[Federal Register Volume 85, Number 105 (Monday, June 1, 2020)]
[Notices]
[Pages 33221-33223]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11649]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88944; File No. SR-ICC-2020-005]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Clearing Participant
Default Management Procedures
May 26, 2020.
I. Introduction
On April 3, 2020, 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 \1\ and Rule
19b-4 thereunder,\2\ a proposed rule change to revise the ICC Clearing
Participant (``CP'') Default Management Procedures (``Default
Management Procedures''). The proposed rule change was published for
comment in the Federal Register on April 15, 2020.\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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Proposed Rule Change Relating to the ICC Clearing
Participant Default Management Procedures; Exchange Act Release No.
88614 (April 9, 2020); 85 FR 21052 (April 15, 2020) (SR-ICC-2020-
005) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The proposed rule change would make amendments to the Default
Management Procedures related to (i) the personnel involved in the
default management process, including personnel at ICC and
representatives of CPs; (ii) actions taken as part of the default
management process; (iii) the development and execution of default
management tests; and (iv) the correction of typographical and drafting
errors.\4\
---------------------------------------------------------------------------
\4\ Capitalized terms not otherwise defined herein have the
meanings assigned to them in the ICC Rules and Default Management
Procedures, as applicable.
---------------------------------------------------------------------------
A. Personnel Involved in the Default Management Process
As mentioned above, the proposed rule change would make changes
related to the personnel involved in the default management process,
including personnel at ICC and representatives of CPs.
First, the proposed rule change would amend the list of defined
terms in Section 2 to update the definition of the term ``ICC
Management''. Under the proposed rule change, ICC Management would
consist of the General Counsel, Chief Risk Officer, Chief Operating
Officer, Chief Compliance Officer, Head of Corporate Development, and
Head of Technology. The Default Management Procedures assign certain
responsibilities to, and require certain notifications to, the
individuals comprising ICC Management.
Second, the proposed rule change would revise the personnel at each
CP for which ICC maintains contact information related to the default
management process. Currently, ICC is required to maintain contact
information for the Chief Executive Officer (``CEO''), Chief Financial
Officer (``CFO''), and General Counsel of each CP, as well as other
role-based contacts that are specific to the default management
process. The proposed rule change would remove this and instead require
ICC to maintain contact information for the most senior person in
charge of the CDS business and the most senior person responsible for
providing compliance oversight for the CDS business. The Default
Management Procedures would refer to these personnel as the CP's ``CP
Default Contacts.'' Accordingly, the proposed rule change would
replace, throughout the Default Management Procedures, references to a
CP's CEO, CFO, and General Counsel, with the term CP Default Contacts.
B. Actions Taken as Part of the Default Management Process
In addition to changes related to the personnel involved in the
default management process, the proposed rule change would make changes
related to certain actions taken as part of the default management
process. First, the proposed rule change would amend Subsection 6.1.1,
which describes certain actions that ICC's President must take before a
CP is declared in default. Currently, ICC's President must notify ICE's
Head of Enterprise Risk Management and ICE's CFO of a CP's possible
default. The proposed rule change would instead require that ICC's
president notify ICE's Global Head of Clearing, rather than the ICE
CFO.
Next, the proposed rule change would amend Subsection 6.1.5, which
describes certain actions that ICC's CCO must take before a CP is
declared in default. Currently, Subsection 6.1.5 requires that ICC's
CCO draft certain notifications and email those notifications to ICC
Management for review and approval prior to sending the notifications.
The proposed rule change would instead require that ICC's CCO email the
notifications to the Close-Out Team, rather than ICC Management, for
review and approval. The Close-Out Team is responsible for overseeing
the default management process and includes ICC Management, the most
senior member of the ICC Treasury Department, and the ICC Risk
Oversight Officer. Thus, under this proposed change, ICC's CCO would
still send the notifications to ICC Management for review and approval,
because ICC Management is part of the Close-Out Team, but would also
send the notifications to the most senior member of the ICC Treasury
Department and the ICC Risk Oversight Officer, who are the other
members of the Close-Out Team.
