[Federal Register Volume 85, Number 149 (Monday, August 3, 2020)]
[Notices]
[Pages 46763-46766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16705]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89409; File No. SR-ICEEU-2020-005]
Self-Regulatory Organizations; ICEEU Limited; Order Approving
Proposed Rule Change Relating to Amendments to the ICEEU Clearing Rules
July 28, 2020.
I. Introduction
On June 2, 2020, ICE Clear Europe Limited (``ICE Clear Europe'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
revise its Clearing Rules (the ``Rules'') \3\ to account for default
insurance proceeds. The proposed rule change was published for comment
in the Federal Register on June 18, 2020.\4\ The Commission did not
receive comments on 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\ Capitalized terms used but not defined herein have the
meanings specified in the Rules.
\4\ Securities Exchange Act Release No. 89060 (June 12, 2020),
85 FR 36904 (June 18, 2020) (SR-ICEEU-2020-005) (``Notice'').
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II. Description of the Proposed Rule Change
ICE Clear Europe proposes amendments to Parts 9 and 11 of the Rules
relating to its use of default insurance that is intended to cover
losses resulting from a Clearing Member default.\5\ Currently, ICE
Clear Europe includes proceeds from default insurance among the
resources available to meet the obligations and liabilities arising
from a default for the F&O contract category, but not for the CDS or FX
contract categories. Such default insurance provides an additional
default resource to cover losses from Clearing Member defaults, prior
to the need to use guaranty fund resources or assessment contributions
from non-defaulting Clearing Members.
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\5\ The following description of the proposed rule change is
excerpted from the Notice, 85 FR 36904.
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As noted further below, the proposed rule change would add
insurance proceeds to the assets available for defaults for the CDS and
FX contract categories, and would alter the placement of insurance
proceeds in the default waterfall for the F&O contract category.
However, ICE Clear Europe is not, and would not be, required to obtain
or maintain default insurance.
Specifically, the proposal would amend the default waterfalls in
Rules 908(b) (for F&O-only Clearing Members or Sponsored Principals),
(c) (for CDS-only Clearing Members or Sponsored Principals), (d) (for
FX-only Clearing Members or Sponsored Principals) and (g) (for Clearing
Members or Sponsored Principals in multiple membership categories),
such that default insurance proceeds would be placed third in each of
these default waterfalls, after first applying the Defaulter's
resources and then ICE Clear Europe's initial contribution (often
referred to as its ``skin in the game'') in the waterfall of assets
used to meet the obligations and liabilities of a Defaulter and any
shortfall, loss or liability to ICE Clear Europe upon an Event of
Default. (In the case of a Defaulter with multiple membership
categories, the proceeds of default insurance would be applied to each
Default Amount on a pro rata basis, as provided in Rule 908(g)(iii).)
Default insurance proceeds would thus be applied before guaranty fund
contributions and assessment contributions from non-defaulting Clearing
Members.\6\
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\6\ Conforming amendments would be made to the Rule 101
definitions of ``ICE Clear Europe CDS GF Contribution,'' ``ICE Clear
Europe F&O GF Contribution,'' and ``ICE Clear Europe FX GF
Contribution'' as well as to Rule 909(a), reflecting the placement
of default insurance proceeds in the applicable waterfalls under
Rule 908.
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Rule 1103(e) sets forth certain limitations with respect to the
benefits of default insurance. The proposed rule change would amend
this rule to clarify that ICE Clear Europe is not obligated to
[[Page 46764]]
obtain or keep in place or make any claim under any default insurance
policy, or to make or receive the proceeds under any claim prior to
moving to the next levels of assets in the applicable waterfalls in
Rule 908, and subject to the payment order specified in Rule 1102(k).
The amendments would further reflect that there could be a delay in
receiving insurance proceeds, such that other assets applicable under
Rule 908 may be called prior to insurance proceeds being received, and
that proceeds of any insurance claim may need to be applied to meet
losses across more than one Event of Default if there are multiple
Defaulters.
In addition, the proposed rule change would amend the Rules to set
out the order in which proceeds of default insurance claims would be
paid out if there are multiple Defaulters within a certain period.
Specifically, insurance proceeds would not be applied to defaults for
which there were no further losses after applying default resources up
to and including the ICE Clear Europe initial contribution. If there
are further losses, then insurance proceeds would be applied to
remaining losses based on which default occurred first in time, and to
losses from defaults occurring simultaneously (which incldues defaults
occurring on the same day) on a pro rata basis.
Rule 1102(k) currently addresses the allocation of amounts
recovered from a Defaulter to Guaranty Fund Contributions of non-
defaulting Clearing Members. The proposed rule change would amend this
rule to address application of these recoveries to pay amounts owed to
default insurers, as well as reimbursements to other Clearing Members
and ICE Clear Europe with respect to their contributions and
assessments. Specifically, these recoveries would be paid in the
reverse order of which assets were applied under Rule 908 (i.e., to
non-defaulting Clearing Members in respect of their guaranty fund
contributions that had been applied, then to the default insurance
provider in respect of amounts owed to it, and then to ICE Clear Europe
in respect of its initial contribution). Rule 1102(k) would also be
revised to clarify that application of such amounts would be subject to
(i) retaining or repaying amounts applied by ICE Clear Europe (which
would no longer include claims under insurance policies) or other third
parties applied to meet shortfalls; (ii) if applicable, reimbursing
payments to Persons that made Assessment Contributions in the reverse
order specified in Rule 908; and (iii) if applicable, meeting certain
repayment obligations under Rules 909(j), 914(j) or 916(n).
