[Federal Register Volume 84, Number 248 (Friday, December 27, 2019)]
[Notices]
[Pages 71501-71504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27872]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87804; File No. SR-ICC-2019-011]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Default Auction
Procedures--Initial Default Auctions and the ICC Secondary Auction
Procedures
December 19, 2019.
I. Introduction
On October 31, 2019, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (the
``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
revise ICC's Default Auction Procedures--Initial Default Auctions
(``Initial Default Auction Procedures'') and Secondary Auction
Procedures. The proposed rule change was published for comment in the
Federal Register on November 18, 2019.\3\ The Commission did not
receive comments regarding the proposed rule change. For the reasons
discussed below, the Commission is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Proposed Rule Change, Security-Based Swap Submission,
or Advance Notice Relating to the ICC Default Auction Procedures--
Initial Default Auctions and the ICC Secondary Auction Procedures;
Exchange Act Release No. 87502 (Nov. 12, 2019); 84 FR 63693 (Nov.
18, 2019) (``Notice'').
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II. Description of the Proposed Rule Change
To resolve a default by a Clearing Participant, ICC may auction the
defaulting Clearing Participant's open CDS contracts through one or
more auctions where ICC's other, non-defaulting Clearing Participants
bid on the contracts.\4\ If ICC does not auction
[[Page 71502]]
off all of the open CDS contracts in an initial auction, ICC may
conduct one or more secondary auctions to allocate the remaining open
CDS contracts. ICC conducts initial auctions pursuant to its Initial
Default Auction Procedures and secondary auctions pursuant to its
Secondary Auction Procedures (collectively, the ``Auction
Procedures''). The proposed rule change would improve both the initial
and secondary default auction processes by amending the Auction
Procedures to (i) require that ICC use the automated Default Management
System (``DMS'') to communicate with Clearing Participants and that
Clearing Participants use the DMS to communicate with ICC; (ii) allow
for all or nothing bidding in default auctions; and (iii) update
defined terms and make clarifications in light of these changes.
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\4\ Capitalized terms used herein but not otherwise defined have
the meanings assigned to them in the ICC Clearing Rules (the
``Rules'') or the Auction Procedures. The description herein is
substantially excerpted from the Notice, 84 Federal Register at
63693.
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The proposed rule change would make substantially identical changes
to both the Initial Default Auction Procedures and the Secondary
Auction Procedures. Thus, for the sake of brevity, the description
below refers collectively to changes to the Auction Procedures.
A. Automated DMS
ICC's DMS is a web-based system that ICC uses to set the
specifications for an auction as well as to communicate certain
information to, and receive certain information from, Clearing
Participants with respect to an auction. Clearing Participants bid on
auctions through the DMS, and the DMS in turns controls bidding by, for
example, prohibiting a Clearing Participant from submitting more than
one valid all-or-nothing bid, as discussed further below. Moreover,
through the DMS, ICC announces winners of auctions. ICC has assigned to
Clearing Participants credentials for logging into and using the DMS,
and Clearing Participants have tested the DMS by using it in various
default drills.
Currently, under the Auction Procedures, ICC communicates the
details of an auction to Clearing Participants in writing, using a
standardized form that is currently set out in Annex A of the Auction
Procedures. The proposed rule change would delete Annex A in its
entirety and would require that ICC communicate the details of an
auction to Clearing Participants through the DMS rather than in
writing. Similarly, the proposed rule change would require that ICC
notify the winning bidder in an auction through the DMS, rather than by
email, telephone, or in writing (which are the methods that the Auction
Procedures currently require ICC to use to notify a winning bidder).
Finally, the Auction Procedures allow ICC to set a minimum bid
requirement for an auction, under which Clearing Participants are
required to bid for a minimum notional amount of contracts. Currently
ICC must communicate this minimum bid requirement to Clearing
Participants through a notice, the form of which is set out in Annex B
to the Auction Procedures. Under the proposed rule change, ICC would
still be able to set a minimum bid requirement as before, but the
proposed rule change would delete Annex B in its entirety and would
require that ICC communicate the details of a minimum bid requirement
to Clearing Participants through the DMS instead. Thus, the proposed
rule change would give ICC the ability to communicate the details of an
auction to Clearing Participants electronically, through the DMS, which
is designed to help improve the speed and consistency of such
communications.
