Notice2023-10472
Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to British Pounds Sterling as Client-Related Margin
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
May 17, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 88 Issue 95 (Wednesday, May 17, 2023)</title>
</head>
<body><pre>
[Federal Register Volume 88, Number 95 (Wednesday, May 17, 2023)]
[Notices]
[Pages 31571-31575]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-10472]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97489; File No. SR-ICC-2023-003]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to British Pounds Sterling as
Client-Related Margin
May 11, 2023.
I. Introduction
On March 13, 2023, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
section 19(b)(2) of the Securities Exchange Act of 1934 (the ``Act'')
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to accept
British Pounds Sterling in satisfaction of client-related margin
requirements. The proposed rule change was published for comment in the
Federal Register on March 30, 2023.\3\ The Commission did not receive
comments regarding the proposed rule change. For the reasons discussed
below, the Commission is approving the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Proposed Rule Change Relating to British Pounds
Sterling as Client-Related Margin; Exchange Act Release No. 97196
(March 24, 2023), 88 FR 19183 (March 30, 2023) (File No. SR-ICC-
2023-003) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
A. Background
ICC is registered with the Commission as a clearing agency for the
purpose of clearing CDS contracts. ICC requires that its Clearing
Participants post margin to collateralize their credit exposure to ICC,
based on the size and risk of their cleared positions. On a daily
basis, ICC determines margin requirements (i) for a Clearing
Participant's own cleared positions (referred to as ``house''
positions) and (ii) for the cleared positions of its clients.
The proposed rule change relates to the second category, margin
requirements for the cleared positions of clients. Specifically, the
proposed rule change would allow Clearing Participants to use cash
British pounds sterling (``GBP'') to satisfy client-related margin
requirements. Currently, a Clearing Participant may meet client-related
margin requirements with US dollars, Euros, or US Treasuries. ICC
previously accepted GBP in satisfaction of client-related margin
requirements, but it revoked that option in 2017.\4\ ICC did so because
no Clearing Participants posted GBP at that time, and ICC considered
GBP a less liquid resource due to the potential need to convert it to
either US dollars or Euros.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 81037 (June 28,
2017), 82 FR 31121 (July 5, 2017) (SR-ICC-2017-010) (notice). The
Commission subsequently approved ICC's proposal to remove the
eligibility of GBP cash (as well as certain other currencies) as
acceptable collateral. See Securities Exchange Act Release No. 81386
(Aug. 14, 2017), 82 FR 39484 (Aug. 18, 2017) (SR-ICC-2017-010).
---------------------------------------------------------------------------
ICC has decided to once again accept GBP in satisfaction of client-
related margin requirements. ICC is doing so in response to feedback
from customers. Several UK and EU market participants have asked ICC
for the ability to post GBP in addition to the asset types currently
accepted by ICC.
In addition to satisfying the request of these customers, ICC
believes that accepting GBP would overall better serve other UK and EU-
based market participants. Such participants may be seeking an
alternative CDS clearing service, given that ICE Clear Europe is
intending to close its UK-based CDS clearing service in October of this
year.\5\
---------------------------------------------------------------------------
\5\ See Circular C22/109 Cessation of clearing of CDS Contracts:
Postponement of Withdrawal Date, available at <a href="https://www.ice.com/publicdocs/clear_europe/circulars/C22109.pdf">https://www.ice.com/publicdocs/clear_europe/circulars/C22109.pdf</a>.
---------------------------------------------------------------------------
To carry out this change, ICC would amend the ICE Clear Credit
Rulebook (``ICC Rules'') and the ICE Clear Credit Treasury Operations
Policies & Procedures (``Treasury Policy''), as described in detail
below.\6\
---------------------------------------------------------------------------
\6\ Capitalized terms not otherwise defined herein have the
meanings provided to them in the Rules or Treasury Policy, as
applicable.
---------------------------------------------------------------------------
B. ICC Rules
Currently, Schedule 401 of the ICC Rules sets out the collateral
that ICC accepts to satisfy client-related margin requirements.
