Notice2021-26448
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change Relating to the ICC Clearing Rules and 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
December 7, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 232 (Tuesday, December 7, 2021)</title>
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[Federal Register Volume 86, Number 232 (Tuesday, December 7, 2021)]
[Notices]
[Pages 69308-69311]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-26448]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93690; File No. SR-ICC-2021-023]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change Relating to the ICC Clearing Rules and
ICC Exercise Procedures
December 1, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934,\1\ and Rule 19b-4,\2\ notice is hereby given that on November 19,
2021, ICE Clear Credit LLC (``ICC'') filed with the Securities and
Exchange Commission (the ``Commission'') the proposed rule change as
described in Items I, II and III below, which Items have been prepared
primarily by ICC. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The principal purpose of the proposed rule change is to revise the
ICC Clearing Rules (``Rules'') and Exercise Procedures \3\ in
connection with the clearing of credit default index Swaptions (``Index
Swaptions'').\4\
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\3\ Capitalized terms used but not defined herein have the
meanings specified in the Rules and Exercise Procedures.
\4\ Index Swaptions are also referred to in ICC's policies and
procedures as ``index options'' or ``index CDS options'', or in
similar terms.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, ICC included statements
concerning the purpose of and basis for the proposed rule change,
security-based swap submission, or advance notice and discussed any
comments it received on the proposed rule change, security-based swap
submission, or advance notice. The text of these statements may be
examined at the places specified in Item IV below. ICC has prepared
summaries, set forth in sections (A), (B), and (C) below, of the most
significant aspects of these statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(a) Purpose
ICC proposes revising the ICC Rules and Exercise Procedures related
to the clearing of Index Swaptions.\5\ The proposed changes to the ICC
Rules and Exercise Procedures enhance the restructuring component of
iTraxx Index Swaptions and include other clarifications or updates,
including with respect to fallback measures in the Exercise Procedures.
ICC proposes to make the changes effective following Commission
approval of the proposed rule change. The proposed revisions are
described in detail as follows.
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\5\ Pursuant to an Index Swaption, one party (the ``Swaption
Buyer'') has the right (but not the obligation) to cause the other
party (the ``Swaption Seller'') to enter into an index credit
default swap transaction at a pre-determined strike price on a
specified expiration date on specified terms. In the case of Index
Swaptions cleared by ICC, the underlying index credit default swap
is limited to certain CDX and iTraxx index credit default swaps that
are accepted for clearing by ICC, and which would be automatically
cleared by ICC upon exercise of the Index Swaption by the Swaption
Buyer in accordance with its terms.
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I. Rule Amendments
The proposed amendments revise Rule 26R-319, which addresses
procedures for settlement of an exercised Index Swaption. ICC proposes
clarifications to Rule 26R-319(b), under which additional settlements
may be required. The proposed changes add a parenthetical with an
exception and specify that clause (i) regarding the settlement of
amounts owed is subject to
[[Page 69309]]
any modification with respect to fixed rate payments or accrual rebates
as specified by ICC Circular.
ICC proposes to revise Rule 26R-319(c) to amend the restructuring
component of iTraxx Index Swaptions. Currently, the iTraxx Index
Swaption delivers a single name position in addition to the re-
versioned underlying index. For bilateral iTraxx Index Swaptions,
counterparties to Index Swaption contracts on the restructured single
name decide what the Index Swaption will deliver in the future if
exercised/assigned: Single name physical position, buyer triggered
auction cash payment, or seller triggered auction cash payment.
Following the changes, the cleared iTraxx Index Swaption would deliver
a blend of all three outcomes such that the cleared instrument would
more closely replicate the payout of the bilateral instrument.
Namely, under the amendments, the blended deliverables apply for
iTraxx Index Swaption expiries on or after the auction settlement date,
such that the Index Swaption delivers a re-versioned underlying index
plus a blend of cash payment and single name. In subsection (c), ICC
proposes minor updates in introducing Existing Restructuring as a
defined term. Clause (ii) continues to discuss the Underlying New Trade
that comes into effect \6\ and includes a reference to new clause (v).
