Notice2023-12299
Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to Clearance of Additional Credit Default Swap Contracts
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Published
June 9, 2023
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 88 Issue 111 (Friday, June 9, 2023)</title>
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[Federal Register Volume 88, Number 111 (Friday, June 9, 2023)]
[Notices]
[Pages 37910-37913]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-12299]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97647; File No. SR-ICC-2023-004]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to Clearance of Additional
Credit Default Swap Contracts
June 5, 2023.
I. Introduction
On April 3, 2023, ICE Clear Credit LLC (``ICC''), filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to provide for the
clearance of Standard Subordinated European Insurance Corporate Single
Name CDS contracts (``STSEIC Contracts''). The Proposed Rule Change was
published for comment in the Federal Register on April 21, 2023.\3\ The
Commission has not received any comments on the Proposed Rule Change.
For the reasons discussed below, the Commission is approving the
Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 97318 (Apr. 17, 2023),
88 FR 24647 (Apr. 21, 2023) (File No. SR-ICC-2023-004) (``Notice'').
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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.\4\ Chapter 26 of ICC's Clearing
Rules covers the CDS contracts that ICC clears, with each subchapter of
Chapter 26 defining the characteristics and Rules applicable to the
various specific categories of CDS contracts that ICC clears. The
purpose of the proposed rule change is to add a new subchapter to
Chapter 26 to permit ICC to clear an additional contract type.
Specifically, new Subchapter 26S would provide the basis for ICC to
clear STSEIC Contracts.
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\4\ Capitalized terms not otherwise defined herein have the
meanings assigned to them in ICC's Clearing Rules.
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New Subchapter 26S has nine associated Rule provisions, with each
described further below. Overall, ICC based new Subchapter 26S on
existing Subchapter 26G, which applies to Standard European Corporate
Single Name contracts (``STEC Contracts''), because STSEIC Contracts
and STEC Contracts have similar terms.
That said, new Subchapter 26S would differ from existing Subchapter
26G as needed to account for differences between the two types of
contracts. For example, Subchapter 26S does not include several
provisions that relate to Modified Modified Restructuring found in
Subchapter 26G. This is the case because the market convention is that
Modified Modified Restructuring does not apply to STSEIC Contracts,
unlike STEC Contracts cleared under Subchapter 26G.\5\ Additionally,
Subchapter 26G includes references to 2003-Type CDS Contracts \6\ as
well as 2014-Type CDS \7\ Contracts.\8\ Subchapter 26S references 2014-
Type Contracts only and eliminates unnecessary references to 2014 Type
Contracts because ICC does not anticipate that any STSEIC Contract
would incorporate the 2003 ISDA definitions.\9\
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\5\ Id. at 24648.
\6\ A 2003-Type CDS Contract is a CDS Contract that incorporates
the 2003 Credit Derivatives Definitions, as published by the
International Swaps and Derivatives Association (``ISDA'').
\7\ A 2014-Type CDS Contract is a CDS Contract incorporating the
2014 ISDA Credit Derivatives Definitions.
\8\ ICE Clear Credit Clearing Rules Subchapter 26G.
\9\ Notice, 88 FR at 24648.
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The remaining differences are discussed with each of the nine
associated rule provisions below.
1. Rule 26S-102 (Definitions)
New Rule 26S-102 would set out the defined terms used in Subchapter
26S. For example, Rule 26S-102 would define an STSEIC Contract as a CDS
Contract in respect of any Eligible STSEIC Reference Entity having a
combination of characteristics listed as eligible for such Eligible
STSEIC Reference Entity in, and permitted by, the List of Eligible
STSEIC Reference Entities. Eligible STSEIC Reference Entities would be
defined as each particular Reference Entity included in the List of
Eligible STSEIC Reference Entities (a list of eligible reference
entities that ICE Clear Credit maintains on its website). Similarly,
for each of those Eligible STSEIC Reference Entities, ICE Clear Credit
would determine which of their obligations (such as bonds) are
considered to be Eligible STSEIC Reference Obligations.
This section differs from its counterpart in Subchapter 26G in that
it does not have a definition that corresponds to the definition of
Eligible STEC Sector in Rule 26G-102. Rule 26G-102 lays out a number of
permitted industrial sectors for STEC reference entities in STEC
Contracts, such as energy and healthcare.\10\ Subchapter
[[Page 37911]]
26S does not need a similar definition because there are no further
sectors to identify. STSEIC Contracts already apply at a sector level
of insurance. Thus, identifying eligible sectors for STSEIC Contracts
is not necessary.\11\ Additionally, this section is updated to remove
references to 2003-Type CDS Contracts, unnecessary references to 2014-
Type CDS Contracts, and provisions relating to restructuring as
discussed above.
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\10\ ICE Clear Credit Clearing Rule 26G-102.