Schedule 401 describes this collateral in terms of the CDS contract for
which the margin is required. Specifically, Schedule 401 categorizes
the collateral as that which ICC accepts for client-related US-dollar
denominated products and client-related Euro denominated products.\7\
For each of those products, Schedule 401 requires that a Clearing
Participant meet a certain percentage of the relevant margin
requirement in particular collateral. Below is what Schedule 401
currently provides for client-related margin.
---------------------------------------------------------------------------
\7\ Currently, ICC only clears US-dollar denominated and Euro
denominated products, and the proposed rule change would not alter
this.
---------------------------------------------------------------------------
Client-Related Initial Margin Liquidity Requirements
Client-Related US Dollar Denominated Product Requirement
--------------------------------------------------------------------------------------------------------------------------------------------------------
Asset Type Minimum Percentage of Requirement
--------------------------------------------------------------------------------------------------------------------------------------------------------
US Dollar Denominated Assets 65%
(US Cash and/or US Treasuries)
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Eligible Collateral +35% (for a total of 100%)
(US Cash, Euro Cash, and/or US Treasuries)
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 31572]]
Client-Related Euro Denominated Product Requirement
--------------------------------------------------------------------------------------------------------------------------------------------------------
Asset Type Minimum Percentage of Requirement
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Eligible Collateral 100%
(US Cash, Euro Cash, and/or US Treasuries)
--------------------------------------------------------------------------------------------------------------------------------------------------------
The proposed rule change would update Schedule 401 by adding GBP to
the list of ``all eligible collateral.'' In addition, ICC would modify
the client-related margin requirements set forth in Schedule 401 of the
ICC Rules as follows. For US dollar denominated products, ICC would
change (i) the percentage of the requirement that must be met in US
dollars and US Treasuries from 65% to 45% and (ii) the percentage that
may be met in any eligible collateral (US dollars, Euros, GBP, and US
Treasuries) from 35% to 55%. For Euro denominated products, ICC would
change (i) the minimum percentage of the requirement that must be met
in US dollars, Euros, or US Treasuries from 100% to 45% and (ii) add a
new category that permits the remaining 55% of the requirement to be
met in any eligible collateral (US dollars, Euros, GBP, and US
Treasuries).
Client-Related Initial Margin Liquidity Requirements (as Amended)
Client-Related US Dollar Denominated Product Requirement
[GRAPHIC] [TIFF OMITTED] TN17MY23.000
Client-Related Euro Denominated Product Requirement
[GRAPHIC] [TIFF OMITTED] TN17MY23.001
Thus, ICC would amend Schedule 401 of the ICC Rules to add GBP as
Eligible Collateral for client-related margin requirements and modify
the percentages for both US-dollar denominated products and Euro
denominated products. With respect to these changes in particular, the
Commission notes that ICC would accept a smaller percentage of US
dollars for a client-related margin requirement relating to a US-dollar
denominated product than it does currently (65% versus 45%). Similarly,
ICC would accept a smaller percentage of US dollars/Euro/Treasuries for
a client-related margin requirement relating to a US-dollar denominated
product than it does currently (100% versus 45%). Because ICC does not
treat any collateral posted for clients as a liquidity resource
available in the event of a default, the Commission does not believe
that the changes in percentages or acceptance of GBP will affect ICC's
liquidity resources.\8\ Moreover, as ICC explained, the proposed
modified thresholds reflect the fact that only the first-day liquidity
needs (measured as 45% of requirements) must be met in a form of
collateral for which ICC maintains committed repurchase agreements and
committed FX facilities.\9\ The remaining 55% can be met with any type
of accepted collateral. The Commission therefore believes that with the
proposed modified thresholds,
[[Page 31573]]
ICC continues to maintain a conservative approach by directly requiring
that client-related first-day liquidity needs (i.e., 45% of Initial
Margin requirements) are met in the forms of permitted collateral for
which either collateral transformations are not necessary, or committed
agreements are in place to provide all necessary immediate liquidity.
