Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Amendments to the ICE Clear Europe Futures & Options Default Management Policy

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Published

January 11, 2022

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Securities and Exchange Commission

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<title>Federal Register, Volume 87 Issue 7 (Tuesday, January 11, 2022)</title>
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[Federal Register Volume 87, Number 7 (Tuesday, January 11, 2022)]
[Notices]
[Pages 1457-1460]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-00267]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93906; File No. SR-ICEEU-2021-026]

Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing and Immediate Effectiveness of Proposed Rule Change Relating
to Amendments to the ICE Clear Europe Futures & Options Default
Management Policy

January 5, 2022.
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 December 22, 2021, 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 prepared primarily by
ICE Clear Europe. ICE Clear Europe filed the proposed rule change
pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(4)(ii)
thereunder,\4\ such that the proposed rule change was immediately
effective upon filing with the Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(4)(ii).
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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 amendments is for ICE Clear
Europe to modify its Futures & Options Default Management Policy (``F&O
Default Management Policy'' or ``Policy'') to make certain
clarifications and updates.

[[Page 1458]]

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 F&O Default Management
Policy to (i) further describe certain aspects of the background UK
legal framework applicable to default management, (ii) update the
composition of the Clearing House's default management committee, (iii)
remove as unnecessary certain operational steps ICE Clear Europe will
take in order to suspend a Defaulter's trading access, (iv) update and
clarify the procedures related to hedging or liquidation of a
Defaulter's positions, (v) remove certain details around the auction
process that are set out in other Clearing House documentation; (vi)
clarify certain procedures for intra-group information sharing, (vii)
revise the description of the Clearing House's default testing, (viii)
revise and remove certain appendices in accordance with the other
changes made in the Policy, and (ix) make other various drafting
clarifications and improvements.
The background discussion of Points of Law applicable to default
management would be revised to provide certain clarification and
simplifications. Specifically, the amendments clarify the ability of
the Clearing House to transfer client positions and collateral in an
omnibus client account to a single solvent Clearing Member provided
that all clients in the omnibus account agree to such transfer. The
amendments would also clarify the benefits of legal certainty provided
to actions taken by the Clearing House in accordance with its default
rules under Part VII of the UK Companies Act. Other non-substantive
drafting clarifications and grammatical updates would be made to
improve readability.\5\ These amendments do not reflect a change in law
but are intended to further clarify state the existing UK legal
background principles.
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\5\ The amendments to this discussion do not affect the existing
statement, consistent with the Rules, that with respect to FCM/BD
Clearing Members in default, the customer accounts are intended to
be treated in accordance with applicable U.S. law.
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The section addressing the actions to be taken by the Clearing
House immediately following declaration of an Event of Default would be
updated to bifurcate the composition of the Clearing House's internal
default management committee to personnel that are always required to
be present and personnel (or deputies) that may attend if required.
Specifically, the default management committee would, at minimum,
consist of the President, Head of Clearing Risk and Chief Risk Officer.
The Chief Operating Officer or Head of Operations, Head of Treasury,
Head of Legal and Head of Compliance may attend if required.
Additionally, the amendments would provide that legal advisors or
counsel to the Clearing House may also be present where required.
Conforming changes would be made in other sections of the policy. The
amendments would also remove from a statement regarding the segmenting
of F&O Guaranty Fund resources in the waterfall by asset class, and
related information. The construction and composition of the F&O
Guaranty Fund is set out in the Rules and Procedures and existing F&O
Guaranty Fund Policy, and the Clearing House does not believe it needs
to be set out in the Policy.
Amendments would also remove provisions relating to an interest
rate swap default management committee, which are not used as the
Clearing House does not clear interest rate swaps.
Procedures for suspending the trading access of a defaulting
Clearing Member would also be clarified. The amendments would clarify
that the Clearing House may (but is not obligated to) instruct the
relevant market surveillance department and helpdesk to disable trading
accesses of the defaulter. The amendments would also remove certain
operational details as to the business hours of the ICE helpdesk and
the scope of denial of trading access that the Clearing House believes
are unnecessary for the Policy. The amendments are not intended to
reflect a change in practice but further describe document existing
practice.
In the section relating to identifying and hedging market exposure
from the defaulter's positions, amendments would add that the Clearing
House may seek to delta hedge the positions through its Exchanges, in
addition to conducting such hedging through brokers (as referenced in
the current Policy). The amendments would also remove a statement that
priority should be giving to hedging products contributing the greatest
original margin requirement. ICE Clear Europe does not believe the
limitation is necessary, as the hedging strategy should take into
account the particular circumstances and market conditions at the time.
Additionally, information describing the processes for entering
positions into the ICE Clear Europe internal risk database would be
removed as unnecessary operational detail.
Provisions addressing the treatment of physically deliverable
positions nearing expiry would be updated to clarify that once a
default has been declared, the Operations Department would be
responsible for taking control and may suspend delivery settlements due
back to the Defaulter, to implement the Clearing House's existing
rights under the Rules. Amendments would also clarify that while the
Clearing House may need to close out positions prior to the
commencement of the delivery process, it would not necessarily be
obligated to do so. In the Clearing House's view, this change would
provide appropriate flexibility in managing such positions of a
defaulter.
The section relating to liquidation of remaining positions would be
amended to reference all positions (not merely house positions), to
remove certain details about specific hedging strategies and to remove
a statement as to the order of preference of different options. ICE
Clear Europe believes that it is appropriate in default management to
have flexibility as to the particular type of hedging or liquidation
actions to be taken, in light of the nature of the positions and market
conditions at the time, and accordingly it is not desirable to state in
advance which default management option is preferable. Similarly, the
Clearing House does not believe it is necessary to specify particular
hedging strategies in the Policy; the appropriate strategy in a
particular default scenario should be selected at the time.
Amendments would also provide that the Clearing House default
management committee may seek advice from third party traders, in
addition to traders of non-defaulting Clearing Members, with respect to
liquidating the positions in a complex trading book. The amendments
would remove as unnecessary a requirement that the senior management
team first approach representatives of Clearing Members on the F&O
product risk committee for assistance.
Certain clarifications to the Policy relating to the conduct of a
default

