Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change Relating to Amendments to the ICE Clear Europe Counterparty Credit Risk Policy and Counterparty Credit Risk Procedures

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Published

February 7, 2023

Issuing agencies

Securities and Exchange Commission

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<title>Federal Register, Volume 88 Issue 25 (Tuesday, February 7, 2023)</title>
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[Federal Register Volume 88, Number 25 (Tuesday, February 7, 2023)]
[Notices]
[Pages 8018-8020]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-02510]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96787; File No. SR-ICEEU-2023-004]

Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing of Proposed Rule Change Relating to Amendments to the ICE
Clear Europe Counterparty Credit Risk Policy and Counterparty Credit
Risk Procedures

February 1, 2023.
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 January 20, 2023, 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. 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

ICE Clear Europe Limited (``ICE Clear Europe'' or the ``Clearing
House'') proposes to modify its Counterparty Credit Risk Policy (the
``CC Risk Policy'') and Counterparty Credit Risk Procedures (the ``CC
Risk Procedures'') to provide that the Clearing House's framework for
monitoring counterparty credit risk covers links,\3\ as defined in the
Commission's standards for clearing agencies. The Clearing House also
proposes to make certain further updates and clarifications to the CC
Risk Procedures.\4\
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\3\ ``Link'' means ``a set of contractual and operational
arrangements between two or more clearing agencies, financial market
utilities, or trading markets that connect them directly or
indirectly for the purposes of participating in settlement, cross
margining, expanding their services to additional instruments or
participants, or for any other purposes material to their
business.'' 17 CFR 240.17Ad-2(a)(8).
\4\ Capitalized terms used but not defined herein have the
meanings specified in the ICE Clear Europe Clearing Rules and the CC
Risk Policy and CC Risk Procedures, as applicable.
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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, 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 revise the CC Risk Policy in order
to provide that the Clearing House's policies for monitoring
counterparty credit risk apply to links, as defined in the Commission's
regulations. ICE Clear Europe is also proposing to revise the CC Risk
Procedures to make conforming updates in respect of links and to make
certain other clarifications and enhancements.
I. Counterparty Credit Risk Policy
The amendments to the CC Risk Policy would include as part of the
description of the Clearing House's counterparty credit risk the risk
that a ``link'' defaults, leaving the Clearing House to fund material
contractual or operational arrangements. A definition of ``link'',
based on the definition in Rule 17Ad-22(a)(8),\5\ would be added.
Conforming references to links would be added in relevant portions of
the CC Risk Policy: the amendments would add that an objective of the
CC Risk Policy is to minimize the risk of the Clearing House realizing
a material loss due to a link defaulting, and that a means by which the
Clearing House achieves this objective is to identify, monitor and
manage risks from links. The amendments would also clarify the credit
scoring with respect to links (which may use credit criteria other than
those used with respect to CMs) and provide that for link
counterparties whose credit scores are worse than a required threshold,
a mitigating action that the Clearing House may take is to change its
usage of links.
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\5\ 17 CFR 240.17Ad-22(a)(8).
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Non-substantive drafting and formatting updates would also be made.
II. CC Risk Procedures
The CC Risk Procedures, which supplement the CC Risk Policy, would
be updated to make conforming changes to those discussed above with
respect to links, including as to including the risk of a link default
as a type of counterparty credit risk that Clearing House seeks to
manage. The amendments would provide that in order to minimize
counterparty credit risk, the Clearing House would identify, monitor
and manage material risks from links as well as ensure that all
counterparty risks are eliminated prior to off-boarding counterparties.
The amendments would remove a specific statement that FSPs must be
legal entities in approved jurisdictions. Consistent with other ICE
Clear Europe policies and current practice, the Clearing House legal
department separately reviews and determines approved jurisdictions,
and accordingly a reference to this process in the CC Risk Procedures
is unnecessary. The amendments would also add a specific reference to
Anti-Money Laundering and Know-Your-Customer screenings. These
amendments would also state that agreements with FSPs are subject to
review by the legal team, including analysis of legal risk relating to
governing law and in that context jurisdiction. These changes are
intended to more clearly reflect current practice of the Clearing
House.
Similar to the changes in the CC Policy, the amendments would
revise the discussion of credit scoring to reflect that the Clearing
House may use related