---------------------------------------------------------------------------
\8\ As explained in its Liquidity Risk Management Framework, ICC
only uses client margin deposits in case of a client default, and
when ICC conducts stress testing of its liquidity resources, it
assumes that no client margin deposits are available.
\9\ Notice, 88 FR at 19184.
---------------------------------------------------------------------------
C. Treasury Policy
The overall purpose of the ICC Treasury Policy is to articulate the
policies and procedures used by the ICC Treasury Department. ICC's
Treasury manages ICC's cash and collateral, including the assets that
Clearing Participants transfer to ICC to satisfy client-related margin
requirements. The Treasury Policy therefore would apply to GBP provided
by Clearing Participants to satisfy client-related margin requirements.
Accordingly, ICC would modify the Treasury Policy to incorporate GBP,
as discussed below.
i. Section III, Funds Management
ICC first would modify Section III of the Policy, which concerns
ICC's funds management. Section III explains the types of funds in
which ICC's Treasury invests cash and collateral and ICC's overall
strategy with respect to such investments. For example, with respect to
Euros posted by Clearing Participants, Section III currently provides
that Treasury may, among other things, hold such cash in bank deposits
or allocate it to outside investment managers. The proposed rule change
would add to Section III a similar explanation of ICC's strategy with
respect to cash posted by Clearing Participants in GBP that is Client
Margin. With respect to those funds, ICC would not invest such GBP but
would instead hold it in bank deposits.
ii. Section IV, Cash Management
ICC next would update Section IV of the Policy, which explains how
ICC moves and transfers cash in the conduct of its business. Section
IV, among other things, describes how ICC monitors the daily collection
of margin to ensure the timely receipt of payment for settlement,
including the deadlines for the collection of margin and for the
withdrawal or substitution of collateral. Currently, ICC requires that
Clearing Participants notify it of withdrawals or substitutions
involving Euros by 9:00 a.m. ET. The proposed rule change would not
alter this deadline, but it would add GBP to the existing 9:00 a.m. ET
deadline. Thus, under the proposed rule change, Clearing Participants
would be required to notify ICC of withdrawals or substitutions
involving Euro cash and GBP collateral by 9:00 a.m. ET.
iii. Section V, Collateral Valuation
ICC also would update Section V of the Policy, which explains the
type of assets that ICC accepts as collateral and how ICC custodies
Clearing Participants' collateral. With respect to the assets that ICC
accepts as collateral, Section V of the Policy explains that Clearing
Participants are generally required to post assets as collateral that
meet ICC's standards for acceptable collateral. Section V also lists
the assets that ICC considers to be acceptable collateral. Currently,
as discussed above, ICC accepts US dollars, Euros, and US Treasuries.
The proposed rule change would add GBP to this list, with the caveat
that ICC accepts it as collateral for client positions only (as opposed
to Clearing Participants' house positions).
With respect to the assets that ICC accepts as collateral, ICC
prices those assets to determine their value (and therefore how much of
the margin requirement those assets satisfy). ICC also discounts the
value of the collateral to account for market risks and currency risks
(a process known as haircutting). Section V describes ICC's process for
valuing each of the types of collateral that it accepts. The proposed
rule change would update this valuation process to include GBP. The
process for valuing GBP would be as follows.
ICC would first convert the value of the GBP to an amount in US
dollars. ICC would then reduce this US-dollar value using the currency
haircut it has established for GBP. ICC would then apply this reduced
value to determine how much of the margin requirement the GBP
collateral satisfies.
If the GBP is being used to satisfy a margin requirement for a
Euro-denominated product, ICC would take one additional step. Margin
requirements for Euro-denominated products are expressed in Euros.
Thus, to determine how much of this margin requirement the GBP
collateral satisfies, ICC would convert the Euro margin requirement to
a US-dollar value. This is needed because, as discussed above, ICC
would convert the value of the GBP collateral to US dollars. In
converting the Euro margin requirement to a US-dollar value, ICC would
increase the value by the currency haircut it has established for Euro.