Rule 909(j), which addresses reimbursement of Assessment
Contributions, would also be amended to reflect the application of
default insurance. The amendments would expand the existing provision
to provide that if, after any Assessment Contribution has been paid in
relation to an Event of Default, ICE Clear Europe collects on the
defaulted obligation, loss or shortfall in whole or in part from an
insurer, ICE Clear Europe would refund the collected amount, less
expenses, to non-defaulting Clearing Members in respect of their paid
Assessment Contributions. The amendment would also add a drafting
clarification that such reimbursements are subject to ICE Clear Europe
retaining or repaying amounts applied to meet any shortfall and certain
repayment obligations, if applicable, under Rules 914(j) (addressing
payment of recoveries to persons that were subject to reduced gains
distributions under Rule 914) and 916(n) (addressing payments of
recoveries to persons that received reduced amounts in the case of
product termination under Rule 916), which is consistent with the
existing language of Rule 914(j) and 916(n).
The term ``Available Non-Defaulter Resources'' in Rule 913 would be
amended to include cash proceeds from claims under default insurance
policies available to be applied pursuant to Rule 908, provided that
such proceeds were received at the time ICE Clear Europe performs a
calculation of Available Non-Defaulter Resources.
The proposed rule change would also amend Rule 914(j) with respect
to the application of recoveries in the context of reduced gains
distribution. Currently, this Rule provides that if ICE Clear Europe
receives an amount from a Defaulter or another Clearing Member or
Sponsored Principal that would, had it been paid on time, have
increased ICE Clear Europe's Available Resources on a day on which a
Margin Account Adjustment was made in connection with Reduced Gains
Distributions, ICE Clear Europe would distribute the amounts received
first, to non-defaulting Contributors who were liable to pay an
adjustment on a pro rata basis, and second, in accordance with Rule
1102(k) (as described above). Under the amendment, default insurance
proceeds would be included in the type of received amounts subject to
the rule.
Similarly, the proposed rule change would amend Rule 916(n), which
addresses application of recoveries in the context of product
termination. Currently, Rule 916, in general, permits ICE Clear Europe
to terminate the open contracts in a relevant contract category (e.g.,
F&O or CDS) under specified circumstances, including in certain cases
following an Under-priced Auction or where ICE Clear Europe determines
there are not sufficient Clearing Members to support continued clearing
of the relevant contract category. Currently, pursuant to Rule 916(n),
in the event that ICE Clear Europe terminates a contract category and
receives an amount that would, had it been paid on time, have increased
the amount owed to (or decreased the amount owed by) Clearing Members
or Sponsored Principals upon termination of a contract category, ICE
Clear Europe would distribute the amount received first to non-
defaulting Clearing Members or Sponsored Principals who received less
in respect of product termination than they were otherwise owed, then
in accordance with Rule 914(j) (as discussed above), and then in
accordance with Rule 1102(k) (as discussed above). The amendment would
include default insurance proceeds in the type of received amounts
subject to distribution under Rule 916(n).
III. 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
the proposed rule change is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to the organization
presenting it.\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 Rules 17Ad-22(e)(4) \9\ and 17Ad-22(e)(13) \10\
thereunder.
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\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(e)(4).
\10\ 17 CFR 240.17Ad-22(e)(13).
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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 ICE Clear Europe be designed to promote the prompt and
accurate clearance and settlement of securities transactions and, to
the extent applicable, derivative agreements, contracts, and
transactions, to assure the safeguarding of securities and funds which
are in the custody or control of ICE Clear Europe or for which it is
responsible, and, in general, to protect investors and the public
interest.\11\
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
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[[Page 46765]]
As discussed above, the proposed rule change would amend the
default waterfalls for the CDS and FX categories to include the
proceeds of default insurance, if any, as an additional default
resource after the application of the Defaulter's own resources and ICE
Clear Europe's own initial contributions and prior to the application
of guaranty fund contributions or assessments from non-defaulting
Clearing Members. In addition, the proposed rule change would alter the
order of the resources identified in the default waterfall for the F&O
category, such that proceeds from default insurance would come third,
after the application the Defaulter's own resources and ICE Clear
Europe's initial contribution and prior to the application of Guaranty
Fund contributions or assessments from non-defaulting Clearing Members.
