[Federal Register Volume 84, Number 243 (Wednesday, December 18, 2019)]
[Notices]
[Pages 69421-69424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27197]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87722; File No. SR-ICEEU-2019-027]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing of Proposed Rule Change, as Modified by Partial Amendment No.
1, Relating to Amendments to the ICE Clear Europe CDS Procedures
December 12, 2019.
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 December 2, 2019, ICE Clear Europe Limited (``ICE Clear Europe'' or
the ``Clearing House'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change described in Items
I, II and III below, which Items have been prepared by ICE Clear
Europe. On December 10, 2019, ICE Clear Europe filed Partial Amendment
No. 1 to the proposed rule change.\3\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as modified by
Partial Amendment No. 1 (hereafter referred to as 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\ Partial Amendment No. 1 amended the filing to remove from
the filed Exhibit 5 certain dates in brackets and replace them with
new dates and remove other language left in brackets; update page
numbering in the filed Exhibit 2 so that the page numbering in the
filed Exhibit 2 states ``of 59'' instead of ``of 60''; and update a
reference to paragraph 8(c) of the CDS Procedures in the original
filing so that it instead refers to paragraph 8.1(c) of the CDS
Procedures.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
ICE Clear Europe proposes to make certain changes to its CDS
Procedures \4\ to incorporate amendments to the industry-standard ISDA
2014 Credit Derivatives Definitions (the ``2014 Definitions'') that are
being adopted in the broader CDS market to address so-called narrowly
tailored credit events and related matters.
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\4\ Capitalized terms used but not defined herein have the
meanings specified in the ICE Clear Europe Rules or CDS 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 proposes amendments to its CDS Procedures to
incorporate changes to the 2014 Definitions that are intended to
address so-called ``narrowly tailored credit events''. In the wake of
certain credit events and potential credit events in the CDS market in
recent years, the International Swaps and Derivatives Association, Inc.
(``ISDA''), in consultation with market participants, has developed and
published the 2019 Narrowly Tailored Credit Event Supplement to the
2014 ISDA Credit Derivatives Definitions (the ``NTCE
[[Page 69422]]
Supplement'').\5\ The NTCE Supplement, if applied to a CDS transaction,
effects two principal changes to the 2014 Definitions: (1) A change to
the definition of the ``Failure to Pay'' credit event designed to
exclude certain narrowly tailored credit events and (2) a change to the
process for determining the Outstanding Principal Balance of an
obligation to address certain obligations of a reference entity that
were issued at a discount.
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\5\ The NTCE Supplement is published on the ISDA website at
https://www.isda.org/a/KDqME/Final-NTCE-Supplement.pdf.
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As described by ISDA in the attached guidance to the NTCE
Supplement, the supplement was published in light of concerns among
market participants and regulators about ``instances of (CDS) market
participants entering into arrangements with corporations that are
narrowly tailored to trigger a credit event for CDS contracts while
minimizing the impact on the corporation, in order to increase payment
to the buyers of CDS protection.'' \6\ ISDA has expressed concern that
``narrowly tailored defaults . . . could negatively impact the
efficiency, reliability and fairness of the overall CDS market.''
Regulators have also expressed concern with narrowly tailored or
manufactured credit events, including a joint statement by the heads of
the Commission, the Commodity Futures Trading Commission and the UK
Financial Conduct Authority that such strategies ``may adversely affect
the integrity, confidence and reputation of the credit derivatives
markets, as well as markets more generally. These opportunistic
strategies raise various issues under securities, derivatives, conduct
and antifraud laws, as well as policy concerns.'' \7\
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\6\ NTCE Supplement, Guidance on the interpretation of the
definition of ``Failure to Pay''.
\7\ Securities and Exchange Commission, Commodity Futures
Trading Commission and UK Financial Conduct Authority, Joint
Statement on Opportunistic Strategies in the Credit Derivatives
Markets (June 24, 2019); see also Update to June 2019 Joint CFTC-
SEC-FCA Statement on Opportunistic Strategies in the Credit
Derivatives Market (Sept. 19, 2019).
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With respect to the Failure to Pay credit event, the NTCE
Supplement adopts a concept of a ``Credit Deterioration Requirement.''
