Notice2023-16719
Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change Relating to Amendments to the Collateral and Haircut Procedures
Primary source
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Published
August 7, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 150 (Monday, August 7, 2023)</title>
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[Federal Register Volume 88, Number 150 (Monday, August 7, 2023)]
[Notices]
[Pages 52229-52230]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-16719]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98032; File No. SR-ICEEU-2023-013]
Self-Regulatory Organizations; ICE Clear Europe Limited; Order
Approving Proposed Rule Change Relating to Amendments to the Collateral
and Haircut Procedures
August 1, 2023.
I. Introduction
On June 9, 2023, ICE Clear Europe Limited (``ICE Clear Europe'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4,\2\ a proposed rule change to amend
the ICE Clear Europe Collateral and Haircut Procedures (the
``Procedures''). The proposed rule change was published for comment in
the Federal Register on June 26, 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Self-Regulatory Organizations; ICE Clear Europe Limited;
Notice of Filing of Proposed Rule Change Relating to Amendments to
the Collateral Haircut Procedures, Exchange Act Release No. 97766
(June 20, 2023); 88 FR 41439 (June 26, 2023) (SR-ICEEU-2023-013)
(``Notice'').
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II. Description of the Proposed Rule Change
ICE Clear Europe is registered with the Commission as a clearing
agency for the purpose of clearing security-based swaps. In its role as
a clearing agency for security-based swaps, ICE Clear Europe provides
services to its Clearing Members and Clearing Members transfer assets
to ICE Clear Europe.\4\ For example, ICE Clear Europe's Clearing
Members transfer to ICE Clear Europe cash and other assets as
collateral to cover the exposures presented by the positions that ICE
Clear Europe clears. ICE Clear Europe communicates such collateral
requirements as Initial Margin and Guaranty Fund requirements.\5\ ICE
Clear Europe generally refers to the assets that it accepts from
Clearing Members to cover their Initial Margin and Guaranty Fund
requirements as Permitted Cover.\6\
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\4\ Capitalized terms not otherwise defined herein have the
meanings assigned to them in the Procedures or the ICE Clear Europe
Clearing Rules.
\5\ ICE Clear Europe's Clearing Rules note that Initial Margin
means ``the Permitted Cover required to be provided or actually
provided . . . to the Clearing House as collateral for the
obligations of a Clearing Member or Sponsored Principal in respect
of CDS Contracts . . . .'' ICE Clear Europe Clearing Rule 101.
Guaranty fund contributions serve to secure the obligations of a
Clearing Member to ICE Clear Europe and may be used to cover losses
sustained by ICE Clear Europe in the event of a default of the
Clearing Member. ICE Clear Europe Clearing Rule 1103.
\6\ ICE Clear Europe Rule 101 defines ``Permitted Cover'' as ``.
. . cash in Eligible Currencies and other assets determined by the
Clearing House as permissible for Margin or Guaranty Fund
Contributions and includes, where the context so requires, any such
cash or assets transferred to the Clearing House and any proceeds of
realisation of the same. A particular kind of currency or asset may
be determined by the Clearing House to be Permitted Cover only in
respect of Proprietary Accounts, particular kinds of Customer
Accounts, Energy Contracts, Financials & Softs Contracts, F&O
Contracts, FX Contracts, CDS Contracts or certain Sets of
Contracts.''
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The Procedures describe ICE Clear Europe's operational activities
and related governance processes with respect to Permitted Cover. These
operational activities include, among other things, enforcing basic
eligibility criteria that assets must satisfy to be Permitted Cover,
valuing Permitted Cover, and applying haircuts to that value.\7\
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\7\ ICE Clear Europe uses these haircuts to reduce the value of
the Permitted Cover. Doing so helps account for a potential decline
in value that ICE Clear Europe could face if it had to liquidate the
Permitted Cover in stressed market conditions.
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The proposed rule change relates to the eligibility criteria that
ICE Clear Europe uses to determine whether to accept a particular asset
as Permitted Cover. Section 2 of the Procedures sets out the general
criteria that all assets must satisfy to be considered Permitted Cover.
Among other things, to be considered Permitted Cover an asset must be
highly liquid with an active sale or repurchase agreement market with a
diverse group of buyers and sellers.
In addition to the general criteria found in Section 2, which
applies to all assets submitted as Permitted Cover, Appendix A to the
Procedures provides additional eligibility criteria for two specific
asset classes: financial instruments and gold. To qualify as
[[Page 52230]]
Permitted Cover, financial instruments and gold must satisfy both the
general eligibility criteria in Section 2 and the specialized criteria
in Appendix A.
