[Federal Register Volume 83, Number 142 (Tuesday, July 24, 2018)]
[Notices]
[Pages 35048-35051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15770]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83665; File No. SR-ICEEU-2018-009]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change Relating to Amendments to the ICE 
Clear Europe CDS End-of-Day Price Discovery Policy (``Price Discovery 
Policy'')

July 18, 2018.
    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 July 11, 2018, ICE Clear Europe Limited (``ICE Clear Europe'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change described in Items I, II and III below, which 
Items have been prepared by ICE Clear Europe. 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.
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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

    ICE Clear Europe proposes to modify certain provisions of its Price 
Discovery Policy related to the bid-offer width (``BOW'') methodology 
for pricing single name credit default swap (``CDS'') contracts. These 
revisions do not require any changes to the ICE Clear Europe Clearing 
Rules or Procedures.\3\
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    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the ICE Clear Europe Clearing Rules.
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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,

[[Page 35049]]

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 proposes revising its Price Discovery Policy to 
enhance the methodology used to determine BOWs for single name CDS 
contracts and to make corresponding changes to related governance 
processes.
    Each business day, ICE Clear Europe determines end-of-day (``EOD'') 
levels for CDS Contracts through in accordance with the Price Discovery 
Policy, based on EOD submissions from its CDS Clearing Members. ICE 
Clear Europe uses these EOD levels for mark-to-market and risk 
management purposes. As part of this price discovery process, ICE Clear 
Europe determines BOWs for each CDS Contract. The BOW is intended to 
estimate the bid-offer width for the two-way market available for each 
clearing-eligible instrument at the specified determination time on 
each business day. The BOWs are then used in ICE Clear Europe's price 
discovery process as inputs in the determination of EOD levels, and 
other risk management matters.
    The current methodology for determining BOWs for single-name CDS 
Contracts is based on a consensus BOW derived from observed intraday 
spread-quotes for the most actively traded instrument (``MATI'') across 
the term structure and cleared coupons. The spread-based consensus BOW 
is multiplied by a ``scrape factor'' to reflect any differences between 
the BOWs provided in intraday quotes and BOWs achieved in the market. 
ICE Clear Europe applies various factors to the consensus BOW to 
reflect differences in instrument liquidity at longer and shorter 
maturities, and at higher and lower coupons.
    ICE Clear Europe is proposing to enhance the methodology for 
determining EOD BOWs for single name instruments. The enhancement 
eliminates the use of the ISDA CDS Standard Model from the computation 
of single name BOWs. ICE Clear Europe established its current BOW 
methodology at a time when it accepted submissions to its end-of-day 
price discovery process in both spread and price terms, at the 
discretion of its Clearing Members. Since that time, ICE Clear Europe 
has enhanced its end-of-day price discovery process to accept Single 
Name submissions only in price terms, eliminating the need for spread-
based BOWs.\4\ The proposed enhancement also determines BOWs 
consistently across single names on all reference entities, including 
those for which only sparse intraday data is available. The enhancement 
also extends the application of price-based BOW floors from the 0/3 
month, 6 month and 1 year benchmark tenors to the entire set of 
benchmark tenors. Finally, the proposed enhancement introduces a 
dynamic feature that can widen BOWs in response to the observed 
dispersion of price-space mid-market levels submitted in the EOD price 
discovery process.
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    \4\ ICE Clear Europe continues to use the ISDA CDS Standard 
Model for certain other purposes under the Price Discovery Policy in 
