[Federal Register Volume 85, Number 231 (Tuesday, December 1, 2020)]
[Notices]
[Pages 77315-77317]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26404]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90505; File No. SR-ICC-2020-011]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change, Security-Based Swap Submission, or 
Advance Notice Relating to the ICC Clearing Rules

November 24, 2020.

I. Introduction

    On September 30, 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 (the 
``Act''),\1\ and Rule 19b-4,\2\ a proposed rule change to revise ICC's 
Clearing Rules (the ``Rules'') \3\ to incorporate credit default 
swaptions (``Index Swaptions'') into its summary assessment 
approach.\4\ The proposed rule change was published for comment in the 
Federal Register on October 16, 2020.\5\ 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\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
    \4\ See Notice infra note 5, 85 FR at 65891.
    \5\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Proposed Rule Change, Security-Based Swap Submission, or Advance 
Notice Relating to the ICC Clearing Rules, Exchange Act Release No. 
90138 (October 8, 2020); 85 FR 65891 (October 16, 2020) (SR-ICC-
2020-011) (``Notice'').

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II. Description of the Proposed Rule Change

    In connection with ICC's proposed launch of the clearing of Index 
Swaptions, ICC is proposing to revise the Rules to incorporate Index 
Swaptions into its summary assessment approach, described in Rule 
702(e) and Schedule 702 of the Rules.\6\ ICC has previously filed with 
the Commission changes to certain other policies and procedures related 
to the clearing of Index Swaptions (the ``Swaption Rule Filings'') in 
order to adopt or amend certain related policies and procedures in 
preparation for the launch of clearing of Index Swaptions.\7\ The 
Swaption Rule Filings describe an Index Swaption as when one party (the 
``Swaption Buyer'') has the right (but not the obligation) to cause the 
other party (the ``Swaption Seller'') to enter into an index credit 
default swap transaction at a pre-determined strike price on a 
specified expiration date on specified terms. In the case of Index 
Swaptions that would be cleared by ICC, the underlying index credit 
default swap would be limited to certain CDX and iTraxx Europe index 
credit default swaps that are accepted for clearing by ICC, and which 
would be automatically cleared by ICC upon exercise of the Index 
Swaption by the Swaption Buyer in accordance with its terms. As also 
described in the Swaption Rule Filings, ICC would not commence clearing 
of Index Swaptions until all such policies and procedures have been 
approved by the Commission or otherwise become effective. As such, ICC 
filed the proposed rule change as part of ICC's larger effort to adopt 
the necessary policies and procedures prior to the eventual launch of 
the clearing of Index Options.\8\
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    \6\ The description herein is substantially excerpted from the 
Notice.
    \7\ SEC Release No. 34-87297 (Oct. 15, 2019), 84 FR 56270 (Oct. 
21, 2019) (SR-ICC-2019-007); SEC Release No. 34-89142 (June 24, 
2020), 85 FR 39226 (June 30, 2020) (SR-ICC-2020-002); SEC Release 
No. 34-89436 (July 31, 2020), 85 FR 47827 (Aug. 6, 2020) (SR-ICC-
2020-008); SEC Release No. 34-89948 (Sep. 22, 2020), 85 FR 60845 
(Sep. 28, 2020) (SR-ICC-2020-010).
    \8\ ICC has represented to the Commission that this proposed 
rule change is the last rule filing under Section 19(b)(2) of the 
Act (15 U.S.C. 78s(b)(2)) needed to change ICC's Rules to account 
for the clearing of Index Swaptions.
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    As part of ICC's end-of-day price discovery process, ICC Clearing 
Participants (``CPs'') are required to submit end-of-day prices for 
single name and index credit default swap (``CDS'') Contracts in 
accordance with ICC Procedures. The failure of any CP to provide such 
price submissions constitutes a Missed Submission pursuant to Rules 
404(b), 702(b) and 702(e). As an incentive against Missed Submissions, 
ICC has adopted a summary assessment approach described in Rule 702(e) 
and Schedule 702 of the Rules.\9\ In connection with ICC's proposed 
launch of the clearing of Index Swaptions, the proposed amendments 
would incorporate Index Swaptions in Rule 702(e) and update Schedule 
702 of the Rules to include assessment amounts for Index Swaption 
Missed Submissions, in addition to the current assessment amounts for 
single name and index CDS Missed Submissions.
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    \9\ See Notice, 85 FR at 65891.
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    Specifically, the proposed changes to Rule 702(e)(i)(2) would 
specify that CPs holding a cleared interest in one or more Index 
Swaption Contracts sharing the same underlying index and expiration 
date are required to provide end-of-day prices for all Index Swaption 
Contracts sharing the same underlying index and expiration date. The 
proposed changes to Rule 702(e)(ii)(2) would specify that a CP is 
eligible for one waiver per calendar year for Index Swaption Missed 
Submissions caused by technical failures, which conforms to one waiver 
per calendar year for single name Missed Submissions and one waiver per 
calendar year for index Missed Submissions, in each case caused by 
technical failures. The proposed amendment to Rule 702(e)(ii)(4) would 
make a related change to include Index Swaptions, along with single 
name and index CDS, as a type of Missed Submission that may satisfy the 
waiver requirements of Rule 702(e)(ii)(2).
    As noted above, ICC would update current Schedule 702 to include 
assessment amounts for Index Swaption Missed Submissions. Specifically, 
the proposed revisions to Schedule 702 would establish an assessment 
amount of $250 for each Index Swaption Missed Submission and a maximum 
assessment per day for Missed Submissions on Index Swaption instruments 
sharing the same underlying index ($10,000) and for all Index Swaption 
instruments during one day ($50,000). ICC's proposed changes to 
Schedule 702 of the Rules would also correct a typographical error with 
respect to single names by replacing ``Submissions'' with 
``Submission'' in the current phrase ``For each Missed Submissions.''