[[Page 1459]]

auction and related auction portfolio disclosures would be made,
including to be consistent with the existing published F&O Auction
Terms. In particular, statements that the portfolio would be hedged
before commencing the auction would be removed, as it is not necessary
in all cases under the Rules or Procedures that a portfolio be hedged
before being auctioned. References to Clearing Members would be
replaced with more general references to auction participants, as the
F&O Auction Terms permit participation by non-Clearing Members in
certain circumstances. In line with the changes described above to
remove references to the IRS Default Committee, information relating to
the IRS Default Committee's role in directing the auction process would
be removed. A detailed description and example of bidding mechanics
would be removed as such details are addressed in the published F&O
Auction Terms.
Section 10.1 (Intra-group Information Sharing) would be amended to
remove certain details about coordination between ICE Group entities
that ICE Clear Europe believes are unnecessary under the Policy. As
proposed to be revised, the ICE Clear Europe President would remain
responsible for notifying counterparts at other ICE Group entities
where the defaulter is active in other relevant markets. Specific
details about the persons to be notified, and relevant backup
personnel, have been removed as unnecessary for the Policy.
The section of the Policy relating to F&O default testing would be
revised to reflect further describe current testing purposes and
practices and make other enhancements. As revised, the Clearing House
would conduct testing on an annual basis with compulsory participation
of Clearing members, with the goal of testing the responsibilities of
each Clearing House department, the systems and tools in the default
management process and external parties' preparation and understanding
of default procedures. The amendments would also revise and clarify
certain elements that comprise a default management test plan. As a
result, Former Appendix A--Default Test Plan (Summary) would be removed
as unnecessary given the updated description of default testing in the
Policy. The subsequent appendices would be renumbered accordingly.
Appendix B (Trade Procedure) (formerly Appendix C) would be updated
in respect of the description of the frequency of certain trade tests.
Specifically, the amendments would provide that Test trades would take
place according to the Multi-Year Default Management Plan, instead of
monthly or quarterly. Additionally, the amendments would remove an
incorrect reference to CDS Clearing Members (which are not as such
subject to an F&O policy).
Appendix C (formerly Appendix D) relating to regulatory reporting
would be replaced with a new schedule of default management information
to be shared with the Bank of England under applicable regulations,
including information as to actions taken prior to and following the
default, summary of positions and relevant margin and guaranty fund
contributions, and certain other exposures.
Other drafting clarifications and other changes would be made
throughout the Policy to make non-substantive typographical and other
corrections, including replacing ``Original Margin'' with ``Initial
Margin'' (and related abbreviations throughout), to conform to the
terminology used in the Rules and Procedures.
(b) Statutory Basis
ICE Clear Europe believes that the proposed amendments to the F&O
Default Management Policy are consistent with the requirements of
Section 17A of the Act \6\ and the regulations thereunder applicable to
it. In particular, Section 17A(b)(3)(F) of the Act \7\ 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.
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\6\ 15 U.S.C. 78q-1.
\7\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed changes to the F&O Default Management Policy are
designed to clarify and strengthen ICE Clear Europe's procedures for
managing the risk of default losses. The amendments would, among other
matters, update the composition of the default management committee,
clarify certain matters relating to the background UK legal framework
for default management, clarify and update certain procedures around
hedging and liquidation of the risk of a defaulter's positions, clarify
testing procedures, and ensure consistency with Clearing House Rules
and Procedures, including those relating to auctions. Through better
managing risks in Clearing Member default scenarios in this manner, the
proposed amendments to the F&O Default Management Policy would promote
the stability of the Clearing House and the prompt and accurate
clearance and settlement of cleared contracts. The enhanced default
risk management is therefore also generally consistent with the
protection of investors and the public interest in the safe operation
of the Clearing House. (ICE Clear Europe would not expect the
amendments to affect materially the safeguarding of securities and
funds in ICE Clear Europe's custody or control or for which it is
responsible.) Accordingly, the amendments satisfy the requirements of
Section 17A(b)(3)(F).\8\
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\8\ 15 U.S.C. 78q-1(b)(3)(F).
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The amendments to the F&O Default Management Policy are also
consistent with relevant provisions of Rule 17Ad-22.\9\ Rule 17Ad-
22(e)(3)(i) provides that ``[e]ach covered clearing agency shall
establish, implement, maintain and enforce written policies and
procedures reasonable designed to, as applicable [ . . . ] identify,
measure, monitor and manage the range of risks that arise in or are
borne by the covered clearing agency''.\10\ The amendments to the F&O
Default Management Policy are intended to clarify the Clearing House's
policies and practices that relate to default management, for
consistency with relevant Rules and Procedures and to make various
clarifications and other improvements. In ICE Clear Europe's view, the
amendments would enhance overall risk management, consistent with the
requirements of Rule 17Ad-22(e)(3)(i).\11\
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\9\ 17 CFR 240.17Ad-22.
\10\ 17 CFR 240.17Ad-22(e)(3)(i).
\11\ 17 CFR 240.17Ad-22(e)(3)(i).
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Rule 17Ad-22(e)(2) provides that ``[e]ach covered clearing agency
shall establish, implement, maintain and enforce written policies and
procedures reasonable designed to, as applicable [ . . . ] provide for
governance arrangements that are clear and transparent'' \12\ and
``[s]pecify clear and direct lines of responsibility''.\13\ The
amendments to the F&O Default Management Policy would clarify certain
responsibilities of the Clearing House's committees and personnel in
relation to default management. The amendments would also remove unused
provisions related to the IRS Default Management Committee. In ICE
Clear Europe's view, the amendments are therefore consistent with the
requirements of Rule 17Ad-22(e)(2).\14\
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\12\ 17 CFR 240.17Ad-22(e)(2)(i).
\13\ 17 CFR 240.17Ad-22(e)(2)(v).
\14\ 17 CFR 240.17Ad-22(e)(2).

