Notice2023-17979
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Amendment No. 1 and Partial Amendment No. 2 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 and Partial Amendment No. 2, 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
August 22, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 88 Issue 161 (Tuesday, August 22, 2023)</title>
</head>
<body><pre>
[Federal Register Volume 88, Number 161 (Tuesday, August 22, 2023)]
[Notices]
[Pages 57164-57167]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-17979]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98147; File No. SR-ICC-2023-009]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Amendment No. 1 and Partial Amendment No. 2 and Order
Granting Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1 and Partial Amendment No. 2, Relating to the ICC
Default Auction Procedures--Initial Default Auctions
August 16, 2023.
I. Introduction
On June 22, 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 amend the
ICC Default Auction Procedures--Initial Default Auctions
[[Page 57165]]
(``Auction Procedures''). The proposed rule change was published for
comment in the Federal Register on July 11, 2023.\3\ On July 20, 2023,
ICC filed Amendment No. 1 to the proposed rule change.\4\ On August 8,
2023, ICC filed Partial Amendment No. 2 to the proposed rule change.\5\
The Commission did not receive comments regarding 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 the ICC Default
Auction Procedures-Initial Default Auctions; Exchange Act Release
No. 97840 (July 5, 2023), 88 FR 44171 (July 11, 2023) (File No. SR-
ICC-2023-009) (``Notice'').
\4\ Amendment No. 1 amended and restated in its entirety the
Form 19b-4, Exhibit 1A, and Exhibit 5 to correct a typographical
error in the Auction Procedures. Amendment No. 1 does not change the
purpose or basis of the proposed rule change.
\5\ Partial Amendment No. 2 replaced and superseded Amendment
No. 1, and amended and restated in its entirety the Form 19b-4,
Exhibit 1A, and Exhibit 5, in addition to including Exhibit 4, to
correct a typographical error in the Auction Procedures. Partial
Amendment No. 2 does not change the purpose or basis of the proposed
rule change.
---------------------------------------------------------------------------
The Commission is publishing this notice to solicit comments on
Amendment No. 1 and Partial Amendment No. 2 from interested persons,
and, for the reasons discussed below, is approving the proposed rule
change, as modified by Amendment No. 1 and Partial Amendment No. 2
(collectively, the ``proposed rule change''), on an accelerated basis.
II. Description of the Proposed Rule Change
ICC is registered with the Commission as a clearing agency for the
purpose of clearing Credit Default Swap (``CDS'') contracts. ICC clears
CDS contracts for its clearing members, which ICC calls Clearing
Participants.\6\ In clearing CDS contracts, ICC is exposed to a variety
of risks, including exposure to losses and liquidity demands, in
situations such as a Clearing Participant default. One way ICC protects
against such risk is by ensuring that it has the authority and
operational capacity to take timely action during a Clearing
Participant default. To minimize impact on non-defaulting Clearing
Participants and its own obligations, ICC established the Auction
Procedures, which document requirements and processes for holding an
auction in the event of a Clearing Participant default. The Auction
Procedures are designed to facilitate liquidation of a defaulting
Clearing Participant's portfolio through a multi-lot modified Dutch
auction.\7\
---------------------------------------------------------------------------
\6\ Capitalized terms not otherwise defined herein have the
meanings assigned to them in the ICC Default Auction Procedures--
Initial Default Auctions or the ICC Clearing Rules.
\7\ Notice, 88 FR at 44171.
---------------------------------------------------------------------------
The proposed rule change would revise the Auction Procedures to (1)
provide an additional exception to ICC's minimum bid requirement under
particular conditions, and (2) treat all Auction Participants \8\ as
senior bidders in certain market-dependent circumstances. These
proposed amendments, as described below, are intended to incorporate
feedback received from market participants during ICC's 2022 default
test.\9\ The proposed revisions would also better align ICC's Auction
Procedures with those of other clearing houses (e.g., LCH Ltd, LCH SA,
and Eurex),\10\ according to market participants' feedback.\11\
---------------------------------------------------------------------------
\8\ Auction Participants are all non-defaulting Clearing
Participants and any Direct Participating Customer(s), defined as a
Clearing Participant's customer(s) that ICC has authorized to
participate directly in an ICC default auction pursuant to the
requirements set out in Section 2.6 of the Auction Procedures. Id.
at n.4.
\9\ Notice, 88 FR at 44171.
\10\ These three 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. Notice, 88 FR at 44172.
\11\ Notice, 88 FR at 44172.
