[Federal Register Volume 85, Number 101 (Tuesday, May 26, 2020)]
[Notices]
[Pages 31564-31571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11138]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88909; File No. SR-ICEEU-2020-006]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing and Immediate Effectiveness of Proposed Rule Change,
Security-Based Swap Submission or Advance Notice Relating to Amendments
to the ICE Clear Europe Auction Terms for F&O Default Auctions and F&O
Default Management Policy (Formerly the F&O Default Management
Framework)
May 19, 2020.
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 May 11, 2019, 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, Security-Based Swap Submission, or Advance Notice
The principal purpose of the proposed amendments is for ICE Clear
Europe to amend its Auction Terms for F&O Default Auctions (the
``Auction Terms'') and F&O Default Management Policy (the ``Policy''),
formerly the F&O Default Management Framework. The revisions do not
involve any changes to the ICE Clear Europe Clearing Rules (the
``Rules'') or other Procedures.\5\
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\5\ Capitalized terms used but not defined herein have the
meanings specified in the Rules.
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[[Page 31565]]
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change, Security-Based Swap Submission or
Advance Notice
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, Security-Based Swap Submission or
Advance Notice
(a) Purpose
ICE Clear Europe is proposing to amend its Auction Terms. The
proposed amendments would (1) add a new ``all or nothing'' bidding
type, (2) provide for determination of minimum bid requirements based
on the relative margin requirements of Clearing Members, (3) provide
for the use of ICEU's default management system, in lieu of email or
other manual forms of communication, for submission of bids and
provision of certain notices to auction participants by the Clearing
House, (4) clarify certain regulatory and compliance obligations of
auction participants, and (5) generally update and clarify certain
terms and provisions and correct certain typographical errors. The
proposed amendments to the Policy would make corresponding changes to
reference the new ``all or nothing'' bidding type, the minimum bid
requirement and the default management system and to make general
updates and clarifications.
I. Auction Terms
1. All or Nothing Bid Type
The amendments would allow auction participants to submit a new
type of bid for an Auction Lot, an ``All or Nothing Bid.'' As provided
in amendments to paragraph 3.2 of the Auction Terms, an All or Nothing
Bid would constitute a bid for the entire Auction Lot which, if it is
the winning bid, would provide for the bidder to receive 100% of the
Auction Lot without that award being split among more competitively
priced bids (as may occur with bids under the current bidding process
(referred to as ``Standard Bids'')). Use of All or Nothing Bids would
be optional, and auction participants could continue to use Standard
Bids as under the current process. An auction participant may also
submit both Standard Bids and an All or Nothing Bid. Revised paragraph
3.2 would also address the manner in which an All or Nothing Bid may
satisfy the Minimum Bid Requirement for an Auction Lot and the
requirement to identify an All or Nothing Bid as such.
Paragraph 3.1 would amended to provide for determining the
competitiveness of an All or Nothing Bid for purposes of the
``juniorization'' provisions in that paragraph relating to the
application of F&O Guaranty Fund Contributions and F&O Assessment
Contributions under the Rules, based on an appropriate scale factor to
calculate a deemed price per unit.
Paragraph 5.3 would be amended to provide for the determination of
whether an All or Nothing Bid is a winning bid. As under the current
process, the auction clearing price (proposed to be defined as the F&O
Auction Clearing Price'') would be the price of the bid at which the
sum of the notional amount of F&O Contracts with equal or higher bid
prices equals or is greater than the notional amount of F&O Contracts
being auctioned. If an All or Nothing Bid is not accepted, the Auction
Lot will be allocated in full to bids at or above the F&O Auction
Clearing Price, but at the F&O Auction Clearing Price. If, however, an
All or Nothing Bid is included in the group of bids with equal or
higher bid prices, then the All or Nothing Bid will be accepted for the
entire Lot, and the F&O Auction Clearing Price will be price of the All
or Nothing Bid. The examples in Paragraph 5.3 would be modified to take
into account All or Nothing Bids, including to show information
regarding a ``price rank'', whether it is an All or Nothing Bid, the
bid size (as a percentage of auction lot), bid price (payment per
100%), size multiplied by price and the allocation percentage of the
auction lot.
Paragraph 5.4 would clarify that All or Nothing Bids are given
precedence over Standard Bids, in the sense that if an All or Nothing
Bid is accepted, a Standard Bid will not be accepted even if it had a
higher price than the F&O Auction Clearing Price. It would also provide
that if multiple All or Nothing Bids are received at the F&O Auction
Clearing Price, the Auction Lot will be allocated equally among those
bidders.