Clause (iii) would be amended and divided into two clauses. Amended
clause (iii) discusses the treatment of the Underlying New Trade
described in clause (ii) if the expiration date occurs prior to
commencement of the CEN Triggering Period (as defined in the
Restructuring Procedures) \7\ for the Existing Restructuring. New
clause (iv) discusses the treatment of the Underlying New Trade
described in clause (ii) if the expiration date occurs on or following
the commencement of such period but prior to the auction settlement
date.
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\6\ An Underlying New Trade remains defined in Rule 26R-102 as a
new single name CDS trade that would arise upon exercise of an Index
Swaption where a relevant Restructuring Credit Event, if applicable,
has occurred with respect to a reference entity in the relevant
index.
\7\ ICC Restructuring Procedures available at: <a href="https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Restructuring_Procedures.pdf">https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Restructuring_Procedures.pdf</a>.
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Proposed clause (v) sets out the framework for the blended
deliverables and would be applicable if the expiration date occurs on
or following the auction settlement date. The proposed language
requires ICC to (1) determine the extent to which positions in relevant
single name contracts of the relevant tenor referencing the reference
entity subject to the Existing Restructuring are settled; (2)
determine, if applicable, a cash settlement amount with respect to the
corresponding portion of the notional amount of the Index Swaption
applicable to such reference entity; and (3) with respect to the
remaining portion of such notional amount, an Underlying New Trade to
come into effect. Additional specifications with respect to the
Underlying New Trade and a reference to the Exercise Procedures or
other applicable procedures are included.
II. Exercise Procedures Amendments
The Exercise Procedures supplement the provisions of Subchapter 26R
of the Rules with respect to Index Swaptions. The proposed amendments
define Minimum Intrinsic Value in paragraph 1 as a minimum intrinsic
value below which an Index Swaption position would not be identified as
``in the money'' for paragraph 2.2(e)(ii) or 2.8. ICC may establish a
Minimum Intrinsic Value and/or permit an exercising party to specify a
Minimum Intrinsic Value for its Index Swaptions for a relevant pre-
exercise notification period or exercise period. ICC would incorporate
this term in respect of fallback provisions described in paragraphs
2.2(e)(ii) and 2.8. Specifically, ICC would take into account any
applicable Minimum Intrinsic Value as part of its procedures for the
pre-exercise notification period (during which preliminary exercise
notices can be submitted, modified, and/or withdrawn) in paragraph
2.2(e)(ii) and for automatic exercise in paragraph 2.8. The proposed
changes further specify that an ``in the money'' determination will be
based on intrinsic value. In general, if intrinsic value is greater
than the Minimum Intrinsic Value, the position will be exercised.
ICC proposes paragraph 3, which would apply in connection with Rule
26R-319(c)(v) where an Existing Restructuring has occurred with respect
to a reference entity underlying an exercised Index Swaption and the
Index Swaption expiration date occurs on or following the auction
settlement date. Paragraph 3 provisions may be modified or supplemented
pursuant to ICC Circular, as specified in paragraph 3.1.
Paragraph 3.2 would set out the determination of settled portions.
The proposed changes define Relevant CDS Transactions as single name
contracts in the relevant reference entity cleared at ICC and such
others as ICC may specify by Circular. ICC would determine the portion
of the aggregate notional amount of Relevant CDS Transactions for which
an eligible party timely delivered a credit event notice (``Triggered
Portion'') and the portion as to which no such notice was timely
delivered (``Untriggered Portion''). With respect to the Triggered
Portion, paragraph 3.2 defines the Buyer and Seller Triggered Portions
as the portions for which the protection buyer or seller delivered
certain notices (i.e., prevailing credit event notice, prevailing
notice to exercise movement option). The portion for which a movement
option was applicable but for which neither protection buyer nor seller
delivered a notice to exercise would be the Unmoved Portion, and
together with the Untriggered Portion, the Untriggered/Unmoved Portion.
ICC may establish by Circular a threshold pertaining to the
Untriggered/Unmoved Portion under paragraph 3.2. This paragraph also
sets out how the Buyer Triggered, Seller Triggered and Untriggered/
Unmoved Portions are defined as percentages, namely the Buyer
Triggered, Seller Triggered, and Untriggered/Unmoved Percentages.