ICC would take this additional step because, as a default, ICC's
treasury system would have already haircut the Euro value in converting
it to US dollars. Thus, increasing the value by the haircut ensures
that, when determining how much of the margin requirement the GBP
collateral satisfies, ICC is considering the full amount of the margin
requirement (rather than only the amount post-haircut).
iv. Section VI, Treasury Management for Client Business
Finally, the proposed rule change would update Section VI of the
Policy. Section VI specifically describes how ICC manages margin
requirements associated with client trades. Among other things, Section
VI describes the types of collateral that ICC accepts to satisfy a
client-related margin requirement. Currently, Section VI lists US
dollars, Euros, and US government securities as collateral eligible for
client margin, and explains that these assets are in line with the
current eligible collateral for house-related margin requirements. The
proposed rule change would add GBP to this list, and also would delete
the explanation that these assets are in line with the current eligible
collateral for House margin. This particular explanation would no
longer be correct, given that ICC would accept GBP for client-related
margin requirements but not for house-related margin requirements.
Section VI of the Policy also explains the percentages of these
assets that a Clearing Participant can use to satisfy a particular
client-related margin requirement. This information mirrors Schedule
401 of ICC's rules, discussed above. Thus, the proposed rule change
would amend this description to match the revisions to Schedule 401
described above. For a client-related margin requirement relating to a
US-dollar denominated product, a Clearing Participant would be required
to meet (i) 45% of the requirement with US dollars and/or US Treasuries
and (ii) the remaining 55% with US dollars, Euros, US Treasuries, and/
or GBP. For a client-related margin requirement relating to a Euro
denominated product, a Clearing Participant would be required to meet
(i) 45% of the requirement with US dollars, Euros, and/or US Treasuries
and (ii) the remaining 55% with US dollars, Euros, US Treasuries, and/
or GBP.
With respect to these changes in particular, the Commission notes
that ICC would accept a smaller percentage of US dollars/Treasuries for
a client-related margin requirement relating to a US-dollar denominated
product than it does currently (65% versus 45%). Similarly, ICC would
accept a smaller percentage of US dollars/Euros/Treasuries for a
client-related margin requirement relating to a Euro denominated
product than it does
[[Page 31574]]
currently (100% versus 45%). Because ICC does not treat any collateral
posted for clients as a liquidity resource available in the event of a
default, the Commission does not believe that the changes in
percentages or acceptance of GBP will affect ICC's liquidity
resources.\10\ Moreover, as discussed above, the Commission believes
that with the proposed modified thresholds, ICC would continue to
maintain a conservative approach by directly requiring that client-
related first-day liquidity needs (i.e., 45% of Initial Margin
requirements) are met in the forms of permitted collateral for which
either collateral transformations are not necessary, or committed
agreements are in place to provide all necessary immediate liquidity.
---------------------------------------------------------------------------
\10\ As explained in its Liquidity Risk Management Framework,
ICC only uses client margin deposits in case of a client default,
and when ICC conducts stress testing of its liquidity resources, it
assumes that no client margin deposits are available.
---------------------------------------------------------------------------
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.\11\ For the reasons discussed below, the Commission finds
that the proposed rule change is consistent with section 17A(b)(3)(F)
\12\ of the Act and Rule 17Ad-22(e)(5) \13\ thereunder.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78s(b)(2)(C).
\12\ 15 U.S.C. 78q-1(b)(3)(F).
\13\ 17 CFR 240.17Ad-22(e)(5).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions.\14\ Based on its
review of the record, and for the reasons discussed below, the
Commission believes the proposed changes to ICC's Rules and the
Treasury Policy are consistent with the promotion of the prompt and
accurate clearance and settlement of securities transactions.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As discussed above, the proposed revisions to the ICC Rules and
Treasury Policy would allow Clearing Participants to post GBP to
satisfy client-related margin requirements. The Commission believes
that these changes, by expanding the collateral that clients could
provide to Clearing Participants to satisfy margin requirements, would
encourage clients to clear their positions at ICC. The Commission
believes this could be especially true for clients that are based in
the UK or otherwise have reserves of GBP. Thus, the Commission believes
this aspect of the proposed rule change would promote the prompt and
accurate clearance and settlement of securities transactions among
clients.