Paragraph 5.5 would be amended to clarify that in the scenario
where the Clearing House elects to determine the F&O Auction Clearing
Price for less than 100% of the contracts in the lot and hold a Second
F&O Auction for the remainder, any All or Nothing Bids would be
disregarded. Related examples in paragraph 5.5 have been amended
accordingly.
2. Minimum Bid Requirement
The amendments would revise paragraph 2.2 to provide that each F&O
Clearing Member's Minimum Bid Requirement for a lot would be determined
separately for each category of F&O Contract and would be determined
pro rata based on the Original Margin requirement applicable to the
Open Contract Positions of such F&O Clearing Member as compared to the
total Original Margin requirements for all the Open Contract Positions
of all F&O Clearing Members. Further, setting Minimum Bid Requirements
would no longer require consultation with the F&O Default Committee.
ICE Clear Europe believes that this approach (as opposed to the current
minimum bid requirement, which is the same for all F&O Clearing
Members) is more appropriately tied to each Clearing Member's relative
risk position in the relevant contract, as demonstrated by original
margin levels. A further conforming change would be made in paragraph
2.2 to reflect that a Clearing Member could have a zero Minimum Bid
Requirement (in which case it would not be required to bid for the
relevant lot).
Minor amendments to paragraph 2.3 would better clarify what is
counted to toward the Minimum Bid Requirement. Specifically, a Clearing
Member's bid for one of its Proprietary Accounts or Customer Accounts,
including Individually Segregated Sponsored Accounts for the account of
any Sponsored Principal for which it acts as Sponsor, would count
towards its Minimum Bid Requirement. The precise wording of the
paragraph has also been revised to improve general clarity. The
amendments are also consistent with changes throughout the Auction
Terms, as discussed herein, to clarify that Individually Segregated
Sponsored Accounts are treated as Customer Accounts for purposes of the
Auction Terms.
Paragraph 2.4 would be amended such that an F&O Clearing Member's
Minimum Bid Requirement would be communicated to it through the DMS (or
via such other means as specified by the Clearing House), as discussed
below, as soon as practicable prior to the relevant F&O Auction instead
of through the template notification set out in an annex to the Auction
Terms (which would accordingly be removed). The amendments would also
clarify the procedures for the Clearing House to determine that a
Minimum Bid
[[Page 31566]]
Requirement would be inappropriate for a particular F&O Clearing Member
in particular circumstances, and explicitly provides that the Clearing
House must confirm that it agrees with the Clearing Member's assessment
that an exception to the Minimum Bid Requirement applies. An F&O
Clearing Member would be required to notify the Clearing House
promptly, but in any event within one hour of the Clearing House
publishing details of the F&O Contracts comprising the relevant Auction
Lot (instead of 12 hours prior to the opening of the auction), in
writing, if it reasonably considers that the Minimum Bid Requirement
would not apply to it. ICE Clear Europe does not believe the current 12
hour period is necessarily practicable as an operational matter, as the
Clearing House may need to conduct an auction with less than 12 hours'
notice. The current requirement could thus either create an undesirable
delay in conducting an auction or impose an unnecessary limitation on
the F&O Clearing Member's ability to request an exception to the
Minimum Bid Requirement. The proposed change, to allow notice within
one hour after the Clearing House publishes auction details, will allow
the Clearing House to move more quickly to minimize losses and preserve
the F&O Clearing Member's ability to request an exception where
warranted. The amendments would also clarify that F&O Clearing Members
could outsource the operational processing of any of their auction
obligations under Rule 102(w) (regarding outsourcing). F&O Clearing
Members could also transfer their Minimum Bid Requirements to an
Affiliate that is also an F&O Clearing Member, subject to notification
to the Clearing House prior to an auction and execution of an agreement
in an approved format.
Paragraph 2.5 would be amended to state that the Clearing House
would expect to create one or more separate Auction Lots consisting of
F&O Contracts for which one or more F&O Clearing Members is excused
from a Minimum Bid Requirement or has a zero Minimum Bid Requirement
under paragraphs 2.2 and 2.4. This change is intended to state more
clearly the Clearing House's existing practice in establishing separate
lots in connection with an auction. Consistent with changes discussed
above relating to setting Minimum Bid Requirements, paragraph 2.5 would
also be amended to remove a requirement to consult with the F&O Default
Committee in establishing Auction Lots, which ICE Clear Europe believes
is unnecessary in light of the standards set out in paragraph 2.5.
