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

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June 22, 2023

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Securities and Exchange Commission

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<title>Federal Register, Volume 88 Issue 119 (Thursday, June 22, 2023)</title>
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[Federal Register Volume 88, Number 119 (Thursday, June 22, 2023)]
[Notices]
[Pages 40890-40893]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-13211]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97737; File No. SR-ICEEU-2023-014]

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

June 15, 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 June 6, 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 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

ICE Clear Europe Limited (``ICE Clear Europe'' or the ``Clearing
House'') is proposing to adopt new Futures and Options Default
Management Procedures (the ``Procedures'').\5\ The new Procedures are
intended to supplement the Clearing House's existing Futures and
Options Default Management Policy by describing in further detail the
actions the Clearing House may take in the event of a Clearing Member
default.
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\5\ Capitalized terms used but not defined herein have the
meanings specified in the ICE Clear Europe Clearing Rules and the
Procedures.
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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 adopt new Futures and Options
Default Management Procedures, which would supplement the Clearing
House's existing F&O Default Management Policy (the ``Default
Management Policy'') and describe in further detail the actions the
Clearing House will take if an Event of Default is declared in relation
to an F&O Clearing Member. The Procedures are generally intended to
document, in a consolidated way, the Clearing House's current practices
around default management in the F&O clearing business and would not
generally change those practices.
The Procedures would outline the Clearing House's overall purposes
and objectives when managing an Event of Default by a Clearing
Member.\6\ The first objective is to take quick action to contain
losses and liquidity pressures while returning the Clearing House to a
matched book, as soon as reasonably practicable. In addition, the
Clearing House may consider other objectives, depending on the
characteristics of the default, including ensuring timely completion of
settlement, limiting disruptions to the market, and managing and
closing out the defaulter's positions and liquidating any applicable
collateral in a prudent and orderly manner. The Clearing House's
default management framework would be guided by ICE Clear Europe's
default Rules and the Default Management Policy and supporting
procedures (including the Procedures). The Procedures would further
recognize that each default is unique and the Procedures do not provide
an exhaustive list of actions ICE Clear Europe would take.
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\6\ The Procedures would also provide that similar provisions
would apply in the case of a Sponsored Principal default. The
Procedures also note that in the case of a default of a customer of
a Clearing Member, the default Rules would not be expected to apply.
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The Procedures would detail the governance and responsibilities of
various Clearing House personnel and committees with respect to default
management, consistent with the Default Management Policy. (These
provisions are intended to more clearly document existing practice,
rather than change practice.) The Procedures would in particular
reflect the following: the Board of Directors has delegated to the
President the authority to declare an Event of Default and take all
actions the Clearing House may take under the Rules in managing an
Event of Default. The President has the discretion to consult the ERC
Default Management Committee (``DMC''), which is a subcommittee of the
Executive Risk Committee. The President has the authority to make final
decisions but may delegate powers as appropriate. The DMC would also
assume the responsibilities of the President in the declaration and
management of an Event of Default if the President is unavailable. The
DMC would require a quorum of the majority of voting members of the
Executive Risk Committee for the DMC to make decisions and the
decisions would have to be by unanimous agreement of the voting members
of the Executive Risk Committee present in the meeting. If there are
dissenting views at the DMC level, the issue must be escalated to the
Board. Consistent with the requirements of the Rules, the Procedures
would state that a declaration of an Event of Default would be limited
to circumstances where an event in Rule 901(a) has occurred with
respect to a Clearing Member. Following an Event of Default, the Board
would have to be informed as soon as practicable of the relevant
circumstances, key steps or actions taken or determinations made or
approvals given.
The Procedures would detail the actions that may be taken with
respect