which it may convert between spread and price levels, and 
accordingly references to the model have been retained in the 
revised Price Discovery Policy notwithstanding that the model is no 
longer used for determining single-name BOWs.
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    Under the proposed enhancement ICE Clear Europe will compute a 
consensus BOW for each benchmark instrument, not only for the most 
actively traded instrument. Rather than consensus BOWs being derived 
only from intraday quotes, they will be computed as a price-based floor 
plus a fraction of the instrument's currently observed level, based on 
the average of price-space mid-market levels submitted by CDS Clearing 
Members as part of the EOD price discovery process. ICE Clear Europe 
will continue to apply various factors to the consensus BOW to reflect 
differences in liquidity at longer and shorter maturities and at higher 
and lower coupons. Under the proposed enhancement, the Clearing House 
will determine systematic BOWs for each benchmark instrument at the 
most actively traded coupon (``MATC'') by applying tenor scaling 
factors to the corresponding consensus BOWs. These tenor scaling 
factors reflect the BOW of each tenor relative to the BOW of the most 
actively traded tenor. ICE Clear Europe will determine systematic BOWs 
for each benchmark instrument at other coupons by applying a 
combination of tenor scaling factors and coupon scaling factors to the 
corresponding consensus BOWs. Coupon scaling factors are an adjustment 
to the BOW to reflect decreased market activity at coupons larger or 
smaller than the MATC, and accordingly result in a wider BOW for such 
coupons as compared to the MATC. ICE Clear Europe will apply the 
appropriate Single Name variability factor resulting in the final 
systematic EOD BOWs based on the applicable variability band (a similar 
variability factor can be applied in the current approach, but on a 
discretionary basis). The variability factor is an additional scaling 
factor that widens the BOW to account for volatile or fast-moving 
market conditions, on the basis of a market proxy variability band that 
is designed to reflect observed variability levels in intraday 
quotes.\5\
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    \5\ For further discussion of the variability band approach, see 
Exchange Act Release No. 34-83389 (SR-ICEEU-2018-006) (June 6, 
2018), 83 FR 27356 (June 12, 2018).
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    ICE Clear Europe will determine the final EOD BOW as the greater of 
an instrument's systematic BOW, and a dynamic BOW established for the 
instrument based on the dispersion of price-based mid-market EOD 
submissions by CDS Clearing Members for the given instrument. The 
amendments remove the requirement for ICE Clear Europe to provide the 
spread space equivalents for BOWs.
    ICE Clear Europe also proposes revisions to the governance 
provisions of the Price Discovery Policy. Under the revisions, and 
consistent with the amendments to the methodology described above, the 
parameters used in the EOD price discovery process are established by 
ICE Clear Europe's clearing risk department in consultation with ICE 
Clear Europe's trading advisory committee, which provides additional 
insight into current market dynamics and conditions. The 
responsibilities of ICE Clear Europe's clearing risk department in this 
regard will include determining the price-based floors and scaling 
factors used to establish BOWs. (References to determination of scrape 
factors, which are no longer used, have been removed.)
    The revised Price Discovery Policy removes a duplicative table 
relating to the assignment of index risk factors to market proxy 
groups, and updates cross-references accordingly. ICE Clear Europe also 
proposes a revision that trading desks at each self-clearing member are 
requested (but not required), to copy ICE Clear Europe on the intraday 
quotes they provide market participants via email.
(b) Statutory Basis
    ICE Clear Europe believes that the proposed amendments are 
consistent with the requirements of Section 17A of the Act \6\ and the 
regulations thereunder applicable to it. Section 17A(b)(3)(F) of the 
Act \7\ in particular 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