3. Default Management System
The amendments would provide for the use of the Clearing House's
electronic default management system (``DMS'') for a number of
communications between the Clearing House and auction participants, in
lieu of the current manual notice process. Pursuant to amended
paragraph 2.1, the Clearing House would notify F&O Clearing Members
electronically through the DMS (or other means specified by the
Clearing House) of an auction taking place instead of by Circular.
Conforming changes would be made throughout the Auction Terms to make
reference to communication through the DMS instead of through existing
means. For example, as noted above, the Clearing House would notify
Clearing Members of Minimum Bid Requirements through the DMS, pursuant
to revised paragraph 2.4. Paragraph 2.6 would be amended to state that
F&O Auction Specifications would be provided through the DMS instead of
in the template format currently attached to the Auction Terms.
Paragraphs 2.8 and 2.9 would be amended to state that all bids must be
submitted via DMS (or other means specified by the Clearing House)
instead of through the existing bid form. Certain provisions such as
paragraph 2.10 have been correspondingly removed as no longer relevant
with electronic submission through DMS. Paragraph 3.7 would be amended
to provide that modified or amended bids may be submitted through DMS
(or another format specified by the Clearing House). Pursuant to
revised paragraph 5.8, winning bidders could also be notified through
the DMS.
4. Clarification of Certain Regulatory and Compliance Obligations
Paragraph 7.7 would be amended to clarify and state explicitly
certain obligations for auction participants in respect of information
they may receive in connection with an auction, including the contents
of the portfolio or the outcome or timing of an auction. Specifically,
the auction participant would acknowledge that such information may
constitute inside information for the purposes of the Market Abuse
Regulation (Regulation (EU) No 596/2014) (``MAR'') or fall within the
definition of any similar term under Applicable Law (``Market Abuse
Laws'') in respect of any Contracts cleared by the Clearing House or in
respect of securities of a Defaulter. Under the revisions, each such
participant would be required to assess whether such information is
inside information and, if so, agree to: (a) Comply with applicable
Market Abuse Laws; (b) generally not disclose such information to
persons outside of its organization; (c) prevent persons engaged in
client trading at such organization from possessing such information;
(d) prevent those in possession of such information from trading on
such information until it ceases to be inside information; and (e)
where such information constitutes inside information under Regulation
(EU) No. 596/2014, maintain an insider list of persons with access to
this information.
5. Other Clarifications and Updates
The amendments would make a number of other clarifications,
drafting improvements and corrections to the Auction Terms. Certain
changes to defined terms would be made throughout the Auction Terms,
including the use of the term ``F&O Default Auction Terms'' instead of
F&O Auction Terms, the new defined term ``Bidding Close Time'' instead
of ``Closing Time'', and the defined term ``Auction Lot'' instead of
the undefined ``lot''. Proposed amendments to paragraph 1.1 would
clarify that references to F&O Contracts, for purposes of the Auction
Terms, include (i) where automatic early termination has taken place
under Part 9 of the Rules or Contract Terms, a reference to the
terminated F&O Contracts or notional amounts representing such
terminated F&O Contracts and (ii) where contracts have arisen from
hedging transactions pursuant to Rule 903(c), a reference to any such
hedging contracts executed by the Clearing House. These amendments thus
clarify that such contracts may be auctioned for purposes of
establishing replacement contracts with non-defaulting Clearing Members
to balance the Clearing House's positions as part of the default
management process, and thereby also establishing an auction price to
be used in determining the Clearing House's loss with respect to the
close out of the defaulter's positions for purposes of the Rules. In
paragraph 1.2, the amendments would clarify that nothing in the Auction
Terms would prevent the Clearing House from administering a sale or
entering into offsetting transactions without holding an auction to
which the Auction Terms apply. This reflects the Clearing House's
existing authority under the Rules, and is intended to avoid any
potential confusion as to the scope of the Auction Terms. New paragraph
1.11 would
[[Page 31567]]
cross-reference defined terms in the Rules, F&O Procedures, Finance
Procedures or F&O Standard Terms as applicable, and in the order of
priority specified in Rule 102(f).
Paragraph 2.3 would be amended to remove an unnecessary statement
that F&O Clearing Members are deemed to have confirmed their intention
to bid in a particular auction prior to the time window for bidding and
the Auction closing time. In this regard, the Auction Terms (in
paragraph 2.2) already impose a requirement on F&O Clearing Members to
bid in the auction.
Paragraph 2.10 (former paragraph 2.11) would be amended to clarify
that after the Bidding Close Time, the Clearing House will notify
participants of the fact that the F&O Auction took place, in addition
to the outcome.