If applicable, this requirement will provide that a failure of a
reference entity to make a payment on an obligation will not constitute
a Failure to Pay Credit Event if the failure ``does not directly or
indirectly either result from, or result in, a deterioration in the
creditworthiness or financial condition'' of the reference entity. As
such, a ``narrowly tailored'' or ``manufactured'' failure to pay, which
does not reflect or result in a credit deterioration, would not
constitute a Credit Event for CDS Contracts that incorporate the NTCE
Supplement and apply the Credit Deterioration Requirement. The NTCE
Supplement also includes guidance as to factors relevant to the
determination of whether credit deterioration has occurred. That
determination would, under the 2014 Definitions, in the ordinary course
be made by the relevant Credit Derivatives Determinations Committee.
The NTCE Supplement also amends the method of calculating the
Outstanding Principal Balance of obligations. The amendments are
intended to address a potential scenario where a corporation agrees to
issue a bond at a substantial discount to its principal amount, where
the bond could be delivered in settlement of a CDS at its full
principal amount. Under the 2014 Definitions, the Quantum of the Claim
(which is used to determine the Outstanding Principal Balance used in
calculating settlement obligations) is determined taking into account
any applicable laws insofar as they reduce the size of the claim to
reflect the original issue price or accrued value of the obligation.
The NTCE Supplement clarifies that the applicable laws to be considered
include any bankruptcy or insolvency law or other law affecting
creditors' rights to which the relevant obligation is or may become
subject. In addition, the NTCE Supplement includes the concept of
``Fallback Discounting,'' which if designated to be applicable,
provides a method for discounting the Quantum of the Claim (where it is
not otherwise reduced under applicable law or pursuant to its own
terms) of an obligation that is issued at less than 95% of its
principal amount, based on straight-line interpolation between the
issue price and the principal amount.
ICE Clear Europe has been advised that CDS market participants are
expected to commence transacting in CDS incorporating the NTCE
Supplement (with Credit Deterioration Requirement and Fallback
Discounting applicable) on or about January 27, 2020. In addition, ISDA
has published, and opened for adherence, an NTCE Protocol pursuant to
which parties may, on a multilateral basis, agree to amend outstanding,
non-cleared CDS transactions to incorporate the NTCE Supplement. The
amendments made by the NTCE Protocol are also expected to have an
implementation date of on or about January 27, 2020. Adherence to the
protocol will thus make existing transactions fungible with
transactions on the new terms. Accordingly, ICE Clear Europe is
proposing to amend its CDS Procedures for relevant products to
incorporate the NTCE Supplement, both for new and existing cleared
transactions. For this purpose, the proposed ICE Clear Europe
amendments would apply to all cleared CDS contracts with corporate
(i.e., non-sovereign) reference entities, consistent with the NTCE
Protocol and the expected approach for new CDS transactions. ICE Clear
Europe proposes to make such changes effective by the industry
implementation date.
Specifically, ICE Clear Europe would amend paragraph 1 of the CDS
Procedures to include new definitions for ``2019 NTCE Protocol'',
``2019 NTCE Supplement'' and ``NTCE Protocol Effective Date'', which
will be the date of implementation of the amendment. The NTCE Protocol
Effective Date will be January 27, 2020 (or such later date as
designated by ICE Clear Europe by Circular). ICE Clear Europe would
renumber the remaining provisions of paragraph 1 of the CDS Procedures
accordingly.
ICE Clear Europe would further amend relevant subparts of the CDS
Procedures to implement the NTCE Supplement for 2014-type CDS Contracts
cleared by ICE Clear Europe. In this regard, in paragraph 8.1(c) of the
CDS Procedures, a new subparagraph (iii) would be added to provide that
for 2014-type CDS Contracts in effect as of the NTCE Protocol Effective
Date or cleared one or after that date, the Applicable Credit
Derivatives Definitions include the 2019 NTCE Supplement. Certain other
amendments would apply to index CDS transactions and certain other
amendments would apply to single-name CDS transactions.
