Notice2023-14524
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change Relating to the ICC Default Auction Procedures-Initial Default Auctions
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
July 11, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 131 (Tuesday, July 11, 2023)</title>
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[Federal Register Volume 88, Number 131 (Tuesday, July 11, 2023)]
[Notices]
[Pages 44171-44173]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-14524]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97840; File No. SR-ICC-2023-009]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change Relating to the ICC Default Auction
Procedures--Initial Default Auctions
July 5, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4,\2\ notice is hereby given that on June
22, 2023, ICE Clear Credit LLC (``ICC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change, as
described in Items I, II and III below, which Items have been prepared
primarily by ICC. 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 Credit LLC (``ICC'') proposes revisions to ICC's Default
Auction Procedures--Initial Default Auctions (the ``Auction
Procedures''). These revisions do not require any changes to the ICC
Clearing Rules (the ``Rules'').\3\
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\3\ Capitalized terms used but not defined herein have the
meanings specified in the Rules.
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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, ICC included statements
concerning the purpose of and basis for the proposed rule change,
security-based swap submission, or advance notice and discussed any
comments it received on the proposed rule change, security-based swap
submission, or advance notice. The text of these statements may be
examined at the places specified in Item IV below. ICC has prepared
summaries, set forth in sections (A), (B), and (C) below, of the most
significant aspects of these statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(a) Purpose
ICC proposes to revise its Auction Procedures. In the event of the
default of an ICC Clearing Participant (``CP''), the Auction Procedures
are designed to facilitate liquidation of the defaulter's portfolio
through a multi-lot modified Dutch auction. ICC believes the proposed
revisions will facilitate the prompt and accurate clearance and
settlement of securities transactions and derivative agreements,
contracts, and transactions for which it is responsible. ICC proposes
to make such changes effective following Commission approval of the
proposed rule change. The proposed revisions are described in detail as
follows.
The purpose of the proposed amendments is to incorporate feedback
received from market participants during ICC's 2022 default test to
revise the Auction Procedures to provide ICC greater flexibility to
determine that a minimum bid requirement is not appropriate for an
auction participant in certain circumstances and/or to decide for a
particular auction lot that so-called ``juniorization'' of
participants' guaranty fund contributions based on competitiveness of
bidding is not appropriate. With respect to the minimum bid
requirement, market participants expressed concern that certain market
participants may not trade, or have the operational, risk management or
other capacity to trade or otherwise manage, particular products
cleared through ICC (e.g., index swaptions). If a participant were
forced to bid for lots including such products, the participant might
acquire in the default auction products for which it may not have the
ready capability to manage the risk of its positions. Forcing
participants to acquire such positions may result in an increase in
systemic risk. Similarly, market participants have expressed concerns
that while juniorization may in general incentivize robust bidding in
the auction process, there may be particular situations where, in the
light of the characteristics of the lot and participants involved in
the auction, the risk of juniorization could make it more difficult to
auction the lot successfully or might otherwise be undesirable or
inappropriate for the auction.
To address these concerns, ICC proposes the following amendments to
the Auction Procedures. Currently, under Section 2.4 of the Auction
Procedures, all non-defaulting CPs and Direct Participating Customers
\4\ (collectively, ``Auction Participants'') are required to bid for a
minimum notional amount of contracts for each auction lot determined
pro rata based on its required contribution to the ICC guaranty fund
(``Minimum Bid Requirement''), subject to certain exceptions. ICC
proposes to amend Section 2.4 to provide an additional exception to the
extent ICC determines that the Minimum Bid Requirement would be
inappropriate for certain Auction Participant(s) in light of: (i) the
operational and other capabilities of such Auction Participant(s) to
clear contracts in the relevant auction lot, or (ii) the conditions in
the market for the contracts in the relevant auction lot. These
amendments would allow ICC to determine that a Minimum Bid
[[Page 44172]]
Requirement should not apply, among other cases, where the relevant
Auction Participant does not have risk management or other operational
capabilities to clear the relevant contracts. It also provides ICC with
flexibility to eliminate a Minimum Bid Requirement in other
circumstances it determines to be appropriate, to address market
conditions and other circumstances that may be prevailing at the time.
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\4\ A Direct Participating Customer is a customer of a CP that
has been authorized to participate in an ICC default auction
pursuant to the requirements set out in the Auction Procedures.
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Furthermore, ICC proposes amending Section 2.6 of the Auction
Procedures to allow ICC to determine that for a particular auction lot,
all Auction Participants will be treated as Senior Bidders in
circumstances where ICC determines that ``juniorization'' may
negatively impact ICC's ability to conduct a successful default auction
given the then current market conditions. The effect of such a
determination would be that ``juniorization'' of Lot Guaranty Fund
Contributions and Lot Assessment Contributions will not occur, such
that all such contributions will be applied on a pro rata basis rather
than based on the relative competitiveness of bids made. ICC believes
this flexibility is appropriate to address potential scenarios where
juniorization may make it more difficult to run a successful auction or
is otherwise inappropriate or undesirable for the auction in light of
the particular circumstances at the time.
In addition, ICC received feedback from market participants during
ICC's 2022 default test that making the foregoing revisions to ICC's
Auction Procedures would better align such procedures with the default
procedures of other clearing houses (e.g., LCH Ltd, LCH SA, and Eurex).