\11\ Notice, 88 FR at 24647-48.
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2. Rule 26S-203 (Restriction on Activity)
New Rule 26S-203 would allow ICE Clear Credit to auction off a CDS
Participant's open STSEIC Contracts where that CDS Participant, among
other things, merges with or becomes an affiliate of an Eligible STSEIC
Reference Entity. This provision would be functionally equivalent to
the corresponding provision in Subchapter 26G. The purpose of this
provision is to prevent ICE Clear Credit's CDS Participants from being
parties to STSEIC Contracts where the CDS Participants are, or could
become, the reference entity of the contract.
3. Rule 26S-206 (Notices Required of Participants With Respect to
STSEIC Contracts)
New Rule 26S-206 would require that CDS Participants provide notice
to ICE Clear Credit if they or their customer, among other things,
merge with or become an affiliate of an Eligible STSEIC Reference
Entity. In such a situation, as discussed above, new Rule 26S-203 would
allow ICE Clear Credit to auction off a CDS Participant's open STSEIC
Contracts. This provision would be functionally equivalent to the
corresponding provision in Subchapter 26G. Like Rule 26S-203, this
provision would help prevent ICE Clear Credit's CDS Participants from
becoming reference entities to STSEIC Contracts.
4. Rule 26S-303 (STSEIC Contract Adjustments)
New Rule 26S-303 would explain how ICC would treat certain
contracts submitted for clearing that appear to be submitted as STSEIC
Contracts, but may be missing certain information or appear to contain
certain incorrect information. For example, if ICC accepts a contract
for an Eligible STSEIC Reference Entity but the contract specifies a
type of transaction other than Standard Subordinated European Insurance
Corporate, then ICC will treat the contract as an open position in an
STSEIC Contract that is otherwise equivalent, but that specifies
Standard Subordinated European Insurance Corporate as the transaction
type. Again, this provision is functionally equivalent to the
corresponding provision in Subchapter 26G.
5. Rule 26S-309 (Acceptance of STSEIC Contracts by ICE Clear Credit)
New Rule 26S-309 would impose certain additional requirements on
CDS Participants when they submit a STSEIC Contract for clearing. ICC
Rule 309 describes ICC's general process for accepting trades for
clearing,\12\ and Rule 26S-309 would prescribe additional provisions
specific to STSEIC Contracts. These provisions would be based on the
existing provisions for Rule 26G-309, but updated to remove references
to 2003-Type Contracts, unnecessary references to 2014-Type Contracts,
and provisions relating to restructuring as discussed above.
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\12\ ICE Clear Credit Clearing Rule 309.
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For example, under Rule 26S-309, if the CDS Participant is or is an
Affiliate of the Eligible STSEIC Reference Entity for a STSEIC Contract
at the time of the Trade submission or Novation Time, it may not submit
such Trade for clearance as a STSEIC Contract and ICC does not have to
accept the Trade for clearance. Rule 26S-309 also would require CDS
Participants to give ICC notice of certain circumstances as soon as
reasonably practicable and would govern the contents of certain ICC
notices to CDS Participants notifying them that ICC has accepted a
Trade submitted for clearance. Additionally, under this rule ICC would
give effect to circumstances giving rise to a Successor and a
Succession Date (i.e., in the event of a corporate merger, acquisition,
or similar transaction that could require a change in a CDS contract's
Reference Entity). Rule 26S-309(e) would explain when ICC would give
effect to a Successor and Succession Date, and the actions ICC would
take to do so.
6. Rule 26S-315 (Terms of the Cleared STSEIC Contract)
New Rule 26S-315 would explain what the terms of each STSEIC
Contract would be. Generally, Rule 26S-315 would incorporate the 2014
Definitions into the STSEIC Contracts but also would define and set
certain terms that would be specific to STSEIC contracts. For example,
Rule 26S-315(f) would define the Transaction Type as being a Standard
Subordinated European Insurance Corporate for the Eligible STSEIC
Reference Entity. Rule 26S-315(g) would indicate which terms would be
determined according to the particular STSEIC Contract submitted for
clearing, subject to Rule 26S-303. For example, the Trade Date is a
term that will be determined according to the particular STSEIC
Contract submitted for clearing, subject to Rule 26S-303. Rule 26S-
315(e) would provide that the Settlement Method for particular STSEIC
Contracts will be Auction Settlement and the Fallback Settlement Method
will be Physical Settlement in accordance with the CDS Physical
Settlement Rules. For the most part, these provisions would be based on
the existing provisions for Rule 26G-315, but updated to remove
references to 2003-Type Contracts, unnecessary references to 2014-Type
Contracts, and provisions relating to restructuring as discussed above.