[[Page 40891]]

to a potential defaulter prior to the occurrence of an Event of
Default. The Procedures would reflect that the Clearing Risk Department
(``CRD'') may perform heightened monitoring of the potential defaulter
including an increase in daily credit risk monitoring, scenario
planning for a potential default management strategy and appropriate
risk mitigation through additional collateralization. The Treasury
Department (``Treasury'') would also review its relationships and
accounts with the potential defaulter in the context of auxiliary
banking services. The Operations Department (``Operations'') may
conduct a review of operational activities relevant to the potential
defaulter. The Compliance Department (``Compliance'') would be expected
to be in close contact with regulators at times when there is an
anticipated default in relation to a Clearing Member. The Legal
Department (``Legal'') may seek the advice of outside legal counsel
regarding the laws of the defaulter's domicile country. Senior
Management may inform the senior management of the other ICE clearing
houses and exchanges of the increased monitoring of a potential
defaulter and the President may provide the Board with an update on
increased monitoring of a potential defaulter.
The Procedures would also set out the Clearing House's actions in a
declaration of an Event of Default, in accordance with the Rules. The
President or its delegate would be expected to be in contact with the
potential defaulter in order to ensure accurate and up to date
information is available to declare an Event of Default. Prior to a
declaration of an Event of Default, Compliance would consult with and
keep informed the relevant regulatory authorities. The President or the
President's delegate may convene the DMC to discuss the potential
default. The Procedures would address internal reports that may be
considered by the DMC in connection with a potential default. If the
criteria for an Event of Default under the Rules are met, the President
(or the President's delegate) would declare an Event of Default. The
Procedures would address the process for issuing a Default notice to
the Defaulter, communicating this issuance to the relevant regulators,
issuing a Circular to the Clearing Members and a notice on its website,
as well as for communication to the Board and other relevant ICE
exchanges and clearing houses.
The Procedures would also detail the actions ICE Clear Europe would
take immediately following the Default Notice in order to protect
itself from any further losses related to the default event. These
actions would include the convening of the DMC, suspension of the
Defaulter's trading access, prevention of payments to the Defaulter,
communication with brokers that may be used in any liquidation strategy
for default management, and confirmation of the Defaulter's positions.
The Procedures would address procedures for client porting in
circumstances where the defaulting Clearing Member provides clearing
services to customers. Consistent with the Rules and applicable law,
the Clearing House would attempt within a predefined period to port
client positions and assets to another solvent Clearing Member, subject
to specified conditions and requirements. The Procedures would set out
certain requirements for porting notices to be provided to the Clearing
House under the Rules with respect to customers' porting preferences.
Consistent with the Rules, where porting is not performed, the Clearing
House would liquidate customer positions.
The Procedures would set out the responsibilities of various
Clearing House departments for aspects of the default management
process. For example, the CRD is responsible for assessing the
defaulter's positions and proposing whether splitting the portfolio
would be the appropriate strategy. In making its determination the CRD
may consider combining offsetting positions of different accounts and
liquidating or hedging the remaining positions. Moreover, the CRD would
consider the portfolio's complexity and timing for the execution of the
default management process. The Procedures would note that the CRD
could determine to take various actions depending on market
circumstances, such as liquidation through private sales or brokers or
liquidation through default auctions with broader participation. The
Procedures would further address considerations in circumstances where
the Defaulter holds physically delivered contracts close to maturity
and where the defaulter's positions are in products traded across
different ICE exchanges.
The Procedures would also address potential hedging strategies. The
CRD has the responsibility to assess the Defaulter's positions and
determine if hedge trades are useful to reduce the portfolio's risk
prior to liquidation. Hedge trades could be executed through brokers,
voluntary auctions or private sales. During the course of the hedging
strategy, the CRD would periodically re-evaluate the risk exposure as
hedges are executed and positions are liquidated. Hedging may continue
until reaching hedging/liquidation targets.
The Procedures would also address liquidation of remaining
positions following hedging, through various strategies. The Procedures
would set out the responsibilities of the President, with advice of the
CRD, in deciding how the remaining positions can be liquidated.
Liquidation options would include holding and financing open positions
until maturity, liquidating positions or sub-portfolios via brokers,
arranging a private sale of part or the entire book, and Default
Auctions.
The Procedures would describe the key features of the Default
Auctions, which are more fully set out in the existing published
Auction Terms for F&O Default Auctions. The Procedures would describe,
among other features, the use of a modified Dutch auction methodology,
the use of ``all or nothing'' bids, the establishment of minimum bid
requirements, customer participation, use of mirrored auctions, and
``juniorization'' of guaranty fund contributions, in accordance with
the Auction Terms for F&O Default Auctions. The Procedures also address
the process for establishing positions with winning bidders and payment
of related amounts. An annex to the Procedures would set out examples
of the operation of the auction methodology.
The Procedures would also describe the Treasury's responsibility in
proposing to the President a liquidation strategy of non-cash
collateral provided by the Defaulter. The liquidation strategy would
take into account the liquidity waterfall as defined under the
Liquidity Stress testing methodology.
The Procedures would also address the steps taken at the conclusion
of the transfer and close out of all the Defaulter's positions,
including an analysis of the cost of managing the event in accordance
with the default Rules. The Procedures would reflect the requirement of
the Rules that post-default, a net sum would be calculated separately
for house and customer accounts according to the methodology in the
Rules, and the net sum would be reported to the officer or
administrator responsible for the Clearing Member in default.
The Procedures would also provide for the testing and review of the
Default Management Procedures on a quarterly basis, through practicing
certain aspects of the default management process. In addition, the
Procedures provide for the Clearing House to conduct a default test on
an annual basis with mandatory participation of the Clearing Members.
Additionally, the Procedures would list

