracts, or both).
[[Page 55047]]
Regarding termination of clearing membership, the Procedures would
cross-reference the procedures in existing Rule 209 for a Clearing
Member to resign its clearing membership, and for ICE Clear Europe to
terminate a Clearing Member's clearing membership.
The Procedures would provide detailed core membership requirements
and additional information on core membership criteria, which would
include minimum capital requirements as well as a description of
additional financial requirements that ICE Clear Europe may impose on
Clearing Members to meet the minimum capital requirement. The
Procedures would address certain aspects of the calculation of member
capital, including the disallowance of certain assets from such
calculation as well as the methods that Clearing Members may use to add
capital, where necessary, including the use of subordinated debt and
controller guarantees if approved by ICE Clear Europe. The Procedures
also would reference Guaranty Fund contributions for CDS and F&O
clearing services, including the required replenishment of
contributions in the event of application of the funds and the need to
meet any additional assessment; the margin-to-capital ratio
requirement; default management capabilities; and EOD price
submissions, which apply only to CDS Clearing Members as required by
the CDS EOD Price Discovery Policy.
The Procedures also would summarize ICE Clear Europe's ongoing
monitoring of Clearing Members that include the following: (i) Periodic
review of the financial position and compliance with the relevant
membership requirements of each Clearing Member; (ii) quarterly review
of Clearing Members' capital situation and financial information, and
monthly reviews of the financial information of FCM/BD Clearing
Members; (iii) quarterly counterparty rating system report, which
aggregates risk factors covering credit, market price, liquidity, and
operational risk for each Clearing Member; (iv) the watch list
highlighting Clearing Members with special risk situations; (v) annual
member returns pursuant to which Clearing Members must provide certain
information to ICE Clear Europe on Anti-Money Laundering/Know Your
Client (``AML/KYC'') requirements, authorized signatories, compliance
with the Rules, and key contact information; and (vi) daily monitoring
of Clearing Member operational performance in fulfilling financial
obligations to cover cash payments, margin collateral, Guaranty Fund
contributions, and delivery obligations.
Finally, the Procedures would also set out the same document
governance arrangements for breach management, ongoing reviews, and
exception handling as those described above with respect to the Policy.
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, as modified by Partial Amendment No. 1, is
consistent with Section 17A(b)(3)(F) of the Act \7\ and Rules 17Ad-
22(e)(2)(i) and (v), and (e)(18) thereunder.\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)(2)(i) and (v), and (e)(18).
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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 ICE Clear Europe be designed to promote the prompt and
accurate clearance and settlement of securities transactions and, to
the extent applicable, derivative agreements, contracts, and
transactions, as well as to assure the safeguarding of securities and
funds which are in the custody or control of ICE Clear Europe 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 discussed above, the proposed rule change would adopt a new
Clearing Membership Policy and new Clearing Membership Procedures. The
proposed Documents would consolidate and summarize existing clearing
membership criteria and related processes in the Rules that govern
clearing membership at ICE Clear Europe. For the reasons discussed
below, the Commission believes that the proposed rule change would
enable ICE Clear Europe to manage and mitigate the risks posed by
Clearing Members, including the risk of membership defaults and the
potential loss of mutualized funds resulting from Clearing Member
failures to meet clearing membership criteria. The Commission further
believes that, in turn, managing effectively such risks would enable
ICE Clear Europe to promote the prompt and accurate clearance and
settlement of securities transactions and help assure the safeguarding
of securities and funds which are in the custody or control of ICE
Clear Europe or for which it is responsible.
i. Clearing Membership Policy
As discussed above, the proposed rule change would establish a new
Policy that consolidates and summarizes ICE Clear Europe's existing
clearing membership criteria and the existing processes that ICE Clear
Europe undertakes to assess applicants for membership, monitor Clearing
Member adherence to the membership criteria on an ongoing basis,
authorize variations of permissions to Clearing Members, and terminate
membership, whether initiated by the Clearing Member or by ICE Clear
Europe. The Policy would state that it is designed to ensure that
membership risks are properly managed, and that clearing membership
admission criteria are non-discriminatory, transparent, and objective
to ensure fair and open access, and also meet relevant regulatory
requirements. The Policy would summarize how ICE Clear Europe achieves
such objectives by setting appropriate membership criteria and
monitoring ongoing adherence to such criteria; establishing a due
diligence process that ensures that applicants meet the membership
criteria when admitted and on a continuing basis; and requiring prompt
notifications from Clearing Members of any changes to their businesses
that may impact a Clearing Member's ability to meet the membership
criteria. The Policy also would establish document governance and
procedures for breach management and exceptions and changes to the
Policy document.