[[Page 35050]]

agreements, contracts, and transactions, the safeguarding of securities 
and funds in the custody or control of the clearing agency, and the 
protection of investors and the public interest. The proposed 
amendments are designed to enhance the Clearing House's Price Discovery 
Policy, which is necessary to determine the daily settlement prices for 
cleared CDS Contracts that are used in mark-to-market margin settlement 
and additionally are key inputs of the risk management and margin 
models of the Clearing House for CDS contracts. The proposed amendments 
in particular will update the methodology for determining BOWs, which 
are an important part of the determination of the EOD level. The 
amendments provide a more comprehensive and dynamic approach for 
determining BOWs for single-name CDS Contracts, that applies across all 
tenors of such contracts. The revised methodology takes into account 
both observed and submitted price levels and implements appropriate 
price floors and tenor, coupon and variability scaling factors that can 
adjust the BOW for particular instruments (including less actively 
traded instruments) to reflect liquidity and other market conditions. 
In ICE Clear Europe's view, the revised approach, together with the 
other aspects of the Price Discovery Policy, will facilitate more 
accurate determinations of EOD levels for the full range of cleared 
single-name instruments, and strengthen the overall EOD price discovery 
process. As a result, ICE Clear Europe believes that the amendments are 
consistent with requirements to promote prompt and accurate clearing 
and settlement, within the meaning of Section 17A(b)(3)(F).\8\ For 
similar reasons, ICE Clear Europe believes that the amendments are also 
consistent with the risk-based margining requirements of Commission 
Rule 17Ad-22(e)(6),\9\ including the requirement to use reliable 
sources of timely price data and procedures and sound valuation models 
for addressing circumstances in which pricing data are not readily 
available or reliable. The enhancements discussed above will in 
particular take into account a broad range of observed and submitted 
price data and enhance the soundness of the overall methodology applied 
to calculating EOD pricing, through the use of tenor, coupon and 
variability factors to develop more accurate BOW levels for the full 
range of cleared instruments, including those that are less actively 
traded and for which direct pricing data may be less readily available. 
Finally, ICE Clear Europe believes that the amendments are consistent 
with the governance requirements of Commission Rule 17Ad-22(e)(2),\10\ 
including ensuring that its written policies provide for governance 
arrangements that specify clear and direct lines of responsibility. In 
this regard, the amendments update the specific responsibilities of the 
Clearing Risk department and the TAC in the determination of BOWs and 
the establishment of relevant parameters, including price-based floors 
and scaling factors.
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    \6\ 15 U.S.C. 78q-1.
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22(e)(6). The rule states that ``[e]ach 
covered clearing agency shall establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable:
    (6) Cover, if the covered clearing agency provides central 
counterparty services, its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum:
    (i) Considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market;
    (ii) Marks participant positions to market and collects margin, 
including variation margin or equivalent charges if relevant, at 
least daily and includes the authority and operational capacity to 
make intraday margin calls in defined circumstances;
    (iii) Calculates margin sufficient to cover its potential future 
exposure to participants in the interval between the last margin 
collection and the close out of positions following a participant 
default;
    (iv) 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;
    (v) Uses an appropriate method for measuring credit exposure 
that accounts for relevant product risk factors and portfolio 
effects across products;
    (vi) Is monitored by management on an ongoing basis and is 
regularly reviewed, tested, and verified by:
    (A) Conducting backtests of its margin model at least once each 
day using standard predetermined parameters and assumptions;
    (B) Conducting a sensitivity analysis of its margin model and a 
review of its parameters and assumptions for backtesting on at least 
a monthly basis, and considering modifications to ensure the 
backtesting practices are appropriate for determining the adequacy 
of the covered clearing agency's margin resources;
    (C) Conducting a sensitivity analysis of its margin model and a 
review of its parameters and assumptions for backtesting more 
frequently than monthly during periods of time when the products 
cleared or markets served display high volatility or become less 
liquid, or when the size or concentration of positions held by the 
covered clearing agency's participants increases or decreases 
significantly; and
    (D) Reporting the results of its analyses under paragraphs 
(e)(6)(vi)(B) and (C) of this section to appropriate decision makers 
at the covered clearing agency, including but not limited to, its 
risk management committee or board of directors, and using these 
results to evaluate the adequacy of and adjust its margin 
methodology, model parameters, and any other relevant aspects of its 
credit risk management framework; and
    (vii) Requires a model validation for the covered clearing 
agency's margin system and related models to be performed not less 
than annually, or more frequently as may be contemplated by the 
covered clearing agency's risk management framework established 
pursuant to paragraph (e)(3) of this section.''
    \10\ 17 CFR 240.17Ad-22(e)(2). The rule states that ``[e]ach 
covered clearing agency shall establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable:
    (2) Provide for governance arrangements that:
    (i) Are clear and transparent;
    (ii) Clearly prioritize the safety and efficiency of the covered 
clearing agency;
    (iii) Support the public interest requirements in Section 17A of 
the Act (15 U.S.C. 78q-1) applicable to clearing agencies, and the 
objectives of owners and participants;
    (iv) Establish that the board of directors and senior management 
have appropriate experience and skills to discharge their duties and 
responsibilities;
    (v) Specify clear and direct lines of responsibility; and
    (vi) Consider the interests of participants' customers, 
securities issuers and holders, and other relevant stakeholders of 
the covered clearing agency.''
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed rule changes would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purpose of the Act. The proposed 
changes to the Price Discovery Policy, and in particular the revised 
BOW methodology for Single Name instruments, will apply uniformly 
across all CDS Clearing Members and market participants. ICE Clear 
Europe does not believe the amendments will adversely affect 
competition among CDS Clearing Members, the cost of clearing, or the 
ability of market participants to clear CDS contracts generally. 
Similarly, the Clearing House does not believe the amendments will 
reduce access to clearing of CDS contracts or limit market 
participants' choices for clearing CDS contracts. Therefore, ICE Clear 
Europe does not believe the proposed rule changes impose any burden on 
competition that is inappropriate in furtherance of the purposes 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 comments received with respect to the proposed 
rule change.

[[Page 35051]]

III. Date of Effectiveness of the Proposed Rule Change, Security-Based 
Swap Submission and Advance Notice and Timing for Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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:

Electronic Comments

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#daa8afb6bff7b9b5b7b7bfb4aea99aa9bfb9f4bdb5ac"><span class="__cf_email__" data-cfemail="82f0f7eee7afe1edefefe7ecf6f1c2f1e7e1ace5edf4">[email protected]</span></a>. Please include 
File Number SR-ICEEU-2018-009 on the subject line.

Paper Comments

    <bullet> 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-2018-009. 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-2018-009 and should be 
submitted on or before August 14, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-15770 Filed 7-23-18; 8:45 am]
BILLING CODE 8011-01-P


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