According to such market participants, the foregoing clearing houses
have rules and/or default procedures that, in general, exclude non-
defaulting clearing members from mandatory participation in default
auctions where such non-defaulting clearing members do not have
exposure to the products in the default auction portfolio.
(b) Statutory Basis
Section 17A(b)(3)(F) of the Act \5\ 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; 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; in general, to protect investors and the public interest;
and to comply with the provisions of the Act and the rules and
regulations thereunder. ICC believes that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to ICC, in particular to Section
17(A)(b)(3)(F),\6\ because ICC believes that the proposed changes to
the Auction Procedures enhance ICC's ability to conduct a default
auction in a manner that mitigates risk to Auction Participants. The
proposed changes introduce additional options to ICC to disapply
minimum bid requirements for certain Auction Participants and/or
juniorization for certain auction lots in circumstances where such
practices might otherwise lead to an increase in systemic risk or be
inappropriate or undesirable in light of ICC's goal of running a
successful auction. Such changes would maintain the incentives for
competitive bidding in a default auction as Auction Participants are
still incentivized to protect their guaranty fund deposits and
assessment contributions, and juniorization would be expected to
continue to apply in most circumstances. Such changes overall are
designed to promote effective and efficient auctions to facilitate the
close-out of the defaulter's portfolio, in light of feedback from
market participants. As such, the proposed rule change is designed to
promote the prompt and accurate clearance and settlement of securities
transactions, derivatives agreements, contracts, and transactions; to
contribute to the safeguarding of securities and funds associated with
security-based swap transactions in ICC's custody or control, or for
which ICC is responsible; and, in general, to protect investors and the
public interest within the meaning of Section 17A(b)(3)(F) of the
Act.\7\
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\5\ 15 U.S.C. 78q-1(b)(3)(F).
\6\ Id.
\7\ Id.
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In addition, the proposed rule change is consistent with the
relevant requirements of Rule 17Ad-22.\8\ Rule 17Ad-22(e)(4)(ii) \9\
requires ICC to establish, implement, maintain and enforce written
policies and procedures reasonably designed to maintain financial
resources at the minimum to enable it to cover a wide range of
foreseeable stress scenarios that include, but are not limited to, the
default of the two participant families that would potentially cause
the largest aggregate credit exposure for the covered clearing agency
in extreme but plausible market conditions. ICC believes that the
proposed revisions enhance its Auction Procedures. As described above,
the proposed changes to the Auction Procedures enhance ICC's ability to
conduct a default auction in a manner that mitigates risk to Auction
Participants. The proposed changes introduce additional options to ICC
to disapply minimum bid requirements for certain Auction Participants
and/or juniorization for certain auction lots in circumstances where
such practices may lead to an increase in risk or may otherwise be
undesirable. Such changes promote effective and efficient auctions to
facilitate the close-out of the defaulter's portfolio. In ICC's view,
these changes represent options that strengthen ICC's ability to manage
its financial resources and withstand the pressures of defaults,
consistent with the requirements of Rule 17Ad-22(e)(4)(ii).\10\
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\8\ 17 CFR 240.17Ad-22.
\9\ 17 CFR 240.17Ad-22(e)(4)(ii).
\10\ Id.
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Rule 17Ad-22(e)(23) \11\ requires ICC to publicly disclose all
relevant rules and material procedures, including key aspects of its
default rules and procedures, and provide sufficient information to
enable participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in the covered clearing
agency. ICC's default management rules and procedures contained in the
ICC Rules, the Auction Procedures, and the Secondary Auction Procedures
are publicly available on ICC's website. The proposed changes to the
Auction Procedures described above provide further specificity and
transparency to the ICC default auction process, all of which are
publicly available. Moreover, the proposed changes provide additional
information on the options available to ICC on the application of
juniorization to default auctions, providing market participants
additional information to allow them to evaluate the risks of
participating at ICC. In ICC's view, these changes are consistent with
the requirements of Rule 17Ad-22(e)(23).\12\
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\11\ 17 CFR 240.17Ad-22(e)(23).
\12\ Id.
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(B) Clearing Agency's Statement on the Burden on Competition
ICC does not believe the proposed rule change would have any
impact, or impose any burden, on competition. The proposed changes to
ICC's Auction Procedures will apply uniformly across all market
participants. Therefore, ICC does not believe the proposed rule change
imposes any burden on
[[Page 44173]]
competition that is inappropriate in furtherance of the purposes of the
Act.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments relating to the proposed rule change have not been
solicited or received. ICC will notify the Commission of any written
comments received by ICC.
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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#c0b2b5aca5eda3afadada5aeb4b380b3a5a3eea7afb6"><span class="__cf_email__" data-cfemail="4e3c3b222b632d2123232b203a3d0e3d2b2d60292138">[email protected]</span></a>. Please include
file number SR-ICC-2023-009 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.
All submissions should refer to file number SR-ICC-2023-009. 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 a.m. and 3
p.m. Copies of such filings will also be available for inspection and
copying at the principal office of ICE Clear Credit and on ICE Clear
Credit's website at <a href="https://www.theice.com/clear-credit/regulation">https://www.theice.com/clear-credit/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-ICC-2023-009 and should
be submitted on or before August 1, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-14524 Filed 7-10-23; 8:45 am]
BILLING CODE 8011-01-P
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