[[Page 8019]]

credit criteria (as opposed to credit scores) to evaluate credit
quality of counterparties. The amendments reflect the fact that
different criteria may be appropriate for evaluation of the credit
risks of FSPs and links, as compared to CMs. Conforming changes to
refer to such related criteria would be made where applicable in the CC
Risk Procedures. Such evaluations will continue to be made daily as set
out in the counterparty risk reviews section of the CC Risk Procedures
and the related Counterparty Credit Risk Parameters (``Parameters'')
(notwithstanding removal of certain duplicative language in the
discussion of credit scoring). A statement that the CRS may incorporate
exposure information reflecting the risk of the CM's portfolio held
with the Clearing House (specifically, loss given default) or analyze
exposure with reference to financial metrics would be removed, to be
consistent with changes to the relevant credit risk model used in
determining CRS scoring (which does not consider such exposures).
The amendments would provide that late submissions of quarterly
financial statements by counterparties would be communicated and
escalated as set out in the Parameters. In the discussion of risk
classification, the amendments would provide that CMs who reach the
Watch List Criteria are added automatically to the Watch List, and that
the Watch List Criteria are set out in the Parameters. These updates
are to ensure alignment between the Clearing House's risk management
framework documentation, including the CC Risk Procedures and the
Parameters.
In the section describing the Clearing House's counterparty credit
risk monitoring, the amendments would add that such monitoring and
review includes monitoring for cross-exposures of CMs' affiliates
(defined in the relevant Parameters as uncollateralized stress loss for
clearing members, unsecured exposure for FSPs and estimate loss for
purposes of links). Such continuous monitoring would, in addition to
other sources, be based on credit scores and public news. The
continuous monitoring will facilitate production of daily, rather than
weekly, risk reviews. Other reviews of monitoring activity would
continue to be carried out monthly and quarterly. The amendments would
also provide that review frequency and criteria in addition to findings
and recommendations from the counterparty risk reviews would be
approved based on the Parameters.
The amendments would add to the discussion of the Clearing House's
practices for monitoring its exposures to CMs that the Clearing House
also monitors at least monthly credit cross-exposures among
counterparties and their affiliates in all their capacities. These
amendments are intended to reflect the expansive nature of the Clearing
House's current risk management practices.
With respect to exposure limits and related capital calculations
for purposes of CMs that are part of a Systemically Important
Institution, the amendments will use the more specific definition of
Systemically Important Institutions in the Parameters as an institution
with assets greater than 200 billion Euros that is treated as a
Globally Systemically Important Institution by the European Banking
Authority. This would replace the previous, more subjective standard. A
reference to the institution being in a robust legal jurisdiction has
been removed as unnecessary in light of the revised definition and
approach to AML/KYC and governing law review discussed above.
Non-substantive drafting and formatting updates would also be made.
(b) Statutory Basis
ICE Clear Europe believes that the amendments to the CC Risk Policy
and the CC Risk Procedures 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 amendments to the CC Risk Procedures and CC Risk Policy are
designed to more clearly document certain of the Clearing House's
practices with respect to the management of counterparty credit risk
and would explicitly include references to losses from defaulting links
(in addition to the existing references to losses resulting from
defaulting CMs and losses resulting from the default of other FSPs).
The amendments would make certain other updates and clarifications with
respect to counterparty credit risk evaluation more generally. The
proposed amendments thus enhance the overall risk management of the
Clearing House and promote the stability of the Clearing House and the
prompt and accurate clearance and settlement of cleared contracts. The
proposed amendments to the CC Risk Policy and CC Risk Procedures are
thus also generally consistent with the protection of investors and the
public interest in the safe operation of the Clearing House. The
aspects of the updates to the CC Risk Policy and CC Risk Procedures
that relate to counterparty credit risk for FSPs or links will also
help manage the risk of assets held by the Clearing House from CMs and
their customers that may otherwise be affected by the default of an FSP
or link, and thus enhance 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 CC Risk Policy and the Risk Procedures are
also consistent with relevant provisions of Rule 17Ad-22. Rule 17Ad-
22(e)(3)(i) \9\ provides that the ``covered clearing agency shall
establish, implement, maintain and enforce written policies and
procedures reasonable designed to, as applicable [. . .] maintain a
sound risk management framework that'' among other matters identifies,
measures, monitors and manages the range of risks that it faces. The
amendments to the CC Risk Policy and the CC Risk Procedures are to
enhance the Clearing House's policies and practices for monitoring and
reviewing counterparty credit risk and related exposures, provide clear
descriptions of such policies and processes, as well as align with
other documents in ICE Clear Europe's overall risk management
framework. The amendments would thus strengthen the management of
potential counterparty risks, and risk management more generally. In
ICE Clear Europe's view, the amendments are therefore consistent with
the requirements of Rule 17Ad-22(e)(3)(i).\10\
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\9\ 17 CFR 240.17 Ad-22(e)(3)(i).
\10\ 17 CFR 240.17 Ad-22(e)(3)(i).
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Rule 17A-22(e)(16) provides that the ``covered clearing agency
shall establish, implement, maintain and enforce written policies and
procedures reasonable designed to, as applicable [. . .] safeguard
[its] own and its participants' assets, minimize the risk of loss and
delay in access to these assets, and invest such assets in instruments
with minimal credit, market and liquidity risks.'' \11\ As discussed
above, the amendments to the CC Risk Policy and CC Risk Procedures are
intended to document Clearing House practices with