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[[Page 1460]]

In addition, ICE Clear Europe believes the amendments satisfy Rule
17Ad-22(e)(13),\15\ which provides that ``[e]ach covered clearing
agency shall establish, implement, maintain and enforce written
policies and procedures reasonable designed to, as applicable [ . . . ]
ensure that the covered clearing agency has the authority and
operational capacity to take timely action to contain losses and
liquidity demands and continue to meet its obligations by, at a
minimum, requiring the covered clearing agency's participants and, when
practicable, other stakeholders to participate in the testing and
review of its default procedures, including any close-out procedures,
at least annually.'' As discussed above, the proposed amendments would
enhance ICE Clear Europe's overall default management processes,
including those relating to hedging and liquidation of the defaulter's
positions. In addition, the amendments would enhance default testing
practices, including to provide explicitly for annual compulsory
participation by Clearing Members and further describe the purposes of
such testing. Other amendments would ensure the Policy remains
consistent with the F&O Auction Terms. Overall, the amendments will
thus ensure that the Clearing House has clear processes in place to
manage Clearing Member defaults and be able to continue to meet the
Clearing House's obligations in default scenarios. The amendments
overall strengthen ICE Clear Europe's ability to contain losses in a
manner consistent with the requirements of Rule 17Ad-22(e)(13).\16\
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\15\ 17 CFR 240.17Ad-22(e)(13).
\16\ 17 CFR 240.17Ad-22(e)(13).
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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 being adopted to update and clarify the Clearing House's F&O
Default Management Policy, which relates to the Clearing House's
internal processes for addressing risks posed by F&O Clearing Member
defaults. The amendments do not change the obligations of Clearing
Members under the Rules or Procedures. Accordingly, ICE Clear Europe
does not believe the amendments would affect the costs of clearing, the
ability of market participants to access clearing, or the market for
clearing services generally. Although the Policy does state certain
obligations of Clearing Members to participate in annual default
testing, ICE Clear Europe believes this is appropriate in light of
regulatory requirements and the importance of such testing to the
default management process. Therefore, ICE Clear Europe does not
believe the proposed rule change imposes any burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Act.

Written comments relating to the proposed amendments have not been
solicited or received by ICE Clear Europe. ICE Clear Europe will notify
the Commission of any written comments received with respect to 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) of the Act \17\ and paragraph (f) of Rule 19b-4 \18\
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.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f).
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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#f587809990d8969a9898909b8186b5869096db929a83"><span class="__cf_email__" data-cfemail="90e2e5fcf5bdf3fffdfdf5fee4e3d0e3f5f3bef7ffe6">[email&#160;protected]</span></a>. Please include
File Number SR-ICEEU-2021-026 on the subject line.

Paper Comments

<bullet> 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-2021-026. 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 Europe and on ICE
Clear Europe's website at <a href="https://www.theice.com/clear-europe/regulation">https://www.theice.com/clear-europe/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-ICEEU-2021-026 and should be
submitted on or before February 1, 2022.
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\19\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-00267 Filed 1-10-22; 8:45 am]
BILLING CODE 8011-01-P

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