The proposed rule change similarly would require that Clearing
Participants communicate with ICC through the DMS rather than through
written communications as required under the current Rules.
Specifically, Clearing Participants currently are required to submit
bids in writing using a Bid Form. Under the proposed rule change
Clearing Participants would be required to submit bids in an auction
electronically through the DMS instead. This is designed to improve the
speed and accuracy of such submissions.
Finally, the current Auction Procedures specify that ICC may set a
minimum bid size for an auction and currently provide that any bid
below the minimum bid size will be null and void. The proposed rule
change would leverage the DMS to automate these existing requirements
by specifying that the DMS would be designed to automatically prevent
Clearing Participants from submitting bids below the minimum bid size
and to render null and void any bid below the minimum bid size that the
DMS accepted in error. This too is designed to help improve the speed
and accuracy of bid submissions by Clearing Participants, and also to
help ensure that such bid submissions are consistent with existing
requirements.
B. All or Nothing Bidding
Currently, the Auction Procedures do not permit a Clearing
Participant to submit an all or nothing bid. An all or nothing bid is a
bid in which the Clearing Participant stipulates that, should its bid
be the winning bid, the Clearing Participant will receive 100% of the
contracts being auctioned or no contracts at all. The proposed rule
change would revise the Auction Procedures to allow Clearing
Participants to submit all or nothing bids. Specifically, a Clearing
Participant could submit one all or nothing bid per auction. A Clearing
Participant would do so by marking the bid as an all or nothing bid in
the bid submission (which, as noted above, would be submitted
electronically through the DMS). The proposed rule change would also
specify that a Clearing Participant could submit in the same auction
both one all or nothing bid and non-all or nothing bids (referred to in
the proposed rule change as ``Standard Bids'') on its own behalf or on
behalf of its customers.
Under the Auction Procedures, ICC determines the auction price by
ordering bids sequentially, starting with the highest bid price and
ending with the lowest bid price. The price of the bid at which, along
with any equal or higher bids, the sum of the notional amount of
contracts being purchased equals or is greater than the notional amount
of contracts that ICC is auctioning is the clearing price of the
auction (the ``Auction Clearing Price''). In other words, ICC proceeds
down the list of bids by price, starting with the highest priced bid,
and sets the Auction Clearing Price at the bid that, along with the
other higher priced bids before it, allows ICC to allocate 100% of the
open CDS contracts.
The Auction Procedures currently require that, in the event there
are multiple bids at the Auction Clearing Price and there is a
shortfall of open CDS contracts, ICC must allocate the contracts pro
rata according to the notional amount of contracts that each winning
bidder requested in its bid. As revised under the proposed rule change,
the Auction Procedures would require that, where there is an all or
nothing bid in the sequence of bids before the Auction Clearing Price,
the price of the all or nothing bid would set the Auction Clearing
Price (because that would be the highest priced bid that would allow
ICC to allocate 100% of the open contracts). In that case, ICC would
allocate to the all or nothing bidder 100% of the contracts even if
there are Standard Bids at a higher or equal price. If there were more
than one all or nothing bid at the Auction Clearing Price, then the
Auction Procedures, as revised under the proposed rule change, would
require that ICC allocate the portfolio equally among all the bidders
submitting all or nothing bids.
The proposed rule change would update other provisions of the
Auction Procedures to clarify how those
[[Page 71503]]
provisions would apply in light of all or nothing bidding. First, the
Auction Procedures currently provide that ICC may, after an initial
auction, in its discretion and after consultation with the CDS Risk
Committee, determine the Auction Clearing Price for such an auction to
be less than 100% of the notional amount of the contracts and declare a
second auction to auction off the remaining contracts. ICC may do so
if, in its reasonable determination, awarding 100% of the notional
amount of the contracts would have a material impact on the amounts
payable or receivable by ICC. The proposed rule change would not alter
this provision but would specify that, in such a situation, ICC could
disregard any all or nothing bids received in the initial auction.