[[Page 8020]]

respect to the management of credit risk with respect to FSPs and
links, including any through which assets of the Clearing House and CMs
may be invested or maintained. The policy and procedures address the
monitoring of an FSP or link's credit risk and the steps the Clearing
House may take to mitigate such risk where it exceeds exposure limits.
As such, the CC Risk Policy and CC Risk Procedures will continue to
enable the Clearing House to safeguard such assets and minimize the
risk of loss from FSP default, consistent with the requirements of Rule
17Ad-22(e)(16).\12\
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\11\ 17 CFR 240.17Ad-22(e)(16).
\12\ 17 CFR 240.17Ad-22(e)(16).
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For similar reasons, the amendments to the CC Risk Policy and the
CC Risk Procedures are consistent with the requirements of Rule 17A-
22(e)(20),\13\ which provides that the ``covered clearing agency shall
establish, implement, maintain and enforce written policies and
procedures reasonable designed to, as applicable [. . .] identify,
monitor, and manage risks related to any link the covered clearing
agency establishes with one or more other clearing agencies, financial
market utilities, or trading markets''. The amendments document the
Clearing House practices and policies with respect to the management of
credit risk and related exposure with respect to link counterparties,
and in ICE Clear Europe's view are therefore consistent with the
requirements of Rule 17Ad-22(e)(20).\14\
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\13\ 17 CFR 240.17Ad-22(e)(20).
\14\ 17 CFR 240.17Ad-22(e)(20).
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(B) Clearing Agency's Statement on Burden on Competition

ICE Clear Europe does not believe the proposed documents would have
any impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purposes of the Act. The amendments
to the CC Risk Policy and the CC Risk Procedures are intended to
enhance practices with respect to counterparty credit risk monitoring
and management, for CMs, FSPs and links, and are not intended to impose
new requirements on CMs. The proposed amendments clarify ICE Clear
Europe's risk management procedures and ensure that ICE Clear Europe
continues to appropriately monitors and limit risks relating to CMs,
FSPs and links' credit risk. The proposed amendments are not expected
to materially change margin requirements or costs for CMs and any such
change which may occur would be tailored to the counterparty credit
risk presented by a particular CM. ICE Clear Europe does not believe
that the proposed amendments will otherwise impact competition among
Clearing Members or other market participants or affect the ability of
market participants to access clearing generally. Therefore, ICE Clear
Europe does not believe the proposed rule change imposes any burden on
competition that is inappropriate or unnecessary 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

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#3240475e571f515d5f5f575c4641724157511c555d44"><span class="__cf_email__" data-cfemail="3d4f485158105e5250505853494e7d4e585e135a524b">[email&#160;protected]</span></a>. Please include
File Number SR-ICEEU-2023-004 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-2023-004. 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-2023-004 and should be
submitted on or before February 28, 2023.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-02510 Filed 2-6-23; 8:45 am]
BILLING CODE 8011-01-P

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