[[Page 40892]]

the aims of the annual default test and quarterly reviews, and the
elements that may be included in a default management test plan.
Finally, the Procedures would describe the process for reviews,
breach management, exception handling and document governance in a
manner generally consistent with other ICE Clear Europe policies. The
document owner identified by the Clearing House would be responsible
for ensuring that the Procedures remain up-to-date and reviewed in
accordance with the Clearing House's governance processes. Any changes
to the document would have to be approved in accordance with ICE Clear
Europe's governance process and will be implemented after the
completion of all required internal and regulatory approvals. Document
reviews would encompass at the minimum regulatory compliance,
documentation and purpose, implementation, use and open items from
previous validations or reviews. Results of the review would have to be
reported to the Executive Risk Committee or in certain cases to the
Model Oversight Committee. The document owner would also aim to
remediate the findings, complete internal governance and receive
regulatory approvals before the following annual review is due. The
document owner would also be responsible for reporting any material
breaches or deviations to the Head of Department, Chief Risk Officer
and Head of Regulation and Compliance. Exceptions to the Procedures
would also be approved in accordance with such governance processes.
(b) Statutory Basis
ICE Clear Europe believes that the Procedures are consistent with
the requirements of Section 17A of the Act \7\ and the regulations
thereunder applicable to it. In particular, Section 17A(b)(3)(F) of the
Act \8\ 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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\7\ 15 U.S.C. 78q-1.
\8\ 15 U.S.C. 78q-1(b)(3)(F).
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The Procedures are designed to supplement the Default Management
Policy by setting out in additional detail the actions and processes of
the Clearing House in declaring and managing an Event of Default,
recognizing that the details of any particular default will vary. The
Procedures would more clearly set out the responsibilities of the
President, DMC and various ICE Clear Europe departments, including the
CRD, in declaring and managing an Event of Default. The Procedures
would also outline various aspects of the default management process,
including convening and use of the DMC, suspension of the Defaulter's
trading access, prevention of payments to the Defaulter, confirmation
of the Defaulter's positions, liquidity considerations, hedging
strategy and liquidation strategy (including as to various means of
liquidation, such as the use of brokers, private sales and auctions).
The Procedures would also address annual default testing with mandatory
involvement of Clearing Members, and quarterly reviews to address
various aspects of the default management process. In ICE Clear
Europe's view, the Procedures will thus facilitate management of the
risks related to a default or anticipated default from a Clearing
Member, so that the Clearing House can promptly restore a matched book
and contain losses. The Procedures will thus promote the prompt and
accurate clearing and settlement of cleared transactions and are
consistent with the protection of investors and the public interest in
the continued operation of the Clearing House in the event of a
Clearing Member default. (ICE Clear Europe would not expect the
adoption of the Procedures to materially affect the safeguarding of
securities and funds in ICE Clear Europe's custody or control or for
which it is responsible.) Accordingly, the Procedures satisfy the
requirements of Section 17A(b)(3)(F).\9\
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\9\ 15 U.S.C. 78q-1(b)(3)(F).
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The Procedures are also consistent with relevant provisions of Rule
17Ad-22.\10\ Rule 17Ad-22(e)(2) provides that ``[e]ach covered clearing
agency shall establish, implement, maintain and enforce written
policies and procedures reasonably designed to, as applicable [. . .]
provide for governance arrangements that are clear and transparent''
\11\ and ``[s]pecify clear and direct lines of responsibility''.\12\ As
discussed, the Procedures would state relevant responsibilities of the
President, Board, DMC, Executive Risk Committee, CRD and other ICE
Clear Europe departments in relation to oversight of default management
processes in the period leading up and following an Event of Default.
Specifically, and consistent with the Rules, Default Management Policy
and current practice, the President would have full authority in
declaring and managing an Event of Default, with the ability to
delegate if necessary or for the DMC to assume certain responsibilities
if the President is unavailable. The CRD would have the responsibility
of advising the President throughout various actions and decisions when
managing an Event of Default. In line with the Clearing House's other
policies and procedures, the Procedures would also describe the
responsibilities of the document owner and appropriate escalation and
notification requirements for responding to exceptions and deviations
from the Procedures. In ICE Clear Europe's view, the Procedures are
therefore consistent with the requirements of Rule 17Ad-22(e)(2).\13\
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\10\ 17 CFR 240.17Ad-22. [sic]
\11\ 17 CFR 240.17Ad-22(e)(2)(i). [sic]
\12\ 17 CFR 240.17Ad-22(e)(2)(v). [sic]
\13\ 17 CFR 240.17Ad-22(e)(2). [sic]
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Rule 17Ad-22(e)(13) provides that the ``covered clearing agency
shall establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable [. . .] ensure that
[sic] 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, where [sic] practicable,
other stakeholders to participate [sic] the testing and review of its
default procedures, including any close-out procedures, at least
annually and following material changes thereto.'' \14\ As discussed
above, the Procedures would address the Clearing House's practices for
testing its default management framework, which includes annual default
tests in which participation by Clearing Members is mandatory, and
further provides for additional quarterly reviews. In ICE Clear
Europe's views, these testing measures, together with the other aspects
of the Procedures and the underlying Rules, will facilitate its ability
to take timely action to contain losses and liquidity pressure in the
event of a Clearing Member default. As such, the Procedures are
consistent with the requirements of Rule 17Ad-22(e)(13).\15\
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\14\ 17 CFR 240.17Ad-22(e)(13).
\15\ 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 Procedures would have any
impact, or impose any burden, on competition not