Second, the proposed rule change would revise the Auction
Procedures to clarify how an all or nothing bid affects the calculation
of a Clearing Participant's bid price for purposes of determining the
competitiveness of a Clearing Participant's bid and satisfaction of a
Clearing Participant's minimum bid requirement. The competitiveness of
a Clearing Participant's bid and satisfaction of a Clearing
Participant's minimum bid requirement are important because under ICC
Rule 802(b) and the default auction priority set out in the Auction
Procedures, in the event that ICC needs to use non-defaulting Clearing
Participants' contributions to the Guaranty Fund to resolve the default
of a Clearing Participant, ICC uses first the contributions to the
Guaranty Fund attributable to Clearing Participants that did not
satisfy their minimum bid requirement (referred to as Non-Bidding
Participants), followed by those that submitted less competitive bids.
Currently, ICC uses the weighted average of a Clearing Participant's
Standard Bids to determine bid price and thus to determine the
competitiveness of a Clearing Participant's bids in an auction for
these purposes. Under the updated Auction Procedures, as revised by the
proposed rule change, where a Clearing Participant has submitted both
an all or nothing bid and one or more Standard Bids, the Clearing
Participant's bid price would be the more competitive of (1) the
weighted average bid price of all valid Standard Bids made by the
Clearing Participant in the auction (weighted by the portfolio size of
each such bid, and converted into USD at the relevant FX spot rate, if
applicable) and (2) the price of any valid All or Nothing Bid made by
the Clearing Participant in the Auction. For this purpose, the more
competitive of the two would be the one that results in the best
outcome for ICC; in other words, the bid under which ICC will receive
the most, or pay out the least, cash in return for the auctioned
contracts.
Finally, under the updated Auction Procedures, as revised by the
proposed rule change, if a Clearing Participant's Standard Bids do not
satisfy its minimum bid requirement, the Clearing Participant's bid
price would be the price of its all or nothing bid. Where a Clearing
Participant has submitted only one or more Standard Bids (and has not
submitted an all or nothing bid), and that Clearing Participant's
Standard Bids do not satisfy its minimum bid requirement, the Auction
Procedures would treat the Clearing Participant as a Non-Bidding
Participant, which, as noted above, has consequences under ICC Rule
802(b). Specifically, if ICC needs to use non-defaulting Clearing
Participants' contributions to the Guaranty Fund to resolve the default
of a Clearing Participant, ICC uses first the contributions to the
Guaranty Fund attributable to Non-Bidding Participants.\5\
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\5\ See ICC Rule 802(b) and the default auction priority set out
in the Auction Procedures.
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C. Updates to Defined Terms and Clarifications
Related to the changes described above, the proposed rule change
would update defined terms and make an additional clarification to the
Auction Procedures.
In connection with the proposed requirement that Clearing
Participants submit bids through the DMS, and to better specify the
meaning of the defined term, the proposed rule change would change the
defined term ``Closing Time'' to ``Bidding Close Time.'' The proposed
rule change would define the term as the bidding close time specified
by ICC in the relevant auction specifications.
To distinguish all or nothing bids, the proposed rule change would
add to the Auction Procedures the defined term ``Standard Bid.'' A
Standard Bid would be a valid bid submitted by a Clearing Participant
that was not an all or nothing bid.
To refer to a bid submitted through the DMS, rather than in paper
through the bid form, the proposed rule change would create the defined
term ``Bid Submission.'' The proposed rule change would define the term
Bid Submission to mean a bid submitted through the DMS.
Finally, the Auction Procedures currently allow a Clearing
Participant to transfer its minimum bid requirement to an affiliate
that is also a Clearing Participant. The Auction Procedures specify
that, in such a case, a Clearing Participant that so transfers or
outsources its minimum bid requirement to an affiliate remains liable
for any breach by its affiliate in respect of such Clearing
Participant's Minimum Bid Requirement. The proposed rule change would
further clarify that in such a case, a Clearing Participant will take
on the same position as a Senior Bidder, Split Bidder, Subordinate
Bidder, or Non-Bidding Participant as the affiliate, as appropriate.
This change is unrelated to the other changes discussed above, but ICC
is using the proposed rule change to submit this additional
clarification.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\6\ For the reasons given below, the Commission finds that
the proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act \7\ and Rule 17Ad-22(d)(11) thereunder.\8\
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\6\ 15 U.S.C. 78s(b)(2)(C).
\7\ 15 U.S.C. 78q-1(b)(3)(F).