Paragraph 3.3 would discuss settlement in respect of an exercised
Index Swaption to which Rule 26R-319(c)(v) applies. Subsection (a) sets
forth ICC's determination of the cash settlement amount owed pursuant
to Rule 26R-319(c)(v)(2). ICC would sum the settlement amounts in cash
applicable to the Buyer and Seller Triggered Portions, which would be
calculated based on the Relevant Notional Amount (i.e., the notional
amount under the Index Swaption applicable to such reference entity)
multiplied by the Buyer and Seller Triggered Percentages. The cash
settlement amount may be adjusted to take into account applicable fixed
payments and accrual rebates as specified by ICC Circular. Under
subsection (b), the notional amount of the Underlying New Trade
established under Rule 26R-319(c)(ii) and (v)(3) would be the Relevant
Notional Amount multiplied by the Untriggered/Unmoved Percentage.
(b) Statutory Basis
ICC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \8\ and the regulations
thereunder applicable to it, including the applicable standards under
Rule 17Ad-22.\9\ In particular, Section 17A(b)(3)(F) of the Act \10\
requires that the rule change be consistent with the prompt and
accurate clearance and settlement of securities
[[Page 69310]]
transactions and derivative agreements, contracts and transactions
cleared by ICC, the safeguarding of securities and funds in the custody
or control of ICC or for which it is responsible, and the protection of
investors and the public interest. ICC proposes changes to the Rules
and Exercise Procedures to support the clearing of Index Swaptions,
including to amend the restructuring component of iTraxx Index
Swaptions. Currently, the iTraxx Index Swaption delivers a single name
position in addition to the re-versioned underlying index. Under the
amendments, the blended deliverables apply for iTraxx Index Swaption
expiries on or after the auction settlement date, such that the Index
Swaption delivers a re-versioned underlying index plus a blend of cash
payment and single name. These changes enhance the restructuring
component such that the cleared instrument more closely replicates the
payout of bilateral instruments, which would provide additional
consistency to market participants. The additional clarifications or
updates ensure that the Rules and Exercise Procedures remain effective,
clear, and up-to-date. The changes clearly identify where ICC may
modify or supplement procedures by Circular. The amended Exercise
Procedures incorporate Minimum Intrinsic Value in respect of fallback
provisions in paragraphs 2.2(e)(ii) and 2.8. ICC believes that defining
this value would enhance the procedures to ensure that ICC's cleared
Index Swaptions are appropriately exercised. Moreover, the changes
continue to specify ICC's role in identifying ``in the money''
positions, taking into account Minimum Intrinsic Value, to ensure that
the processes associated with the pre-exercise notification period and
automatic exercise operate reliably. In ICC's view, the proposed rule
change will ensure that ICC's Rules and policies and procedures clearly
reflect the terms and conditions applicable to Index Swaptions and is
thus consistent with the prompt and accurate clearing and settlement of
the contracts cleared by ICC, including Index Swaptions, the
safeguarding of securities and funds in the custody or control of ICC
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.\11\
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\8\ 15 U.S.C. 78q-1.
\9\ 17 CFR 240.17Ad-22.
\10\ 15 U.S.C. 78q-1(b)(3)(F).
\11\ Id.
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The amendments would also satisfy relevant requirements of Rule
17Ad-22.\12\ Rule 17Ad-22(e)(1) \13\ requires each covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to provide for a well-founded,
clear, transparent, and enforceable legal basis for each aspect of its
activities in all relevant jurisdictions. The proposed changes support
the clearing of Index Swaptions by ICC, including by enhancing the
restructuring component of iTraxx Index Swaptions and making other
clarifications or updates, to ensure that the Rules and Exercise
Procedures clearly and accurately reflect the requirements and
procedures applicable to iTraxx Index Swaptions and Index Swaptions
more generally. Moreover, the changes to the Rules and Exercise
Procedures clearly identify where ICC may modify or supplement
procedures by Circular. The proposed rule change would thus continue to
support the legal basis for ICC's clearance of Index Swaptions and
operation of the exercise and assignment process. As such, the proposed
rule change would satisfy the requirements of the Rule 17Ad-
22(e)(1).\14\
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\12\ 17 CFR 240.17Ad-22.