By creating a consolidated summary of existing clearing membership
criteria for admitting applicants and the related processes that ICE
Clear Europe currently undertakes for monitoring and terminating
Clearing Members, the Commission believes that the Policy would
facilitate ICE Clear Europe's ability to implement the membership risk
management objectives of the Policy and thereby enhance its overall
risk management. In the Commission's view, enhanced management of
membership risks is critical to mitigating the risk of Clearing Member
defaults that could undermine ICE Clear Europe's ability to maintain
prompt and accurate clearance and settlement of securities transactions
and the safeguarding of securities and funds at ICE Clear Europe. For
example, ICE Clear Europe relies on accurate end-of-day prices to
generate margin
[[Page 55048]]
requirements, which it uses to manage the risks associated with
clearing CDS portfolios. Similarly, ICE Clear Europe relies on its
default management tools to help manage and reduce the risks associated
with a defaulting Clearing Member's portfolio. Such risks, if not
properly managed, could cause ICE Clear Europe to realize losses on
such portfolios and could disrupt ICE Clear Europe's ability to
promptly and accurately clear CDS and other derivative transactions and
safeguard securities and funds which are in the custody or control of
ICE Clear Europe or for which it is responsible. For these reasons, the
Commission believes that the proposed rule change, in establishing a
new Policy that clearly and succinctly documents membership criteria
and the related processes for admitting, monitoring, and terminating
Clearing Members, would promote the prompt and accurate clearance and
settlement of securities transactions and help assure the safeguarding
of securities and funds which are in the custody or control of ICE
Clear Europe or for which it is responsible. Finally, the Commission
believes that, in defining the responsibilities of the document owner
in document governance, breach management, and exception handling, the
Policy would help to ensure ongoing and consistent compliance with ICE
Clear Europe's clearing membership criteria and related processes for
admission to membership, monitoring, and termination of membership, as
well as establish a process to modify the Policy as needed.
ii. Clearing Membership Procedures
As discussed above, the new Procedures would describe in further
detail ICE Clear Europe's existing processes for reviewing applications
for clearing membership, variations of membership permissions, ongoing
monitoring, and membership termination. The Procedures would have a
stated objective for the membership application process to establish a
due diligence process to ensure applicants meet ICE Clear Europe's
membership criteria at the time of application and on an ongoing basis
after admission, and also provide notifications of any changes to their
businesses that could impact their ability to meet the membership
criteria. The Procedures would provide the same document governance
arrangements for breach management, ongoing reviews, and exception
handling as those described above with respect to the Policy.
By creating a consolidated summary that would describe the
application of ICE Clear Europe's existing procedures and processes for
reviewing applications for clearing membership, variations of
membership permissions, ongoing monitoring, and termination of
membership, the Commission believes that the Procedures would enhance
ICE Clear Europe's ability to implement the complementary objectives of
the Documents and thereby enhance its membership risk management
policies and procedures that contribute to the effectiveness of its
overall risk management. Also, in defining the responsibilities of the
document owner in document governance, breach management, and exception
handling, the Procedures would help to ensure ongoing and consistent
compliance with ICE Clear Europe's general governance and exceptions
process for the Procedures document.
iii. Promoting the Prompt and Accurate Clearance and Settlement of
Securities Transactions, and Assuring the Safeguarding of Securities
and Funds
For the reasons discussed above, the Commission believes that the
proposed rule change would help to ensure that ICE Clear Europe
effectively manages the potential risks posed by its Clearing Members
in the clearance and settlement of CDS and other derivative contracts
and transactions cleared at ICE Clear Europe. Moreover, the Commission
believes that such membership risks, if not properly managed, could
threaten ICE Clear Europe's ability to operate and thereby clear and
settle cleared contracts, and also could threaten access to securities
and funds in ICE Clear Europe's control. Accordingly, the Commission
believes that, in ensuring that ICE Clear Europe has clear and
effective processes and procedures for identifying and managing
membership risks by setting appropriate membership criteria; assessing
applicants for membership based on such criteria; monitoring Clearing
Member adherence to the membership criteria on an ongoing basis;
authorizing variations of permissions to Clearing Members; terminating
membership; and establishing clear document governance procedures for
the Documents, the proposed rule change would promote the prompt and
accurate clearance and settlement of securities transactions and help
assure the safeguarding of securities and funds which are in the
custody or control of the ICE Clear Europe or for which it is
responsible.
Therefore, the Commission finds that the proposed rule change would
promote the prompt and accurate clearance and settlement of securities
transactions, and assure the safeguarding of securities and funds in
ICE Clear Europe's custody or control, consistent with the 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)(2)(i) and (v) Under the Act
Rule 17Ad-22(e)(2)(i) and (v) require that ICE Clear Europe
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to provide for governance arrangements
that are clear and transparent and specify clear and direct lines of
responsibility, respectively.\11\ As discussed above, each of the
Documents would establish the general governance and exceptions process
for that document, and this process would be identical between the
Documents. The Commission believes that, in doing so, the Documents
would establish clear and transparent arrangements for ensuring that
ICE Clear Europe personnel adhere to the Documents and for modifying
the Documents as needed. The Commission also believes that the
Documents would define clearly the roles and responsibilities of the
document owner, the Head of Department, the Chief Risk Officer, and the
Head of Compliance for document governance, breach management, and
exception handling. The Commission believes that these lines of
responsibility would be clear and transparent because they would be
defined and readily available for review in the Documents.