Paragraph 3.1 would be amended to provide that where, in respect of
a particular F&O auction, the portfolio of a Defaulter is split into
multiple auction lots, the process for determining the competitiveness
of bids described (which is used for determining the priority of
application of Clearing Members' F&O Guaranty Fund Contribution and F&O
Assessment Contributions) would be carried out separately for each
Auction Lot. In such case, the weighted average price per unit for each
auction lot would be scaled based on the proportion that the Original
Margin requirement applicable to the Open Contract Positions comprising
such Auction Lot represents in relation to the total Original Margin
requirements for all the Open Contract Positions of the Defaulter in
relation to auctioned F&O Contracts. Paragraph 3.1 would only apply to
bids indicated or deemed related to Minimum Bid Requirements (i.e.,
those Standard Bids, or if applicable the All or Nothing Bid, that
count toward the Minimum Bid Requirement).
An additional clarification would be made in Paragraph 3.2 that the
Minimum Bid Requirement could be satisfied by submitting multiple bids
provided that any individual bid is equal to (and not merely larger
than) any applicable minimum bid size.
Under revised Paragraph 3.7, following the bidding close time, upon
request of an F&O Auction Participant stating that a mistake was made
in the bid submission, the Clearing House could invalidate the bid and
the participant would be treated as if it had not made such a bid. The
Clearing House would no longer be required to permit the participant to
submit a corrected bid. This reflects the operation of DMS, which does
not permit submission of a bid following the bidding close time, and
further reflects ICE Clear Europe's view that given the objective of
ensuring a fair and orderly auction, it is not appropriate for Clearing
Members to modify bids following the bidding close deadline.
The amendments to Paragraph 4.1 would remove a statement that an
F&O Clearing Member may make an unlimited number of separate bids and
clarify that the member may make separate bids for Customers or
Sponsored Principals for whom it acts as Sponsor in the same way as it
may make a bid for one of its Proprietary Accounts and subject to the
same provisions of the Auction Terms. This amendment reflects that
relevant systems do not permit an infinite number of separate bids, and
in practice is intended to give ICE Clear Europe flexibility to set a
maximum number of bids if it determines that is appropriate. Amendments
to paragraph 4.2 would clarify that F&O Clearing Members are liable for
the entry into of F&O Contracts resulting from bids made on behalf of a
Customer or Sponsored Principal (including a Customer or Sponsored
Principal that is an F&O Auction Participant) in the same manner and to
the same extent as for other customer contracts. The amendments clarify
the drafting to remove statements that the F&O Clearing Member becomes
liable for the bid (as opposed to the contract resulting from the bid
if accepted.
Amendments to Paragraph 4.3 would require that each F&O Auction
Participant that is not an F&O Clearing Member enter into an F&O
Auction Participation Agreement with its F&O Clearing Member prior to
participation in an F&O Auction (as opposed to merely deeming the F&O
Auction Participant to have agreed to be bound by the Auction Terms).
ICE Clear Europe believes it is preferable to have a formal agreement
with the F&O Auction Participant in this situation, as it provides a
clearer and stronger basis for enforcement of the Auction Terms against
the F&O Auction Participant.
Amendments to Paragraph 5.1 would clarify a reference to the
Clearing House's F&O default management policies and procedures
generally, as opposed to only the Default Management Policy.\6\ This
would ensure that the Auction Terms themselves as well as the relevant
provisions of the Rules are also incorporated in these references.
Amendments to Paragraph 5.2 would also permit the Clearing House to at
its discretion withdraw an auction lot after (as well as prior to) the
bidding close time. An additional amendment to Paragraph 5.3 would
provide that in the event of invalid or void bid or no F&O Contract
being established, such bid would not be accepted and the F&O Auction
Participant would be treated as if it had not made such bid.
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\6\ This change would be consistent with similar clarifications
made in Paragraphs 5.5.
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In Paragraph 5.4, an additional clarification would add that bids
invalidated pursuant to certain Paragraph 3 (Bidding Process)
provisions could, at Clearing House discretion, be excluded for
purposes of calculating the auction clearing price or allocating sizes
at that price.
Paragraph 5.7 would be amended to provide that the Winning Bidder
will be the relevant F&O Clearing Member, acting for its Proprietary
Accounts or Customer Account, including Individually Segregated
Sponsored Accounts, as applicable. This amendment clarifies that an
Individually Segregated Sponsored Account is treated as a Customer
Account for this purpose and that the relevant F&O Clearing Member (and
not the Sponsored Principal for which it is acting) is treated as the
Winning Bidder.