Next, the proposed rule change would amend Subsection 6.4, which
describes certain actions that ICC's President must take after a CP is
declared in default. Currently, Subsection 6.4 requires that ICC's
President call or email the Chairman of the Risk Committee to inform
the Chairman of the declaration of default and that ICC's President
confirm with ICC's CCO that the Chairman has been notified. The
proposed rule change would expand this to require that the President
inform the Risk Committee (not just the Chairman) and ICC's Board, and
furthermore, that the President confirm with ICC's CCO that the Risk
Committee and Board have been notified.
The proposed rule change would also amend Subsection 8.6 to clarify
that ICC could only take certain actions relating to direct liquidation
if ICC obtains Board approval. Currently, Subsection 8.6 describes the
actions that ICC would take to liquidate a defaulting CP's portfolio by
direct transactions, rather than a default auction. Subsection 8.6
currently provides that if the Close-Out Team does not receive Board
approval, ICC may not execute direct liquidation trades that would
consume the Guaranty Fund resources of non-Defaulting CPs and provides
a list of certain actions that ICC would take otherwise. The proposed
rule change would clarify this point by specifying that the list of
actions ICC would take are actions that
[[Page 33222]]
ICC would only take if Board approval is obtained. In other words, the
proposed rule change would make explicit a point assumed in the current
drafting of Subsection 8.6, that ICC would only undertake the listed
actions upon approval of ICC's Board to execute direct liquidation
trades that would consume the Guaranty Fund resources of non-Defaulting
CPs.
Finally, the proposed rule change would amend Subsection 9.1,
regarding calling for assessments. ICC's Rules and the Default
Management Procedures allow ICC to call for assessment contributions to
the Guaranty Fund in the event that the Guaranty Fund has been depleted
or ICC anticipates the need for additional funds related to a default,
and CPs are obligated to meet these assessments by providing additional
amounts to the Guaranty Fund.\5\ Currently, ICC distributes notices
calling for assessment contributions to each CP's Execution
Coordinator. Under ICC's Default Management Procedures, such role is
responsible for coordinating internally and with ICC for hedging and
liquidation related activities. The proposed rule change would replace
the term Execution Coordinator with the existing defined term Central
Point of Contact. Under the Default Management Procedures, the Central
Point of Contract is the position at each CP that has overall
responsibility for coordinating internally and with ICC during the
default management process.
---------------------------------------------------------------------------
\5\ See ICC Rule 803.
---------------------------------------------------------------------------
C. Development and Execution of Default Management Test
The proposed rule change would also revise the Default Management
Procedures regarding the development and execution of default
management tests, which ICC uses to simulate a Clearing Participant
default and its actions to manage such a default. Currently, Subsection
4.5 requires that ICC, in coordination with its CPs and Direct
Participant Customers, conduct a default management test at least once
per calendar year. The proposed rule change would amend the Default
Management Procedures to require that ICC coordinate with its Risk
Committee and Board, in addition to CPs and Direct Participant
Customers, regarding its default management test and that ICC conduct
its default management test every twelve months instead of once per
calendar year.
Moreover, Subsection 4.5 currently requires that ICC's Risk
Oversight Officer work with ICC Management (which is a defined term as
discussed above) in planning and coordinating the execution of default
management tests. The proposed rule change would require that ICC's
Risk Oversight Officer work with the Close-Out Team instead of ICC
Management. As discussed above, as defined, the Close-Out Team includes
the personnel comprising ICC Management as well as certain additional
personnel, and thus ICC Management would still be involved in planning
and coordinating the execution of default management tests. Moreover,
the proposed rule change would require that the proposed scope of a
default management test be presented to ICC's Board for review prior to
execution of the test.