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.\10\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act, Section 17A(b)(3)(G) of the Act, Section 17A(b)(3)(H) of 
the Act,\11\ and Rule 17Ad-22(e)(6)(iv) thereunder.\12\
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    \10\ 15 U.S.C. 78s(b)(2)(C).
    \11\ 15 U.S.C. 78q-1(b)(3)(F), 15 U.S.C. 78q-1(b)(3)(G), and 15 
U.S.C. 78q-1(b)(3)(H).
    \12\ 17 CFR 240.17Ad-22(e)(6)(iv).
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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.\13\
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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    As noted above, the proposed rule change would amend ICC's summary 
assessment approach described in Rule 702(e) and Schedule 702 of the 
Rules with respect to Missed Submissions to incorporate Index 
Swaptions. The proposed rule change would also amend current Rule 
702(e) to provide one waiver per calendar year to CPs for Index 
Swaption Missed Submissions caused by technical failures. The 
Commission believes that by amending its summary assessment approach to 
include Index Swaptions, ICC would enhance its ability to maintain the 
accuracy, integrity and effectiveness of ICC's price discovery process 
by incentivizing CPs to avoid Index Swaption Missed Submissions for 
non-technical reasons.
    The Commission further believes that the proposed amendments to 
ICC's summary assessment approach should improve ICC's end-of-day 
pricing process because they should provide ICC a means of ensuring 
that its CPs submit complete prices for Index Swaptions. Consequently, 
the Commission believes that the proposed changes should promote the 
prompt and accurate clearance and settlement of transactions by ICC. 
The Commission further believes that these improvements, in turn, 
should enhance ICC's ability to manage the risks associated with 
clearing Index Swaptions, including the calculation

[[Page 77317]]

and collection of margin requirements that will account for Index 
Swaptions as part of its overall risk-based margin system and risk 
management processes which rely, in part, on the end-of-day prices 
submitted by ICC's CPs.\14\ Moreover, the Commission believes these 
risks, if mismanaged, could threaten ICC's ability to operate and 
therefore its ability to clear and settle transactions and safeguard 
funds. As a result, the Commission believes that the proposed changes 
should promote ICC's ability to assure the safeguarding of securities 
and funds which are in the custody or control of ICC or for which it is 
responsible.
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    \14\ See SEC Release No. 34-82960 (Mar. 28, 2018), 83 FR 14300, 
14302 (Apr. 3, 2018) (SR-ICC-2018-002) (finding improvements to 
ICC's end-of-day pricing process would improve ``ICC's risk 
management processes related to the end-of-day pricing process, 
including the calculation and collection of certain margin 
requirements'' and would ``promote the prompt and accurate clearance 
and settlement of the products cleared by ICC, and . . . enhance 
ICC's ability to assure the safeguarding of securities and funds 
which are in the custody or control of ICC or for which it is 
responsible'').
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    Therefore, the Commission believes that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act.\15\
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Section 17A(b)(3)(G) of the Act