---------------------------------------------------------------------------
A. Additional Exception to Minimum Bid Requirement
Generally, in the event of an auction to liquidate a defaulting
Clearing Participant's portfolio, all non-defaulting Auction
Participants are required to submit minimum bids (``Minimum Bid
Requirement''). Currently, Section 2.4 requires Auction Participants to
bid for a minimum notional amount of contracts for each auction, the
lot determined pro rata based on its required contribution to the ICC
guaranty fund, subject to certain exceptions.\12\ The proposed rule
change would amend the Auction Procedures to provide an additional
exception to the Minimum Bid Requirement. Under the proposed exception,
the Minimum Bid Requirement would not apply if ICC determined that it
would be inappropriate for certain Auction Participants in light of:
(i) the operational and other capabilities of such an Auction
Participant to clear contracts in the relevant auction lot, or (ii) the
conditions in the market for the contracts in the relevant auction
lot.\13\ For example, under the proposed rule change, ICC would be
allowed to determine whether the Minimum Bid Requirement would apply to
an Auction Participant if the Auction Participant does not have risk
management or other operational capabilities to clear the types of
contracts involved in a particular auction,\14\ or if market conditions
change for certain types of contracts.\15\ ICC represents that the
proposed change is designed to disapply minimum bid requirements where
they might lead to an increase in systemic risk or be inappropriate or
undesirable in light of ICC's goal of running a successful auction.\16\
---------------------------------------------------------------------------
\12\ Notice, 88 FR at 44171. For example, a Minimum Bid
Requirement shall not apply to an Auction Participant for a
particular Lot to the extent it would be in breach of applicable law
or ICC Rules, or the Lot includes Contracts that are sovereign CDS
referencing the country in which the Auction Participant or its
parent company is domiciled. See ICC Initial Auction Procedure,
Section 2.4.
\13\ Id.
\14\ For instance, 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, such as
index swaptions. In that case, if such a participant were forced to
bid for lots that included these types of products during the course
of the auction, the participant might acquire products for which it
may not have the ready capability to manage the risk of its
positions, thereby potentially increasing systemic risk. Id.
\15\ Notice, 88 FR at 44171-2.
\16\ Notice, 88 FR at 44172.
---------------------------------------------------------------------------
B. Treatment of Auction Participants as Senior Bidders
Currently, ICC's rules specify how losses from a default auction
will be applied.\17\ Under such prioritization, losses would be applied
to the collateral of a member that does not participate in a default
auction before being applied to other members' collateral
(``juniorization''). ICC proposes to amend the Auction Procedures to
allow ICC to disapply such juniorization where ICC determines that
juniorization may make it more difficult to run a successful auction or
is otherwise inappropriate or undesirable for the particular lot in
light of certain market conditions or circumstances at the time. In
effect, under the proposed rule change, ICC would be allowed to
determine 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.\18\
---------------------------------------------------------------------------
\17\ See Auction Procedures, Section 3.3.
\18\ Such changes would maintain the incentives for competitive
bidding in a default auction as Auction Participants still would be
incentivized to protect their guaranty fund deposits and assessment
contributions, and juniorization would be expected to continue to
apply in most circumstances. Notice, 88 FR at 44172.
---------------------------------------------------------------------------
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
[[Page 57166]]
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.\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)(13) \21\
thereunder.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78s(b)(2)(C).
\20\ 15 U.S.C. 78q-1(b)(3)(F).
\21\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------
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 Credit ``are designed to promote the prompt and
accurate clearance and settlement of securities transactions and, to
the extent applicable, derivative agreements, contracts, and
transactions.'' \22\ Based on its review of the record, and for the
reasons discussed below, the Commission believes the proposed changes
to the Auction Procedures are consistent with the promotion of the
prompt and accurate clearance and settlement of securities
transactions.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The proposed additional exception to the Minimum Bid Requirement
provides ICC with greater flexibility to administer a default auction
with the appropriate set of Auction Participants and respond to
changing market conditions promptly, while maintaining its clearance
and settlement responsibilities with the least possible disruption. The
proposed amendments would allow ICC to determine whether an Auction
Participant has the operational or other capabilities required to clear
contracts in a particular lot, thus ensuring an appropriate fit between
the Auction Participants and the types of contracts involved in the
auction. The proposal would also give ICC the leeway to respond to
changing market forces to hold a timely default auction that is
responsive to the characteristics and implications of the contracts in
the relevant auction lot. Similarly, the proposed revisions to the
Auction Procedures would give ICC the latitude to disapply the Default
Auction Priority and treat all Auction Participants as senior bidders
in limited circumstances, thus helping ICC run a successful, effective,
and efficient default auction in circumstances where the juniorization
of Auction Participants would be unsuitable for the auction, and
facilitating the prompt and accurate close-out of the defaulter's
portfolio.