For index CDS transactions, for iTraxx Europe transactions, in
paragraph 9 of the CDS Procedures, the definitions of iTraxx Terms
Supplement and iTraxx Legacy Terms Supplement would be amended to
include the new standard terms supplement and confirmations for such
transactions, which incorporate the NTCE Supplement (or any electronic
equivalent thereto or other applicable document specified by the
Clearing House). Pursuant to paragraphs 9.2 and 9.3, the applicable new
documentation would apply to iTraxx Contracts submitted for clearing on
or after the NTCE Protocol Effective Date. Conforming changes to other
provisions to include references to such definitions would be made. In
addition, a new paragraph 9.8 would be added to provide that existing
open positions in iTraxx Contracts that are 2014-type CDS Contracts or
that include a Component
[[Page 69423]]
Transaction that is a 2014-type CDS Contract, would be amended, as of
the NTCE Protocol Effective Date, to reference the applicable new
standard terms supplement and confirmation in lieu of the standard
terms supplement and confirmation previously in effect. This will have
the effect of converting existing iTraxx Contracts to reference the new
standard terms incorporating the NTCE Supplement, such that they will
be fungible with new iTraxx Contracts, which will also reference the
new standard terms supplement and confirmation.
Substantially similar changes for CDX.NA Contracts would be made in
paragraph 10 of the CDS Procedures.
In the case of Single Name Contracts, the CDS Procedures would be
amended by adding a new paragraph 11.8, which provides that existing
open positions in all Single Name Contracts (other than Single Name
Contracts for which the Relevant Transaction Type is ``Standard Western
European Sovereign'') that are 2014-type CDS Contracts would be
amended, effective as of the NTCE Protocol Effective Date, to reference
the new relevant ISDA physical settlement matrix, to be published as of
the NTCE Protocol Effective Date. The amendments will have the effect
of converting existing Single Name Contracts to reference the updated
physical settlement matrix, such that they will be fungible with new
Single Name Contracts, which will also reference that matrix. The
amendments would also provide that the amendments would be effective
regardless of whether any transaction record in the Deriv/SERV
warehouse is updated to reflect the change. Conforming changes would be
made throughout paragraph 11 to reflect this change.
(b) Statutory Basis
ICE Clear Europe believes that the proposed rule changes are
consistent with the requirements of Section 17A of the Act \8\ and the
regulations thereunder applicable to it, including the applicable
standards under Rule 17Ad-22.\9\ In particular, Section 17A(b)(3)(F) of
the Act requires that the rule change be consistent with the prompt and
accurate clearance and settlement of securities transactions and
derivative agreements, contracts and transactions cleared by ICE Clear
Europe, the safeguarding of securities and funds in the custody or
control of ICE Clear Europe or for which it is responsible, and the
protection of investors and the public interest.\10\
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\8\ 15 U.S.C. 78q-1.
\9\ 17 CFR 240.17Ad-22.
\10\ 15 U.S.C. 78q-1(b)(3)(F).
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The amendments incorporate changes to the standard terms of CDS
Contracts that are being widely adopted by market participants to
address potential concerns that have arisen with so-called narrowly
tailored credit events. The amendments reflect amendments to the 2014
Definitions, specifically with respect to the Failure to Pay and
Outstanding Principal Balance definitions, that have been developed by
ISDA, in consultation with market participants in both the cleared and
uncleared CDS markets, and are set out in the NTCE Supplement. ICE
Clear Europe understands that for the uncleared swap market, these
amendments are expected to be widely implemented through the NTCE
Protocol. ICE Clear Europe notes that the heads of the Commission, the
Commodity Futures Trading Commission and the UK Financial Conduct
Authority have stated that they welcome the efforts to implement the
amendments set out in the NTCE Supplement and NTCE Protocol.\11\ ICE
Clear Europe is proposing to adopt amendments to its CDS Procedures to
implement these same changes for both new and existing contracts
cleared by it. As a result, in ICE Clear Europe's view, the amendments
will enhance the integrity of the credit derivatives markets and the
confidence of market participants in those markets, and will therefore
facilitate the prompt and accurate clearance and settlement of such
contracts at ICE Clear Europe and will further facilitate the
protection of investors and the public interest, within the meaning of
Section 17A(b)(3)(F) of the Act. ICE Clear Europe does not believe the
amendments will materially affect the safeguarding of securities and
funds in the custody or control of ICE Clear Europe or for which it is
responsible.
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\11\ Update to June 2019 Joint CFTC-SEC-FCA Statement on
Opportunistic Strategies in the Credit Derivatives Markets (Sept.
19, 2019).
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The amendments will also satisfy relevant requirements of Rule
17Ad-22,\12\ as set forth in the following discussion.
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\12\ 17 CFR 240.17Ad-22.