Finally, the proposed rule change would add Appendix 1 to the
Default Management Procedures. Appendix 1 would include language on the
development of the scope of a default management test. Specifically,
proposed Appendix 1 would set forth key scenario components that ICC
may consider when developing a default management test, including (1)
scenarios resulting in CP defaults, such as a CP's failure to meet
payment obligations to ICC, insolvency or bankruptcy; (2) default
management tools available to ICC in case of default, including
consulting with the CDS Default Committee or performing Secondary
Default Management Actions (e.g., calling for assessment
contributions); (3) timing considerations, such as the time and length
of a default event; (4) planning strategy (e.g., whether there is
advance notice of a test); and (5) event specific elements that may
occur in a default scenario, such as the occurrence of multiple CP
defaults or stressed market conditions.
D. Typographical and Drafting Errors
Finally, as mentioned above, the proposed rule change would make
other non-material changes to fix typographical and drafting errors.\6\
---------------------------------------------------------------------------
\6\ For further information about these specific changes, please
see Notice, 85 FR at 21054.
---------------------------------------------------------------------------
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.\7\ For the reasons given below, the Commission finds that
the proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act \8\ and Rule 17Ad-22(d)(8) and (d)(11).\9\
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78s(b)(2)(C).
\8\ 15 U.S.C. 78q-1(b)(3)(F).
\9\ 17 CFR 240.17Ad-22(d)(8), (d)(11).
---------------------------------------------------------------------------
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.\10\
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As discussed above, the proposed rule change would update,
throughout the Default Management Procedures, the defined list of
individuals that comprise ICC Management. The proposed rule change
would also update the personnel at CPs for which ICC maintains contact
information, and that ICC contacts, regarding a default. The Commission
believes that this aspect of the proposed rule change should help ICC
better manage a default by helping to ensure that ICC has accurate
contact information for CPs and contacts the personnel at CPs who
should be best positioned to respond to a default, and that the
appropriate personnel at ICC (as part of the defined term ICC
Management) are involved in responding to a default.
The proposed rule change would also, as discussed above, make
changes related to the actions available to ICC in response to a
default, by clarifying in Section 8.6 that ICC may take certain actions
to directly liquidate a defaulting CP's portfolio via bilateral trades
(rather than an auction) if ICC's Board approves. Similarly, the
proposed rule change would require that ICC's president notify ICE's
Global Head of Clearing of the possible default or risk of default
before a default is declared and notify the Risk Committee and Board
once a CP has been declared in default. The proposed rule change would
also require that ICC's CCO email notifications to the Close-Out Team,
rather than ICC Management, for review and approval, and that ICC
distribute notices calling for assessment contributions to each CP's
Central Point of Contact rather than Execution Coordinator. The
Commission believes that these aspects of the proposed rule change
should help to ensure that appropriate personnel are informed of, and
able to participate in, ICC's
[[Page 33223]]
response to a default. The Commission therefore believes that these
aspects of the proposed rule change should improve ICC's ability to
manage a default.
As discussed above, the proposed rule change would also enhance
ICC's development and conduct of default tests by specifying, in new
Appendix 1, the processes, tools, and conditions that ICC would test
and requiring that ICC's Risk Oversight Officer work with other members
of the Close-Out Team (which term would include ICC Management) to
determine the scope of each default management test. Similarly, the
proposed rule change would require that ICC coordinate default
management tests with its Risk Committee and Board and that the Board
review the scope of the Default Test prior to executing the test.
Finally, the proposed rule change would also specify that ICC conducts
a default management test at least every twelve months, rather than
once per calendar year. The Commission believes these changes should
improve the planning and conduct of default tests by setting out
specific factors to test in Appendix 1 and requiring additional input,
including Board review, on the scope and conduct of default tests.
Because the Commission believes that default tests should help ICC to
plan and prepare for responding to an actual default, the Commission
believes that these aspects of the proposed rule change should improve
ICC's ability to manage a default.