Amendments to Paragraph 5.8 would state in more detail the
mechanism under the Rules through which F&O Contracts are entered into
as a result of an auction, by providing that each bid constitutes an
offer by the F&O Clearing Member to the Clearing House to enter into
F&O Contracts pursuant to a Transfer governed by Rule 904(b) (but
without regard to any Customer or Customer-CM Transactions of the
Defaulter) and Part 4 of the Rules. The amendment is intended as a
clarification of the existing process for entering into contracts and
is not a substantive change in the Auction Terms. A reference to such
an offer being made by a Sponsored Principal would be removed, as the
F&O Clearing Member would be offering to enter into the contract on
behalf of the Sponsored Principal in such case. Other changes in this
paragraph clarify that resulting F&O Contracts would arise between the
Clearing House and the winning bidder (acting for one of its
Proprietary Accounts or Customer Accounts, including for an
Individually Segregated Sponsored Account, as applicable), in
accordance with such a Transfer and Part 4 of the Rules, but without
regard to any Customer or Customer-CM Transactions of the Defaulter, on
economically identical terms to the F&O Contracts that are the subject
of the auction lot in the relevant F&O Auction. The additional text has
been added for clarification and for consistency with
[[Page 31568]]
the amendments to Paragraph 5.7 as discussed above.
Paragraph 5.10 would be amended such that if the Clearing House
accepts bids below a reserve price or above a maximum price, the F&O
auction for that lot would not be treated as a failed F&O auction.
Paragraph 6.2 would be amended to clarify that Customer-CM F&O
Transactions would only arise as a result of the F&O auction for
Customers of the Winning Bidder. The amendment was intended to make a
drafting clarification and does not reflect a substantive change in the
operation of the Auction Terms.
Clarifying amendments as to the treatment of Individually
Segregated Sponsored Accounts as a form of Customer Account, consistent
with other amendments discussed above, are made in paragraph 7.1.
II. Default Management Policy
ICE Clear Europe is also proposing to make various amendments to
its F&O Default Management Framework, which would be renamed the F&O
Default Management Policy. The amendments would be consistent with the
amendments to the Auction Terms discussed above and make certain other
clarifications and updates. Conforming changes would also be made
throughout the document to reflect the name change.
In the statement of purpose of the document, a reference to the
``Executive'' would be replaced with the ``Senior Management Team'' (to
more accurately reflect relevant ICE Clear Europe governance
arrangements). References to Executive elsewhere in the Policy would
similarly be updated. With respect to default declarations, the Policy
would be updated to clarify that the Board has delegated authority to
declare an event of default to the President (instead of the President
& COO or the Head of Clearing Risk). This reflects a change in the
authority that has been delegated by the Board. Also, the Policy would
state more clearly that legal representation as appropriate would be
present at meetings of the Default Management Committee where required.
The amendments would also clarify that the Clearing House expects
to liaise with the relevant regulators prior to the declaration of an
Event of Default and issuance of a Default Notice, but removes a
statement that it would do so in all instances. In ICE Clear Europe's
view, there may be circumstances in which liaising with regulators in
advance may not be feasible, such as where a default may require
immediate action to protect the Clearing House. The revised Policy
nonetheless retains the requirement that the Clearing House notify its
regulators prior to declaration of an Event of Default.
With respect to the issuance of a circular and the posting of a
website notice regarding an event of default, the amendments would
remove a requirement that such actions be taken ``immediately''
following notice to the Defaulter. Similarly, the amendments would
remove the requirement that the Clearing House act ``immediately'' to
take certain additional actions relating to forming committees,
suspending Defaulter trading access and preventing payments from the
Clearing House to the Defaulter following issuance of the Default
Notice. Although ICE Clear Europe expects that such actions would be
implemented in a timely manner under the circumstances, it is not
necessary (or necessarily feasible) to specify that it do so
immediately.
Pursuant to the amendments, the statement that in the event that
the President and COO are absent, the Head of Clearing Risk would have
the ability to overrule any other head of department (including Head of
Treasury and Head of Operations) where necessary on matters relating to
default management, would be removed. The amendment is intended to be
consistent with the change in the Board's delegation of authority to
the President referred to above. With respect to preventing payments
from the Clearing House to the Defaulter, the requirement for treasury
to call and email the Clearing House's account manager to stop the
auto-release of funds would be amended to remove the reference to a
specific bank (as a number of financial institutions may be relevant in
particular circumstances). Certain other clarifications would be made
as to the means of contacting default brokers (by phone or email) and
to refer to relevant liquidity groups rather than sub-markets, as
discussed in further detail below.