[[Page 40893]]

necessary or appropriate in furtherance of the purposes of the Act. The
Procedures are being adopted to document the Clearing House's practices
and actions in the event of an Event of Default in relation to a
Clearing Member. The Procedures do not change the rights or obligations
of Clearing Members or the Clearing House under the Rules or
Procedures. The Procedures set out certain requirements for Clearing
Members to participate in annual default testing, but these
requirements reflect current practices and Clearing House does not
believe this requirement would impose a material burden on Clearing
Members. (In any event such participation is required of all Clearing
Members under Commission regulations as set out above.) Accordingly,
ICE Clear Europe does not believe that adoption of the Procedures would
adversely affect competition among Clearing Members, materially affect
the costs of clearing, adversely affect the ability of market
participants to access clearing or the market for clearing services
generally, or otherwise adversely affect competition in clearing
services. 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 amendment has not been
solicited or received by ICE Clear Europe. ICE Clear Europe will notify
the Commission of any 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 \16\ and paragraph (f) of Rule 19b-4 \17\
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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\16\ 15 U.S.C. 78s(b)(3)(A).
\17\ 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#abd9dec7ce86c8c4c6c6cec5dfd8ebd8cec885ccc4dd"><span class="__cf_email__" data-cfemail="5a282f363f77393537373f342e291a293f39743d352c">[email&#160;protected]</span></a>. Please include
File Number SR-ICEEU-2023-014 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-2023-014. 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>.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-ICEEU-2023-014 and
should be submitted on or before July 13, 2023.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-13211 Filed 6-21-23; 8:45 am]
BILLING CODE 8011-01-P

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