Finally, the proposed rule change would correct typographical and
drafting errors. Again, the Commission believes these proposed changes
should help ICC better manage a default by reducing the possibility for
confusion when applying the Default Management Procedures by removing
unintentional drafting errors.
By improving ICC's ability to manage a CP default, the Commission
believes that the proposed rule change should also improve ICC's
ability to avoid losses that could result from a CP default. The
Commission further believes that such losses, if not properly managed,
could hinder ICC's ability to continue operations and therefore clear
and settle securities transactions and safeguard securities and funds
in its custody or control. Therefore, for these reasons, the Commission
finds that the proposed rule change should promote the prompt and
accurate clearance and settlement of securities transactions and assure
the safeguarding of securities and funds in ICC's custody and control,
consistent with the Section 17A(b)(3)(F) of the Act.\11\
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(d)(8)
Rule 17Ad-22(d)(8) requires that ICC establish, implement, maintain
and enforce written policies and procedures reasonably designed to have
governance arrangements that are clear and transparent to fulfill the
public interest requirements in Section 17A of the Act \12\ applicable
to clearing agencies, to support the objectives of owners and
participants, and to promote the effectiveness of ICC's risk management
procedures.\13\ As discussed above, the proposed rule change would make
explicit in Section 8.6 that ICC may take certain actions to directly
liquidate a defaulting CP's portfolio via bilateral trades (rather than
an auction) if ICC's Board approves, require that ICC coordinate
default management tests with its Risk Committee and Board, and require
that the Board review the scope of the Default Test prior to executing
the test. The Commission believes that this aspect of the proposed rule
change should establish clear governance arrangements regarding the
Board's involvement in responding to a default and planning and
conducting a Default Test. Similarly, the proposed rule change would
require that ICC's President notify certain other ICE and ICC personnel
prior to and after declaration of a default. Again, the Commission
believes that this should establish clear governance arrangements
regarding the President's actions in response to a default. For these
reasons, the Commission finds the proposed rule change is consistent
with Rule 17Ad-22(d)(8).\14\
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78q-1.
\13\ 15 U.S.C. 17Ad-22(d)(8).
\14\ 15 U.S.C. 17Ad-22(d)(8).
---------------------------------------------------------------------------
C. 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 ICC's 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.\15\ As discussed above, the proposed rule change would enhance
ICC's development and conduct of default management tests, require that
ICC coordinate default management tests with its Risk Committee and
Board, and require that the Board review the scope of the default
management test prior to executing the test. The proposed rule change
would also specify that ICC conducts a default management test at least
every twelve months, rather than once per calendar year, and correct
typographical and drafting errors. The Commission believes that these
changes, in improving ICC's conduct of its default tests and specifying
how often ICC would conduct such tests, should help to improve ICC's
default testing. The Commission further believes that such testing
should help to ensure the effectiveness of ICC's Default Management
Procedures by revealing potential deficiencies in, and facilitating the
improvement of, ICC's Default Management Procedures. The Commission
therefore believes that the proposed rule change should help 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. For these reasons, the Commission finds the
proposed rule change is consistent with Rule 17Ad-22(d)(11).\16\
---------------------------------------------------------------------------
\15\ 15 U.S.C. 17Ad-22(d)(11).
\16\ 15 U.S.C. 17Ad-22(d)(11).
---------------------------------------------------------------------------
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 \17\ and Rules 17Ad-22(d)(8) and (d)(11).\18\
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ 17 CFR 240.17Ad-22(d)(8), (d)(11).
---------------------------------------------------------------------------
It is therefore ordered pursuant to Section 19(b)(2) of the Act
\19\ that the proposed rule change (SR-ICC-2020-005), be, and hereby
is, approved.\20\
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78s(b)(2).
\20\ 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.\21\
---------------------------------------------------------------------------
\21\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11649 Filed 5-29-20; 8:45 am]
BILLING CODE 8011-01-P