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\11\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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As discussed above, the Procedures would define the roles and
responsibilities of the relevant departments within ICE Clear Europe in
the application process prior to submission of applications to the
Executive Risk Committee for approval. The Procedures would specify
that applications for membership are formally considered, and approved
and rejected by, the Executive Risk Committee, and that the relevant
Product Risk Committees are notified of approved applications. The
Commission believes that these aspects of the proposed rule change
would help to ensure that the governance regarding review and approval
of applicants is clear and transparent, and also establishes a clear
and direct line of responsibility, by clearly specifying that the
Executive Risk Committee would approve or disapprove applications under
delegated authority from the Board. The Commission believes this would
therefore clearly specify the
[[Page 55049]]
responsibility of ICE Clear Europe management in approving or rejecting
applicants.
For these reasons, the Commission finds that the proposed rule
change is consistent with Rule 17Ad-22(e)(2)(i) and (v).\12\
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\12\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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C. Consistency With Rule 17Ad-22(e)(18) Under the Act
Rule 17Ad-22(e)(18) requires that ICE Clear Europe establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to establish objective, risk-based, and publicly
disclosed criteria for participation, which permit fair and open access
by direct and, where relevant, indirect participants and other
financial market utilities, to require participants to have sufficient
financial resources and robust operational capacity to meet obligations
arising from participation in the clearing agency, and monitor
compliance with such participation requirements on an ongoing
basis.\13\
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\13\ 17 CFR 240.17Ad-22(e)(18).
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As discussed above, the Documents would summarize the core
membership requirements and additional information on core membership
criteria, which would include minimum capital requirements as well as a
description of additional financial requirements that ICE Clear Europe
may impose on Clearing Members to meet the minimum capital requirement.
In particular, the Procedures would address more detailed aspects of
the calculation of member capital; Guaranty Fund contributions for both
CDS and F&O clearing services; the margin-to-capital ratio requirement;
default management capabilities; and EOD price submissions for CDS
Clearing Members. The Commission believes that these aspects of the
proposed rule change would establish objective, risk-based, and
disclosed clearing membership criteria that require applicants for
clearing membership to prove that they have sufficient financial
resources and robust operational capacity to meet obligations arising
from participation in ICE Clear Europe. Moreover, the Commission
believes that these criteria represent objective criteria which any
applicant for clearing membership could potentially satisfy, thereby
permitting fair and open access to membership at ICE Clear Europe.
As discussed above, the Documents also would summarize ICE Clear
Europe's ongoing monitoring of Clearing Members that would include: (i)
Periodic review of the financial position and compliance with the
relevant membership requirements of each Clearing Member; (ii)
quarterly review of Clearing Members' capital situation and financial
information, and monthly reviews of the financial information of FCM/BD
Clearing Members; (iii) quarterly counterparty rating system report,
which aggregates risk factors covering credit, market price, liquidity,
and operational risk for each Clearing Member; (iv) the watch list
highlighting Clearing Members with special risk situations; (v) annual
member returns pursuant to which Clearing Members must provide certain
information to ICE Clear Europe on AML/KYC requirements, authorized
signatories, compliance with the Rules, and key contact information;
and (vi) daily monitoring of Clearing Member operational performance in
fulfilling financial obligations to cover cash payments, margin
collateral, Guaranty Fund contributions, and delivery obligations. The
Commission believes that these aspects of the proposed rule change
would facilitate ICE Clear Europe's ability to monitor compliance by
Clearing Members with its participation requirements on an ongoing
basis and thereby mitigate the risks posed by Clearing Members who may
no longer meet the requirements for continuing participation in ICE
Clear Europe.
For these reasons, the Commission finds that the proposed rule
change is consistent with Rule 17Ad-22(e)(18).\14\
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\14\ 17 CFR 240.17Ad-22(e)(18).
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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 \15\ and Rules 17Ad-22(e)(2)(i) and (v), and (e)(18)
thereunder.\16\
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\15\ 15 U.S.C. 78q-1(b)(3)(F).
\16\ 17 CFR 240.17Ad-22(e)(2)(i) and (v), and (e)(18).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\17\ that the proposed rule change (SR-ICEEU-2021-014), be, and hereby
is, approved.\18\
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\17\ 15 U.S.C. 78s(b)(2).
\18\ 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.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21616 Filed 10-4-21; 8:45 am]
BILLING CODE 8011-01-P
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