The proposed rule change adds one sentence to new Rule 26S-315 that
is not present in the corresponding section of existing 26G-315. That
sentence, in new Rule 26S-315(f), ensures that the Subordinated
European Insurance Terms will apply to each STSEIC Contract.
Subordinated European Insurance Terms are part of the market-standard
provisions that apply under the 2014 Definitions.\13\ According to the
definition for List of Eligible STSEIC Reference Entities in Rule 26S-
102, Eligible STSEIC Reference Entities must use the 2014 Definitions
in their STSEIC Contracts.
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\13\ Id. at 24648.
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7. Rule 26S-316 (Relevant Physical Settlement Matrix Updates)
New Rule 26S-316 would describe how ICC would handle ISDA updates
to the Relevant Physical Settlement Matrix. For example, Rule 26S-
316(a) indicates that in certain circumstances when ISDA publishes a
newer version of the Credit Derivatives Physical Settlement Matrix
(``New Matrix'') than the Relevant Physical Settlement Matrix for any
STSEIC Contract, STSEIC Contracts with previous versions of the Matrix
(``Superseded Matrix'') shall become STSEIC Contracts referencing the
New Matrix as the Relevant Physical Settlement Matrix, and the List of
Eligible STSEIC Reference Entities shall be updated accordingly. Any
STSEIC Contract referencing a Superseded Matrix and submitted for
clearing shall, upon acceptance for clearing, become a STSEIC Contract
referencing the New Matrix. This provision is functionally equivalent
to the corresponding provision in Subchapter 26G.
8. Rule 26S-502 (Specified Actions)
ICC Rule 502 defines certain actions as Specified Actions and
prohibits ICC
[[Page 37912]]
from taking or permitting to be taken any Specified Action without
first consulting with the Risk Committee.\14\ For example, modification
of the ICC Rules, Procedures, or any other governing provisions related
to Margin would be a Specified Action.\15\ New Rule 26S-502 provides
that certain actions are not Specified Actions. For example, adding
and/or Modifying Permitted STSEIC Fixed Rates and adding new Eligible
STSEIC Reference Entities each would not constitute a Specified Action.
This provision is functionally equivalent to the corresponding
provision in Subchapter 26G.
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\14\ ICE Clear Credit Clearing Rule 502.
\15\ ICE Clear Credit Clearing Rule 502(f).
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9. Rule 26S-616 (Contract Modification)
ICC Rule 616 prohibits ICC from carrying out a Contract
Modification without first providing Participants at least ten ICE
Business Days' notice prior to the effective date of such Contract
Modification. Under ICC Rule 616 a Contract Modification is defined as
a Modification that ``would, in the determination of ICC, (i)
reasonably be expected to have a material effect on the Mark-to-Market
Price (as defined in Rule 404) of such Contract or (ii) materially
increase the basis risk of such Contract relative to the over-the-
counter agreement equivalent to such Contract referred to in Rule
301.'' \16\ New Rule 26S-616 would provide that it will not constitute
a Contract Modification if ICC's Board or its designee updates the List
of Eligible STSEIC Reference Entities (and modifies the terms and
conditions of related STSEIC Contracts) to give effect to
determinations by the Regional CDS Committee (or applicable Dispute
Resolver) or a Credit Derivatives Determinations Committee.
Additionally, the determination that ``Standard Reference Obligation''
will be applicable to an Eligible STSEIC Reference Entity will not
constitute a Contract Modification.
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\16\ ICE Clear Credit Clearing Rule 616(a).
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Rule 26S-616 would contain two differences from the corresponding
provision in Subchapter 26G. First, Rule 26S-616 would not include a
provision applicable to 2003-Type Contracts that convert to 2014-Type
Contracts. As mentioned above, ICC does not anticipate that any STSEIC
Contract would be a 2003-Type Contract, so this provision is not
necessary.
Second, Rule 26S-616 would not include a provision that
incorporates the NTCE Supplement to the 2014 Definitions.\17\ ISDA has
issued the NTCE Supplement and previously incorporated it into the 2014
Definitions. Thus, the NTCE Supplement would automatically apply to any
STSEIC Contracts going forward, and 26S-616 would not need to
specifically incorporate it into the terms of the contracts.\18\
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\17\ The NTCE Supplement is the 2019 Narrowly Tailored Credit
Event Supplement to the 2014 ISDA Credit Derivatives Definitions
published by ISDA. For more information on this supplement, see
Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving
Proposed Rule Change Relating to the ICC Clearing Rules To Reflect
the ISDA NTCE Supplement, Exchange Act Release No. 87971 (Jan. 5,
2020), 85 FR 3724 (Jan. 22, 2020) (SR-ICC-2019-013).