\13\ 17 CFR 240.17Ad-22(e)(1).
\14\ Id.
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Rule 17Ad-22(e)(10) \15\ requires each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to establish and maintain transparent
written standards that state its obligations with respect to the
delivery of physical instruments, and establish and maintain
operational practices that identify, monitor, and manage the risks
associated with such physical deliveries. The Rules continue to clearly
set out the procedures for settlement of Index Swaptions on exercise.
Under the amendments, the blended deliverables apply for iTraxx Index
Swaption expiries on or after the auction settlement date, such that
the Index Swaption delivers a re-versioned underlying index plus a
blend of cash payment and single name. Moreover, the amended Exercise
Procedures clearly set out procedures associated with the determination
of the cash settlement amount owed pursuant to Rule 26R-319(c)(v)(2)
and the notional amount of the Underlying New Trade established under
Rule 26R-319(c)(ii) and (v)(3). In ICC's view, the Rules and Exercise
Procedures continue to enable ICC to identify and manage the risks of
settlement of Index Swaptions on exercise. As such, the amendments
would satisfy the requirements of Rule 17Ad-22(e)(10).\16\
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\15\ 17 CFR 240.17Ad-22(e)(10).
\16\ Id.
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Rule 17Ad-22(e)(17) \17\ requires, in relevant part, each covered
clearing agency to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to manage its operational
risks by (i) 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; and (ii)
ensuring that systems have a high degree of security, resiliency,
operational reliability, and adequate, scalable capacity. The enhanced
restructuring component in Rule 26R-319 would avoid introducing
unnecessary complexity or operational risk, as the iTraxx Index
Swaption would deliver a re-versioned underlying index plus a blend of
cash payment and single name, and proposed paragraph 3 of the Exercise
Procedures would further set out associated procedures. Moreover, the
Exercise Procedures allow ICC to manage the operational risks
associated with the exercise and assignment process by establishing
procedures for the exercise and assignment of Index Swaptions and
including fallback measures, which help mitigate the impact from
operational or technical issues and ensure that the system has a high
degree of security, resiliency, operational reliability, and adequate,
scalable capacity. The amendments to the Exercise Procedures add
clarity by specifying a minimum intrinsic value below which an Index
Swaption position would not be identified as ``in the money'' in
respect the pre-exercise notification period and automatic exercise and
would further ensure that the processes associated with these fallback
measures operate reliably. ICC's procedures continue to be designed to
help mitigate the impact from technical issues to ensure that the
system has a high degree of security, resiliency, operational
reliability, and adequate, scalable capacity. The proposed rule change
is therefore reasonably designed to meet the requirements of Rule 17Ad-
22(e)(17).\18\
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\17\ 17 CFR 240.17Ad-22(e)(17)(i) and(ii).
\18\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
ICC does not believe the proposed amendments would have any impact,
or impose any burden, on competition not necessary or appropriate in
furtherance of the purpose of the Act. The proposed changes to the ICC
Rules and Exercise Procedures will apply uniformly across all market
participants. Therefore, ICC does not believe the proposed rule
[[Page 69311]]
change imposes any burden on competition not necessary or appropriate
in furtherance of the purpose of the Act.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments relating to the proposed rule change have not been
solicited or received. ICC will notify the Commission of any written
comments received by ICC.
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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#3e4c4b525b135d5153535b504a4d7e4d5b5d10595148"><span class="__cf_email__" data-cfemail="4d3f382128602e2220202823393e0d3e282e632a223b">[email protected]</span></a>. Please include
File Number SR-ICC-2021-023 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-ICC-2021-023. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filings will also be available for inspection
and copying at the principal office of ICE Clear Credit and on ICE
Clear Credit's website at <a href="https://www.theice.com/clear-credit/regulation">https://www.theice.com/clear-credit/regulation</a>. All comments received will be posted without change.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-ICC-2021-023 and should be
submitted on or before December 28, 2021.
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. 2021-26448 Filed 12-6-21; 8:45 am]
BILLING CODE 8011-01-P
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