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Legal Framework. Rule 17Ad-22(e)(1) \13\ requires a clearing agency
to establish, implement, maintain and enforce written policies and
procedures reasonably designed to ``provide for a well-founded,
transparent and enforceable legal framework for each aspect of its
activities in all relevant jurisdictions.'' \14\ The amendments to the
CDS Procedures are designed to supplement the contractual terms,
consistent with industry initiatives, to address and reduce the
likelihood of certain situations involving narrowly tailored credit
events that have given rise to concerns among market participants and
regulators, as described above. As such, ICE Clear Europe believes that
the amendments will enhance the legal framework for clearing of CDS
Contracts, consistent with the requirements of Rule 17Ad-22(e)(1).\15\
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\13\ 17 CFR 240.17Ad-22(e)(1).
\14\ 17 CFR 240.17Ad-22(e)(1).
\15\ 17 CFR 240.17Ad-22(e)(1).
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Risk Management. Rule 17Ad-22(e)(3) \16\ requires a clearing agency
to establish, implement, maintain and enforce written policies and
procedures reasonably designed to ``maintain a sound risk management
framework for comprehensively managing legal, credit, liquidity,
operational, general business, custody and other risks that arise in or
are borne by the'' clearing agency.\17\ ICE Clear Europe believes the
amendments, by implementing the NTCE Supplement for existing and new
CDS Contracts, will be consistent with, and eliminate basis risk as
compared to, changes being made in the uncleared CDS markets. The
changes will also ensure the fungibility of new and existing contracts
in light of the NTCE Supplement amendments, which will facilitate
ongoing risk management by the clearing house and market participants.
As a result, in ICE Clear Europe's view, the amendments are consistent
with the requirements of Rule 17Ad-22(e)(3).\18\
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\16\ 17 CFR 240.17Ad-22(e)(3).
\17\ 17 CFR 240.17Ad-22(e)(3).
\18\ 17 CFR 240.17Ad-22(e)(3).
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(B) Clearing Agency's Statement on Burden on Competition
ICE Clear Europe does not believe the proposed amendments would
have any impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purpose of the Act. The amendments
reflect an industry-wide initiative designed to apply to all CDS market
participants, in both the cleared and uncleared markets. ICE Clear
Europe's specific amendments to its CDS Procedures will apply
consistently across all Clearing Members, their customers and other
market participants. ICE Clear Europe further expects that other market
participants will make similar changes to their contracts and terms of
trading. As a result, ICE Clear Europe does not expect that the
proposed changes will
[[Page 69424]]
adversely affect access to clearing or the ability of Clearing Members,
their customers or other market participants to continue to clear
contracts, including CDS Contracts. ICE Clear Europe also does not
believe the amendments would materially affect the cost of clearing or
otherwise limit market participants' choices for selecting clearing
services. Accordingly, ICE Clear Europe does not believe the amendments
would impose any burden on competition not necessary or appropriate in
furtherance of the purpose of the Act.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
ICE Clear Europe has conducted a public consultation on the
amendments to its CDS Procedures set forth herein.\19\ ICE Clear Europe
received two written responses to the consultation pursuant to which
certain definitional clarifications and minor typographical corrections
were requested. ICE Clear Europe has made certain drafting
clarifications to the proposed rules as a result of these requests.
Certain comments in these responses related to the standard terms
supplements and confirmations referenced in the revised CDS Procedures,
and ICE Clear Europe determined that no changes to the proposed rules
themselves were appropriate as a result of such comments. One commenter
also questioned whether there was a need to explicitly amend Customer-
CM Transactions as a result of the proposed rule changes; ICE Clear
Europe determined that no such change was necessary to effectuate the
proposed rule amendments. ICE Clear Europe will notify the Commission
of any further written comments with respect to the proposed rules
received by ICE Clear Europe.
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\19\ ICE Clear Europe Circular C19/175 (November 12, 2019),
available at https://www.theice.com/publicdocs/clear_europe/circulars/C19175.pdf.
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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 the 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
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
Send an email to [email protected]. Please include
File Number SR-ICEEU-2019-027 on the subject line.
Paper Comments
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-2019-027. 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 (http://www.sec.gov/rules/sro.shtml).
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 https://www.theice.com/clear-europe/regulation. All comments received will be posted without change.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-ICEEU-2019-027 and should be
submitted on or before January 8, 2020.
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\20\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27197 Filed 12-17-19; 8:45 am]
BILLING CODE 8011-01-P