\18\ Notice, 88 FR at 24648.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act requires the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
the Proposed Rule Change is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to the
organization.\19\ For the reasons given below, the Commission finds
that the Proposed Rule Change is consistent with Section 17A(b)(3)(F)
of the Act \20\ and Rule 17Ad-22(e)(1).\21\
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\19\ 15 U.S.C. 78s(b)(2)(C).
\20\ 15 U.S.C. 78q-1(b)(3)(F).
\21\ 17 CFR 240Ad-22(e)(1).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Under Section 17A(b)(3)(F) of the Act, ICC's rules, among other
things, must be ``designed to promote the prompt and accurate clearance
and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, to
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible . . . and, in general, to protect investors and the public
interest . . . .'' \22\ Based on its review of the record, and for the
reasons discussed below, the Commission believes that ICC's proposed
rule change is consistent with Section 17A(b)(3)(F) of the Act because
ICC's clearing of STSEIC Contracts will allow market participants an
increased ability to manage risk and the provisions of Subchapter 26S
would help ensure that ICC has in place rules to appropriately govern
the clearing of STSEIC Contracts and manage the risk related to
clearing STSEIC Contracts.
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\22\ 15 U.S.C. 78q-1(b)(3)(F).
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ICC's clearing of STSEIC Contracts will provide market participants
an increased ability to manage risk through the contracts. ICC will
clear STSEIC Contracts pursuant to its existing clearing arrangements
and related financial safeguards, protections and risk management
procedures.\23\ For example, ICC will apply its existing initial margin
methodology to the clearing of STSEIC Contracts.\24\ The Commission
believes these safeguards, protections, and risk management procedures
will lower the risk that a party to a STSEIC Contract transaction will
default, which, in turn, would promote the prompt and accurate
clearance and settlement of STSEIC Contracts and help to ensure the
safeguarding of margin assets.
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\23\ Notice, 88 FR at 24648.
\24\ Id.
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Moreover, combined with ICC's current safeguards, Subchapter 26S
promotes the prompt and accurate clearance and settlement of STSEIC
Contracts. Subchapter 26S would amend the ICC Clearing Rules to
accommodate the clearing of STSEIC Contracts. Among other things, these
amendments would provide definitions and contract terms with respect to
STSEIC Contracts, which would help ensure that ICC has in place rules
to appropriately govern the clearing of STSEIC Contracts. In addition,
ICC will clear STSEIC Contracts pursuant to its existing clearing
arrangements and related financial safeguards, protections, and risk
management procedures. This will allow ICC to appropriately manage the
risk of STSEIC Contracts. Accordingly, the Commission believes that the
addition of Subchapter 26S, taken together with ICC's existing
safeguards, would promote the prompt and accurate clearance and
settlement of STSEIC Contracts.
The Commission believes, therefore, that the Proposed Rule Change
is consistent with the requirements of Section 17A(b)(3)(F) of the
Act.\25\
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\25\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(1)
Rule 17Ad-22(e)(1) requires ICC 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.\26\ When it adopted Rule 17Ad-22(e)(1), the Commission
noted that, in addressing legal risk, a covered clearing agency should
consider whether its rules, policies and procedures, and contracts are
clear,
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understandable, and consistent with relevant laws and regulations.\27\
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\26\ 17 CFR 240.17Ad-22(e)(1).
\27\ Securities Exchange Act Release No. 78961 (Sept. 28, 2016),
81 FR 70786, 70802 (Oct. 13, 2016) (File No. S7-03-14).
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The Commission believes that ICC's addition of Subchapter 26S to
its clearing rules helps ensure that ICC's rules are clear and
understandable with respect to its clearance of STSEIC Contracts. Among
other things, Subchapter 26S defines relevant terms, provides
provisions relevant to STSEIC Contracts, and clarifies how ICC will
handle and process certain potential lifecycle and other events in
connection with relevant STSEIC Contracts, including a CDS
Participant's merger or affiliation with an Eligible STSEIC Reference
Entity and certain ISDA updates to the Relevant Physical Settlement
Matrix. Through its provisions, Subchapter 26S provides a reasonable
level of certainty related to, and a clear legal basis for, outcomes
related to its clearance of STSEIC Contracts.
The Commission believes, therefore, that the Proposed Rule Change
is consistent with the requirements of Rule 17Ad-22(e)(1) of the
Act.\28\
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\28\ 17 CFR 240.17Ad-22(e)(1).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act,
and in particular, Section 17A(b)(3)(F) of the Act and Rule 17Ad-
22(e)(1) thereunder.\29\
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\29\ 15 U.S.C. 78q-1(b)(3)(F).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
that the Proposed Rule Change (SR-ICC-2023-004) be, and hereby is,
approved.\30\
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\30\ In approving the Proposed Rule Change, the Commission
considered the proposal's impacts on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-12299 Filed 6-8-23; 8:45 am]
BILLING CODE 8011-01-P
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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.