The Commission believes that by including additional financial
resources in its default management system, ICE Clear Europe would
enhance the financial resources used to manage defaults. Specifically,
the Commission believes that the ability to use the proceeds of default
insurance in this manner would provide ICE Clear Europe with an
additional potential source of default liquidity with respect to the
CDS and FX product categories. In addition, the placement of the
default insurance proceeds in the default waterfalls for all three
categories could allow ICE Clear Europe to avoid utilizing the
resources of non-defaulting Clearing Members, which, in turn could
reduce the risk of loss contagion (i.e., the risk of losses arising at
non-defaulting Clearing Members if ICE Clear Europe has to utilize the
guaranty fund, which would then be subject to replenishment). In
addition, these financial resources would be more likely to remain
available for subsequent defaults and also provide additional financial
resources necessary to ensure ICE Clear Europe's ability to safeguard
securities and funds.
For these reasons, the Commission finds that the proposed rule
change would promote the prompt and accurate clearance and settlement
of securities transactions and to assure the safeguarding of securities
and funds in ICE Clear Europe's custody and control. Therefore, the
Commission finds the proposed rule change is consistent with section
17A(b)(3)(F) of the Act.\12\
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\12\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4)
Rule 17Ad-22(e)(4) \13\ requires ICE Clear Europe to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to, as applicable, effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes, including
by maintaining additional 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 exposure in
extreme but plausible market conditions.\14\
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\13\ 17 CFR 240.17Ad-22(e)(4).
\14\ 17 CFR 240.17Ad-22(e)(4)(ii).
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As noted above, the proposed rule change would revise ICE Clear
Europe's rules to account for the receipt of default insurance proceeds
for all product categories prior to the need to use guaranty fund
contributions and assessments from non-defaulting Clearing Members,
such that default insurance proceeds would be placed third in the
waterfall of assets after Defaulter resources and ICE Clear Europe's
initial contribution used to meet the obligations and liabilities of a
Defaulter. Further, in the event insurance proceeds are received after
mutualized default or other resources are used, the proposed rule
change would allow the proceeds to repay non-defaulting Clearing
Members, including for such things as assessments or reduced gains
distributions that otherwise would not have been made had the insurance
proceeds been received at the time. The Commission believes that by
adding insurance proceeds to its financial resources in this way, the
proposal should help ICE Clear Europe to preserve mutualized default
resources and the resources of individual non-defaulting Clearing
Members, which in turn would give it the ability to manage its credit
exposures and cover a wide range of foreseeable stress scenarios with
additional financial resources.
As noted above, the proposed rule change would also allow for the
use of insurance proceeds in circumstances when ICE Clear Europe
terminates open contracts. Specifically, where ICE Clear Europe
receives an amount that would, had it been paid on time, have increased
the amount owed to (or decreased the amount owed by) Clearing Members
or Sponsored Principals upon termination of a contract category, ICE
Clear Europe would distribute the amount received first to non-
defaulting Clearing Members or Sponsored Principals who received less
in respect of product termination than they were otherwise owed. The
proposal would include default insurance proceeds in the type of
received amounts subject to distribution. The Commission believes that
the application of additional financial resources in this way would
strengthen its overall ability to deal with a variety of stress
scenarios by lessening the burden on Clearing Members during contract
termination.
For these reasons, the Commission finds that the proposed rule
change is consistent with Rule 17Ad-22(e)(4)(ii).\15\
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\15\ 17 CFR 240.17Ad-22(e)(4)(ii).
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C. Consistency With Rule 17Ad-22(e)(13)
Rule 17Ad-22(e)(13) requires ICE Clear Europe to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to, as applicable, ensure it has the authority and
operational capacity to take timely action to contain losses and
liquidity demands and continue to meet its obligations.\16\
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\16\ 17 CFR 240.17Ad-22(e)(13).
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As noted above, the proposed rule change would provide that ICE
Clear Europe would not be obligated to obtain or keep in place or make
any claim under any default insurance policy or make, or receive the
proceeds under, any claim prior to processing to the next levels of
assets in the event of a default. Further, the proposed rule change
would specify how ICE Clear Europe would apply the proceeds of any
default insurance after other resources, such as non-defaulting
Clearing Members' guaranty fund contributions or assessments, had been
used to address losses arising from a default. The Commission believes
that these aspects of the proposed rule change will enable ICE Clear
Europe to, if necessary, use the contributions of non-defaulting
Clearing Members to the guaranty fund prior to the receipt of proceeds
owed under the default insurance provided that those Clearing Members
are reimbursed from the insurance proceeds when received, which in turn
ensures that ICE Clear Europe can take timely action to contain losses
and meet liquidity demands even if there are delays in making and
processing an insurance claim and that the existence and use of default
insurance does not interfere with meeting such obligations.
For the reasons stated above, the Commission believes that the
proposed rule change is consistent with Rule 17Ad-22(e)(13).\17\
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\17\ 17 CFR 240.17Ad-22(e)(13).
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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 \18\ and Rules 17Ad-22(e)(4) and 17Ad-22(e)(13) thereunder.\19\
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\18\ 15 U.S.C. 78q-1(b)(3)(F).
\19\ 17 CFR 240.17Ad-22(e)(4) and 17 CFR 240.17Ad-22(e)(13).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\20\ that the proposed rule change (SR-ICEEU-2020-005) be, and hereby
is, approved.\21\
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\20\ 15 U.S.C. 78s(b)(2).
\21\ 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.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16705 Filed 7-31-20; 8:45 am]
BILLING CODE 8011-01-P