Certain references to the ``Risk Management'' would be updated to
refer to the ``Clearing Risk Department'' to better reflect the
Clearing House's internal organization.
The provisions of the Policy regarding bidding mechanics would be
amended to address ``All or Nothing'' bids and the ``Minimum Bid
Requirement'', among other general clarifications and drafting
improvements. The amendments would clarify that the positions to be
auctioned will generally be divided by liquidity group. The term
``liquidity group'' replaces the less accurate term ``sub-market'', but
the change is not intended to result in a substantive change in product
grouping. The term liquidity group is intended to indicate product
categories within the broader F&O Guaranty Fund segments. The liquidity
groups, as listed in the Policy, are defined by underlying product and
in some cases by margin group. The amendments would also reference the
ability for Auction Participants to also submit an ``All or Nothing''
bid type and would explain this bid type. Amendments would also clarify
that Clearing Member participation in the auction is mandatory provided
that Clearing Members have an initial margin requirement in the
liquidity group of the auctioned portfolio and that each Clearing
Member is allocated a Minimum Bid Requirements based its portion of the
initial margin of a liquidity group. This amendment is intended to be
the same as set forth in the revised Auction Terms as discussed above
(with certain differences in terminology (such as the use of the term
``initial margin'' to be consistent with the use of terms in the
Policy). Clearing Members who do not participate in an auction where
they have an allocated Minimum Bid Requirement would be liable to the
juniorization of their own Guaranty Fund contributions related to that
liquidity group. The example regarding the bidding process as well as
the distinctions in the process relating to listed contracts would be
removed as no longer representative of the amended bidding process. The
description of the bid submission process would be updated to refer to
submission of bids through the DMS. Winning bidders would also receive
notice through the ICE DMS rather than through the ICE secure server.
The statement that in the event that a Clearing Member would receive a
partial fill at auction if its bid is over the cusp for clearing the
auction would be amended to clarify that this is only true of standard
(i.e., non All or Nothing) bids. The statement that the Clearing House
only expects to utilize mirror portfolios for the Dutch auction
methodology would be removed (as it is unnecessary in the context of
current F&O products).
The amendments also remove certain provisions of the Policy that
would be inconsistent with or superseded by the amended Auction Terms.
This includes statements with respect to requirements for participation
by clients in auctions (which are now addressed in paragraph 4.3 of the
Auction Terms, among other provisions). A statement as to a requirement
by certain clients to post collateral to the F&O Guaranty Fund in
connection with auctions has been
[[Page 31569]]
removed as not reflecting current practice or practice under the
Auction Terms as proposed to be amended. A statement that auction
procedures are executed by asset class and then sub-market has been
removed as it has been superseded by paragraph 2.5 of the Auction
Terms. The amendments would also clarify that trades resulting from the
auction would be booked against the margin account specified in the
portfolio bid submission, instead of the DTCC account ID specified. The
change reflects current Clearing House practices for identification of
relevant accounts, and is consistent with the operation of the new DMS
system for bid submission.
The amendments to the Policy would also update arrangements for
breach management, ongoing Policy reviews and exception handling. The
amendments are intended to make the Policy consistent in this regard
with other ICE Clear Europe policies and governance processes. Pursuant
to the amendments, the document owner would be responsible for ensuring
that the Policy remains up-to-date and is reviewed in accordance with
ICEU's governance processes. The owner would also be responsible for
reporting report material breaches or unapproved deviations from this
document to the Head of Department, the Chief Risk Officer and the Head
of Compliance (or their delegates) who together would determine if
further escalation should be made to relevant senior executives, the
Board and/or competent authorities. Exceptions to the Policy would
approved in accordance with ICE Clear Europe's governance process for
the approval of changes to the Policy.
(b) Statutory Basis
ICE Clear Europe believes that the proposed amendments 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. ICE Clear Europe
believes that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to ICE Clear Europe, in particular, to Section
17(A)(b)(3)(F),\9\ because ICE Clear Europe believes that the proposed
changes to the Auction Terms and the Policy enhance ICE Clear Europe's
ability to manage the risk of defaults. The proposed changes introduce
All or Nothing Bidding to ICE Clear Europe's existing auction
methodology. This new bid type is intended to reward auction
participants for bidding competitively on both size and price, rather
than just price (as with a Standard Bid). If an All or Nothing Bid sets
the auction clearing price, the revised Auction Terms award 100% to
that bid, rather than splitting the award with participants bidding
more competitively on price but with smaller size. Such changes
incentivize competitive bidding by rewarding auction participants for
bidding competitively on both price and size and are designed to
promote effective and efficient auctions to facilitate the close-out of
the defaulter's portfolio.