The proposed rule change would amend the specialized criteria for
gold found in Appendix A. Currently ICE Clear Europe will accept gold
as Permitted Cover in either of the following circumstances: (i) the
gold is owned as allocated gold bullion, meaning ICE Clear Europe
directly owns an interest in specific gold bars or (ii) the gold is
owned as unallocated gold bullion through a firm with low credit risk
based on ICE Clear Europe's own assessment. Unallocated means ICE Clear
Europe owns an interest in a pool of gold bars rather than specific
gold bars. Thus, unallocated gold represents a claim against the
relevant custodian for an amount of metal held in bulk, while allocated
gold held by a custodian is specifically identified for a particular
owner. The proposed rule change would delete the unallocated option.
Under Appendix A as amended, ICE Clear Europe would only accept gold if
it is specifically allocated to ICE Clear Europe.
Specifically, the amended Appendix A would state that ICE Clear
Europe would only recognize gold as Permitted Cover where the gold is
transferred from an unallocated account to an allocated account of a
custodian in the name of ICE Clear Europe. Once the gold meets those
criteria, it will be deemed to be allocated pure gold bullion of
recognized good delivery.
This amendment would help to ensure that ICE Clear Europe's
eligibility criteria for gold collateral conforms to certain
requirements under the European Market Infrastructure Regulation that
gold collateral be held in allocated form.\8\
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\8\ See Notice, 88 FR 41440; Commission Delegated Regulation
(EU) No 153/2013 of 19 December 2012 supplementing Regulation (EU)
No 648/2012 of the European Parliament and of the Council with
regard to regulatory technical standards on requirements for central
counterparties, Annex I, Section 3.
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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.\9\ For the reasons discussed below, the Commission finds
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \10\ and Rule 17Ad-22(e)(5) thereunder.\11\
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\9\ 15 U.S.C. 78s(b)(2)(C).
\10\ 15 U.S.C. 78q-1(b)(3)(F).
\11\ 17 CFR 240.17Ad-22(e)(5).
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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 ICE Clear Europe be designed to promote the prompt and
accurate clearance and settlement of securities transactions and, to
the extent applicable, derivative agreements, contracts, and
transactions.\12\ Based on its review of the record, and for the
reasons discussed below, the Commission believes the proposed changes
to the Procedures are consistent with the promotion of the prompt and
accurate clearance and settlement of securities transactions.
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\12\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission believes that accepting gold as Permitted Cover only
if in allocated form would help to ensure the availability of that gold
for liquidation. Should ICE Clear Europe need to liquidate gold to
satisfy a Clearing Member's Initial Margin or Guaranty Fund
requirement, the Commission believes gold in allocated form is more
likely to be available than gold not in allocated form. The Commission
believes this to be the case because allocated gold would be held by a
custodian in the name of ICE Clear Europe, giving ICE Clear Europe an
interest in specific bars of gold, rather than an interest in shared
pool of bars of gold.
The Commission therefore believes that accepting only allocated
gold would improve ICE Clear Europe's ability to liquidate that gold if
needed, thereby helping to improve ICE Clear Europe's ability to manage
potential losses that could result from a Clearing Member's default.
The Commission further believes these potential losses, if not properly
managed, could disrupt ICE Clear Europe's ability to clear and settle
transactions. Accordingly, the Commission believes the proposed rule
change, by requiring ICE Clear Europe to only accept allocated gold as
Permitted Cover, would be consistent with the promotion of the prompt
and accurate clearance and settlement of securities transactions.
Therefore, the Commission finds that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act.\13\
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\13\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(5) Under the Act
Rule 17Ad-22(e)(5) requires that ICE Clear Europe establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to, among other things, limit the assets it accepts
as collateral to those with low credit, liquidity, and market risks.
The Commission believes that accepting gold as Permitted Cover only in
allocated form would help to lower the credit risk associated with that
gold. As discussed above, allocated gold would give ICE Clear Europe an
interest in specific bars of gold, rather than an interest in shared
pool of bars of gold. Unallocated gold represents a claim against the
custodian for an amount of metal held in bulk, while allocated gold
held by a custodian is specifically identified for a particular owner
and therefore represents a lower credit risk than unallocated gold. The
Commission therefore believes that accepting gold as Permitted Cover
only in allocated form would support ICE Clear Europe's ability to
limit the assets it accepts as collateral to those with low credit
risks.
Therefore, the Commission finds that the proposed rule change is
consistent with Rule 17Ad-22(e)(5).\14\
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\14\ 17 CFR 240.17Ad-22(e)(5).
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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, with the requirements of Section 17A(b)(3)(F) of the
Act \15\ and Rule 17Ad-22(e)(5) thereunder.\16\
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\15\ 15 U.S.C. 78q-1(b)(3)(F).
\16\ 17 CFR 240.17Ad-22(e)(5).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\17\ that the proposed rule change (SR-ICEEU-2023-013), be, and hereby
is, approved.\18\
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\17\ 15 U.S.C. 78s(b)(2).
\18\ 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).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-16719 Filed 8-4-23; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on August 7, 2023.
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