    Section 17A(b)(3)(G) of the Act requires, among other things, that 
ICC's rules provide that CPs shall be appropriately disciplined for 
violation of any provision of ICC's rules by fine or other fitting 
sanction.\16\ As noted above, the proposed rule change would amend 
current Rule 702(e) and Schedule 702 of the Rules to impose an 
assessment amount on any CP that violates the ICC Procedures for 
submitting end-of-day prices with respect to Index Swaption Contracts. 
The Commission believes that this aspect of the proposed rule change 
should be an appropriate form of discipline for CPs that violate such 
price submission procedures for any reason other than technical 
failures that meet the waiver requirements of Rule 702(e)(ii)(2). The 
Commission also believes that without an appropriate sanction that 
would deter CPs from committing Index Swaption Missed Submission 
Violations, the accuracy, integrity and reliability of ICC's end-of-day 
price discovery process could be impaired. Therefore, the Commission 
believes that the proposed rule change is consistent with Section 
17A(b)(3)(G) of the Act.\17\
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    \16\ 15 U.S.C. 78q-1(b)(3)(G).
    \17\ 15 U.S.C. 78q-1(b)(3)(G).
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C. Consistency With Section 17A(b)(3)(H) of the Act

    Section 17A(b)(3)(H) of the Act \18\ requires, among other things, 
that ICC's rules, in general, provide a fair procedure with respect to 
the disciplining of participants. As noted above, the proposed rule 
change would provide a generally applicable process for requesting and 
reviewing waivers of the summary assessment amount for Index Swaption 
Missed Submissions. This proposed process is consistent with the 
processes currently set forth in Rule 702(e) for requesting and 
reviewing waivers for single name Missed Submissions and index Missed 
Submissions, which is another indication of procedural fairness and 
consistency with respect to disciplining CPs for Missed Submissions 
across all three types of CDS Contracts after ICC's proposed launch of 
clearing Index Swaptions. For these reasons, the Commission believes 
that the proposed rule change is consistent with Section 17A(b)(3)(H) 
of the Act.\19\
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    \18\ 15 U.S.C. 78q-1(b)(3)(H).
    \19\ 15 U.S.C. 78q-1(b)(3)(H). In addition, the Commission 
believes that ICC's proposed correction of a typographical error in 
Schedule 702 of the Rules with respect to single names will enhance 
the clarity and procedural fairness of ICC's assessment approach 
with respect to each single name Missed Submission.
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D. Consistency With Rule 17Ad-22(e)(6)(iv) Under the Act

    Rule 17Ad-22(e)(6)(iv) \20\ requires each covered clearing agency 
to establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, uses reliable sources of timely price data and uses procedures 
and sound valuation models for addressing circumstances in which 
pricing data are not readily available or reliable. The Commission 
believes the proposed rule change is reasonably designed to deter the 
occurrence of Index Swaption Missed Submissions that would undermine 
ICC's ability to maintain the integrity and effectiveness of its end-
of-day price discovery process for the provision of reliable prices, 
which could, in turn, be used to enhance ICC's ability to establish and 
maintain risk-based margin requirements which rely, in part, on the 
end-of-day prices provided by CPs. The Commission believes that the 
proposed rule change is therefore consistent with Rule 17Ad-
22(e)(6)(iv).\21\
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    \20\ 17 CFR 240.17Ad-22(e)(6)(iv).
    \21\ 17 CFR 240.17Ad-22(e)(6)(iv).
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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, Section 17A(b)(3)(G) of the Act, Section 17A(b)(3)(H) of the Act 
\22\ and Rule 17Ad-22(e)(6)(iv) thereunder.\23\
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    \22\ 15 U.S.C. 78q-1(b)(3)(F), 15 U.S.C. 78q-1(b)(3)(G) and 15 
U.S.C. 78q-1(b)(3)(H).
    \23\ 17 CFR 240.17Ad-22(e)(6)(iv).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\24\ that the proposed rule change (SR-ICC-2020-011), be, and hereby 
is, approved.\25\
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    \24\ 15 U.S.C. 78s(b)(2).
    \25\ 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.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26404 Filed 11-30-20; 8:45 am]
BILLING CODE 8011-01-P