\8\ 17 CFR 240.17Ad-22(d)(11).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, as well
as to assure the safeguarding of securities and funds which are in the
custody or control of ICC or for which it is responsible, and, in
general, to protect investors and the public interest.\9\ As discussed
above, the proposed rule change would require that ICC use the DMS to
communicate certain information to Clearing Participants, such as
specific parameters of an auction, and would in turn, require Clearing
Participants to use the DMS to communicate their bids to ICC. The DMS
would also automatically reject bids that do not satisfy the minimum
bid size. The Commission
[[Page 71504]]
believes that in doing so the proposed rule change would improve the
efficiency and accuracy of communications regarding default auctions,
which may help to avoid delays or miscommunications that could delay
the completion of an auction. Thus, in requiring use of the DMS, the
Commission believes the proposed rule change would help to promote the
prompt resolution of default auctions. Similarly, the Commission
believes that all or nothing bidding would enhance ICC's ability to
sell all of the open CDS contracts in an initial default auction by
providing a means for a single bidder to take all of the contracts and
requiring that ICC allocate such contracts to that bidder if the all or
nothing bid meets the Auction Clearing Price. Finally, the Commission
believes that the updates to the defined terms and the clarification
regarding a Clearing Participant's ability to transfer its minimum
requirement to an affiliate would support and enhance ICC's ability to
implement these changes.
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\9\ 15 U.S.C. 78q-1(b)(3)(F).
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Through default auctions, ICC allocates the open CDS contracts of a
defaulting Clearing Participant to other, non-defaulting Clearing
Participants. Thus, in improving the efficiency of such auctions, the
Commission believes the proposed rule change would promote the prompt
and accurate clearance and settlement of the CDS transactions resulting
from such auctions. Moreover, the Commission believes that the default
of a Clearing Participant, if not promptly resolved, could causes
losses for ICC. The Commission believes the proposed rule change would
help to avoid these losses by promoting the prompt resolution of
default auctions, and therefore the prompt resolution of a Clearing
Participant's default. Because losses resulting from the default of a
Clearing Participant could disrupt ICC's ability to operate and
therefore threaten ICC's access to securities and funds, the Commission
believes the proposed rule change also would help to assure the
safeguarding of securities and funds in ICC's custody and control.
Finally, for these reasons, the Commission believes that the proposed
rule change would, in general, protect investors and the public
interest.
Therefore, the Commission finds that the proposed rule change would
promote the prompt and accurate clearance and settlement of securities
transactions, assure the safeguarding of securities and funds in ICC's
custody and control, and, in general, protect investors and the public
interest, consistent with the Section 17A(b)(3)(F) of the Act.\10\
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(d)(11)
Rule 17Ad-22(d)(11) requires that ICC establish, implement,
maintain and enforce written policies and procedures reasonably
designed to make key aspects of its default procedures publicly
available and establish default procedures that ensure that ICC can
take timely action to contain losses and liquidity pressures and to
continue meeting its obligations in the event of a participant
default.\11\ As discussed above, the Commission believes the proposed
rule change would improve the efficiency and accuracy of communications
regarding default auctions and increase the likelihood that ICC is able
to allocate all open CDS contracts in an initial auction by providing a
means for a single bidder to take all of the contracts up for auction.
The Commission believes that these changes would help ICC to resolve
defaults quickly through auctions. The Commission believes, in turn,
that resolving defaults quickly through auctions would therefore help
to ensure that ICC can take timely action to contain losses and
liquidity pressures and to continue meeting its obligations in the
event of a Clearing Participant's default.
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\11\ 15 U.S.C. 17Ad-22(d)(11).
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Therefore, for the above reasons the Commission finds that the
proposed rule change is consistent with Rule 17Ad-22(d)(11).\12\
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\12\ 15 U.S.C. 17Ad-22(d)(11).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A(b)(3)(F) of the
Act \13\ and Rule 17Ad-22(d)(11) thereunder.\14\
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\13\ 15 U.S.C. 78q-1(b)(3)(F).
\14\ 17 CFR 240.17Ad-22(d)(11).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\15\ that the proposed rule change (SR-ICC-2019-011), be, and hereby
is, approved.\16\
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\15\ 15 U.S.C. 78s(b)(2).
\16\ 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.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27872 Filed 12-26-19; 8:45 am]
BILLING CODE 8011-01-P