As such, the Commission finds that the proposed rule change is
consistent with section 17A(b)(3)(F) of the Act.\23\
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(13)
Rule 17Ad-22(e)(13) requires ICC to ``establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to [. . .] [e]nsure 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 [. .
.].'' \24\ Based on its review of the record, and for the reasons
discussed below, the Commission believes the proposed changes to the
Auction Procedures are consistent with the requirements of Rule 17Ad-
22(e)(13).\25\
---------------------------------------------------------------------------
\24\ 17 CFR 240.17Ad-22(e)(13).
\25\ Id.
---------------------------------------------------------------------------
The proposed exception to the Minimum Bid Requirement would provide
ICC the authority to not force a Clearing Participant to bid on lots
containing contracts that the Clearing Participant is not equipped to
manage financially or operationally. Excepting such a Clearing
Participant from the bidding process should reduce the likelihood of
ICC receiving poor quality bids, thereby improving the auction process.
In foregoing the Minimum Bid Requirement for Auction Participants who
are not appropriately positioned to take on certain types of contracts,
ICC would be giving itself the ability to take steps, in limited
circumstances, to streamline the auction process and limit potential
losses or liquidity demands resulting from a Clearing Participant's
default. Similarly, the proposed change to allow ICC to disapply the
juniorization of certain Clearing Participants' guaranty fund
contributions would better align ICC's default management practices
with its members' financial and operational capacities. Imposing the
Minimum Bid Requirement or incentivizing bidding through the
juniorization process where a Clearing Participant lacks necessary
financial or operational capabilities could result in that Clearing
Participant acquiring products whose risks it is not prepared to
manage. The proposed rule change would allow ICC to protect the
integrity of the default auction and increase its likelihood of success
by ensuring that the bids received are provided by members most able to
value and risk manage the defaulter's portfolio.
IV. Solicitation of Comments on Amendment No. 1 and Partial Amendment
No. 2 to the Proposed Rule Change
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 1 and Partial Amendment No. 2, 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#4331362f266e202c2e2e262d3730033026206d242c35"><span class="__cf_email__" data-cfemail="4b393e272e66282426262e253f380b382e28652c243d">[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
[[Page 57167]]
should be submitted on or before September 12, 2023.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1 and Partial Amendment No. 2
The Commission finds good cause, pursuant to section 19(b)(2) of
the Act,\26\ to approve the proposed rule change prior to the 30th day
after the date of publication of notice of the filing of Amendment No.
1 and Partial Amendment No. 2 in the Federal Register. As discussed
above, Amendment No. 1 amended and restated in its entirety the Form
19b-4, Exhibit 1A, and Exhibit 5 to correct a typographical error in
the Auction Procedures, and Partial Amendment No. 2 replaced and
superseded Amendment No. 1, and amended and restated in its entirety
the Form 19b-4, Exhibit 1A, and Exhibit 5, in addition to including
Exhibit 4, to correct a typographical error in the Auction Procedures.
Amendment No. 1 and Partial Amendment No. 2 do not change the purpose
of or basis for the proposed changes.
---------------------------------------------------------------------------
\26\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
For similar reasons as discussed above, the Commission finds that
Amendment No. 1 and Partial Amendment No. 2 are consistent with the
requirement that ICC's rules be designed to promote the prompt and
accurate clearance and settlement of securities transactions under
section 17A(b)(3)(F) of the Act.\27\ Accordingly, the Commission finds
good cause to approve the proposed rule change, as modified by
Amendment No. 1 and Partial Amendment No. 2, on an accelerated basis,
pursuant to section 19(b)(2) of the Act.\28\
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78q-1(b)(3)(F).
\28\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
VI. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change, as modified by Amendment No. 1 and Partial
Amendment No. 2, is consistent with the requirements of the Act, and in
particular, with the requirements of section 17A(b)(3)(F) of the Act,
and Rule 17Ad-22(e)(13) thereunder.\29\
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------
It is therefore ordered pursuant to section 19(b)(2) of the Act
\30\ that the proposed rule change (SR-ICC-2023-009), as modified by
Amendment No. 1 and Partial Amendment No. 2, be, and hereby is,
approved on an accelerated basis.\31\
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78s(b)(2).
\31\ 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.\32\
---------------------------------------------------------------------------
\32\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-17979 Filed 8-21-23; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on August 22, 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.