Moreover, as noted above, ICC requires that Clearing Participants
satisfy a certain percentage of a client-related margin requirement in
US dollars and/or Euros, as applicable. The proposed rule change would
lower the minimum percentage that a Clearing Participant must meet in
US dollars and/or Euros. The proposed rule change also would allow
Clearing Participants to use GBP to satisfy the non-US dollar/Euros
portion. Again, the Commission believes these changes would encourage
clients to clear transactions at ICC, especially those who may have
reserves of GBP. The Commission further believes that doing so would
not materially affect ICC's available liquidity resources in case of a
default because, consistent with its current practice, ICC would not
treat the GBP posted to satisfy a client's margin requirement as a
liquidity resource available in the event of a default. As discussed
above, ICC only uses client margin deposits in case of a client
default, and when ICC conducts stress testing of its liquidity
resources, it assumes that no client margin deposits are available.
Moreover, as discussed above, ICC would continue to maintain a
conservative approach by directly requiring that client-related first-
day liquidity needs (i.e., 45% of Initial Margin requirements) are met
in the forms of permitted collateral for which either collateral
transformations are not necessary, or committed agreements are in place
to provide all necessary immediate liquidity.
The Commission therefore finds that the proposed revisions to the
ICC Rules and Treasury Policy are designed to promote the prompt and
accurate settlement of securities transactions, derivatives agreements,
contracts, and transactions for which ICC is responsible, consistent
with section 17A(b)(3)(F) of the Exchange Act.\15\
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(5) Under the Act
Rule 17Ad-22(e)(5) requires that ICC, among other things,
establish, implement, maintain and enforce written policies and
procedures reasonably designed to limit the assets it accepts as
collateral to those with low credit, liquidity, and market risks, and
set and enforce appropriately conservative haircuts and concentration
limits.\16\ As discussed above, the proposed rule change would allow
Clearing Participants to use GBP to satisfy client-related margin
requirements. The proposed rule change also would lower the minimum
percentage of a client-related margin requirement that a Clearing
Participant must meet in US dollars and/or Euros. The proposed rule
change would not alter ICC's current collateral haircuts or
concentration limits. Indeed, as discussed above, ICC would convert the
GBP posted as collateral to a US dollar value and then reduce the US
dollar value using the GBP currency haircut.
---------------------------------------------------------------------------
\16\ 17 CFR 240.17Ad-22(e)(5).
---------------------------------------------------------------------------
Moreover, consistent with its current practice, ICC would not treat
the GBP posted to satisfy a client's margin requirement as a liquidity
resource available in the event of a Clearing Participant's default.
ICC only uses client margin deposits in case of a client default, and
when ICC conducts stress testing of its liquidity resources, it assumes
that no client margin deposits are available.
For these reasons, the Commission believes that ICC would continue
to limit the assets it accepts as collateral to those with low credit,
liquidity, and market risks, and set and enforce appropriately
conservative haircuts and concentration limits while accepting GBP as
collateral, consistent with Rule 17Ad-22(e)(5).\17\
---------------------------------------------------------------------------
\17\ 17 CFR 240.17Ad-22(e)(5).
---------------------------------------------------------------------------
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 section 17A(b)(3)(F) \18\ of the Act and Rule
17Ad-22(e)(5) \19\ thereunder.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78q-1(b)(3)(F).
\19\ 17 CFR 240.17Ad-22(e)(5).
---------------------------------------------------------------------------
It is therefore ordered pursuant to section 19(b)(2) of the Act
\20\ that the proposed rule change (SR-ICC-2023-003), be, and hereby
is, approved.\21\
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78s(b)(2).
\21\ 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).
[[Page 31575]]
---------------------------------------------------------------------------
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
---------------------------------------------------------------------------
\22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-10472 Filed 5-16-23; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on May 17, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.