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\7\ 15 U.S.C. 78q-1.
\8\ 15 U.S.C. 78q-1(b)(3)(F).
\9\ 15 U.S.C. 78q-1(b)(3)(F).
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The amendments to the determination of the Minimum Bid Requirement
are intended to enhance default management by more closely linking the
bid requirement for a clearing member with the risk of the clearing
member's particular positions, as evidenced through original margin
requirements. The amendments are designed to allocate potential risk in
the auction taking into account the ability of the clearing member to
trade in the particular product and thus to manage the risk of
positions that it may acquire in the auction as a result of its minimum
bid requirement. The amendments would thus reduce the risk to a
clearing member of being forced to bid on a type of contract that it
does not typically trade and may have less capability to manage. ICE
Clear Europe believes this approach is more appropriate than the
current approach of assigning each clearing member the same minimum bid
requirement.\10\ ICE Clear Europe further believes that the revised
approach, with a more tailored minimum bid requirement, will be more
likely to result in competitive bidding by those clearing members
consistent with their ability to manage the resulting positions.
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\10\ The change is also consistent with recently adopted
requirements of the Commodity Futures Trading Commission applicable
to derivatives clearing organizations, including ICE Clear Europe.
See 17 CFR 39.16(c)(2)(iii)(C) (a DCO shall not require a clearing
member to bid for a portion of the defaulting clearing member's
positions that is not proportional to the size of bidding clearing
member's positions in the same product class at the DCO).
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The proposed amendments also implement the use of the automated DMS
to replace certain manual communication tasks in the auction process,
including announcing the auction, communicating Minimum Bid
Requirements and auction specifications, submitting bids and notifying
winning bidders. Such changes allow ICE Clear Europe to more
efficiently and safely manage its auction process and reduce the risk
of miscommunication or error. The added compliance requirements around
treatment of information concerning the auction will help prevent
market abuse, enhance compliance with applicable law and thus generally
promote the public interest. Finally, the clarification and clean-up
changes provide greater specificity with respect to the Auction Terms
and the Policy such that auction participants have greater certainty
and clarity regarding the auction process and the requirements for
their participation. ICE Clear Europe believes that the proposed
amendments augment ICE Clear Europe's procedures relating to default
management and enhance ICE Clear Europe's ability to withstand defaults
and continue providing clearing services, thereby promoting the prompt
and accurate clearance and settlement of securities transactions,
derivatives agreements, contracts, and transactions, the safeguarding
of securities and funds which are in the custody or control of ICE
Clear Europe or for which it is responsible; and the protection of
investors and the public interest, within the meaning of Section
17A(b)(3)(F) of the Act.\11\
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
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In addition, the proposed rule change is consistent with the
relevant requirements of Rule 17Ad-22.\12\ Rule 17Ad-22(e)(4)(ii) \13\
requires ICE Clear Europe to establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain
sufficient financial resources at a 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 exposures in extreme but
plausible market conditions. ICE Clear Europe believes that the
proposed revisions enhance its Auction Terms. As described above, the
optional All or Nothing Bid incentivizes competitive bidding, promoting
the goal of reaching an efficient auction clearing price that permits
ICE Clear Europe to close out
[[Page 31570]]
the defaulter's portfolio and return ICE Clear Europe to a matched
book. Such new bid type rewards auction participants for bidding
competitively on both size and price and may increase the willingness
and ability of participants and their customers to participate in an
auction and absorb the defaulter's positions through the default
management process. Similarly, the changes to the Minimum Bid
Requirement will incentivize bidding by clearing members that have
taken on positions of the relevant type and may be better placed to
manage the risks of the auctioned positions. In ICE Clear Europe's
view, these enhancements represent tools that strengthen ICE Clear
Europe's ability to manage its financial resources and withstand the
pressures of defaults, consistent with the requirements of Rule 17Ad-
22(e)(4)(ii).\14\
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\12\ 17 CFR 240.17Ad-22.
\13\ 17 CFR 240.17Ad-22(e)(4)(ii).
\14\ 17 CFR 240.17Ad-22(e)(4)(ii).
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In addition, ICE Clear Europe believes the amendments satisfy Rule
17Ad-22(e)(13),\15\ which requires a clearing agency to ensure that it
``has the authority and operational capacity to take timely action to
contain losses and liquidity demands'' in the case of default. As
discussed above, the proposed amendments would enhance ICE Clear
Europe's default management capabilities in F&O default auctions.
Specifically, ICE Clear Europe believes the proposed addition of All or
Nothing Bidding, the new methodology for calculating Minimum Bid
Requirements and the automated DMS enhance ICE Clear Europe's ability
to withstand defaults and continue providing clearing services,
including by incentivizing competitive bidding to promote effective and
efficient auctions that facilitate the close-out of the defaulter's
portfolio and maximizing ICE Clear Europe's ability to efficiently and
safely manage its auction process in default events, to ensure that ICE
Clear Europe can take timely action to contain losses and liquidity
pressures and to continue meeting its obligations in the event of a
participant default consistent with the requirements of Rule 17Ad-
22(e)(13).\16\
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\15\ 17 CFR 240.17Ad-22(e)(13).
\16\ 17 CFR 240.17Ad-22(e)(13).
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Rule 17Ad-22(e)(1) \17\ requires that clearing agencies establish
policies and procedures that provide for a well-founded, clear,
transparent, and enforceable legal basis for each aspect of its
activities in all relevant jurisdictions. The amendment to Paragraph
7.7 of the Auction Terms are designed to enhance compliance by F&O
auction participants with Market Abuse Laws to the extent that they
receive any inside information relating to any Contracts cleared by the
Clearing House or in respect of securities of a Defaulter. In ICE Clear
Europe's view, the amendments are therefore consistent with the
requirements of Rule 17Ad-22(e)(1).\18\
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\17\ 17 CFR 240.17Ad-22(e)(1).
\18\ 17 CFR 240.17Ad-22(e)(1).
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Rule 17Ad-22(e)(3)(i) \19\ requires clearing agencies to maintain a
sound risk management framework that identifies, measures, monitors and
manages the range of risks that it faces. The amendments to the Policy
are intended to ensure that the Policy is consistent with the Auction
Terms and to ensure risks relating to defaults continue to be well
managed. In ICE Clear Europe's view, the amendments are therefore
consistent with the requirements of Rule 17Ad-22(e)(3)(i).\20\
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\19\ 17 CFR 240.17 Ad-22(e)(3)(i).
\20\ 17 CFR 240.17 Ad-22(e)(3)(i).
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Rule 17Ad-22(e)(2) \21\ requires clearing agencies to establish
reasonably designed policies and procedures to provide for governance
arrangements that are clear and transparent and specify clear and
direct lines of responsibility. The proposed amendments to the Policy
more clearly define the roles and responsibilities of the document
owner, the Head of Department, the senior members of the Risk Oversight
Department and the senior members of the Compliance Department, and are
therefore consistent with the requirements of Rule 17Ad-22(e)(2).\22\
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\21\ 17 CFR 240.17 Ad-22(e)(2).
\22\ 17 CFR 240.17 Ad-22(e)(2).
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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 purposes of the Act. The amendments
are being adopted further clarify and update the Auction Terms and
better calibrate how market risks are allocated among F&O Clearing
Members. The addition of All or Nothing Bids would provide an
additional bidding option for Clearing Members if they choose to use
it. Although the amendments to the Minimum Bid Requirement
determination may result in some Clearing Members having higher Minimum
Bid Requirements than others, ICE Clear Europe believes that this
result is appropriate as it reflects the position risk in contracts of
the relevant type that the Clearing Member has taken on, as exhibited
by original margin requirements. As such, in ICE Clear Europe's view,
the approach more appropriately allocates the risk of mandatory
participation in default auctions to those clearing members that may
have better ability to manage the risk of the contracts being
auctioned, as demonstrated by their existing positions. ICE Clear
Europe does not expect that the proposed changes will adversely affect
access to clearing or the ability of Clearing Members, their customers
or other market participants to continue to clear contracts. ICE Clear
Europe also does not believe the amendments would materially affect the
cost of clearing or otherwise impact competition among Clearing Members
or other market participants or 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
Written comments relating to the proposed amendments have not been
solicited or received by ICE Clear Europe. ICE Clear Europe will notify
the Commission of any written comments received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change, Security-Based
Swap Submission and Advance Notice and Timing for Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \23\ and paragraph (f) of Rule 19b-4 \24\
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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\23\ 15 U.S.C. 78s(b)(3)(A).
\24\ 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, security-based swap submission or advance notice is consistent
with the Act. Comments may be submitted by any of the following
methods:
[[Page 31571]]
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-2020-006 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-2020-006. 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, security-based
swap submission or advance notice that are filed with the Commission,
and all written communications relating to the proposed rule change,
security-based swap submission or advance notice 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-2020-006 and should be
submitted on or before June 16, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11138 Filed 5-22-20; 8:45 am]
BILLING CODE 8011-01-P