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[Federal Register Volume 83, Number 176 (Tuesday, September 11, 2018)]
[Notices]
[Pages 46005-46008]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19640]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84033; File No. SR-ICEEU-2018-009]

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

September 5, 2018.

I. Introduction

    On July 11, 2018, 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 (SR-
ICEEU-2018-009) to revise ICE Clear Europe's CDS End-of-Day Price 
Discovery Policy (``Price Discovery Policy'') related to the bid-offer 
width (``BOW'') methodology for pricing single-name credit default swap 
(``CDS'') instruments.\3\ The proposed rule change was published for 
comment in the Federal Register on July 24, 2018.\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\ The Price Discovery Policy uses the term ``instrument'' to 
refer to the complete set of contractual terms that affect the value 
of a CDS contract. For single-name CDS contracts, these terms 
include the reference entity, currency, debt tier, document clause, 
coupon, and scheduled termination date.
    \4\ Securities Exchange Act Release No. 34-83665 (July 18, 
2018), 83 FR 35048 (July 24, 2018) (SR-ICEEU-2018-009) (``Notice'').
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II. Description of the Proposed Rule Change

    Currently, ICE Clear Europe uses end-of-day (``EOD'') price levels 
for risk management purposes.\5\ Each business day, ICE Clear Europe 
determines EOD prices in accordance with its Price Discovery Policy.\6\ 
Specifically, ICE

[[Page 46006]]

Clear Europe uses BOWs to determine these EOD price levels.\7\ The BOW 
is intended to estimate the bid-offer width for the market available 
for each clearing-eligible instrument at a specified time on each 
business day.\8\ 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.\9\
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    \5\ Capitalized terms used herein but not otherwise defined have 
the meaning set forth in the ICE Clear Europe Clearing Rules, which 
is available at https://www.theice.com/publicdocs/clear_europe/rulebooks/rules/Clearing_Rules.pdf, or in the Price Discovery 
Policy.
    \6\ Notice, 83 FR at 35049.
    \7\ Id.
    \8\ Id.
    \9\ Id.
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    ICE Clear Europe derives BOWs for single-name CDS instruments based 
on observed intraday spread-quotes for the most actively traded 
instrument (``MATI'') across the term structure and cleared coupons 
(otherwise known as ``consensus BOW'').\10\ ICE Clear Europe calculates 
the consensus BOW for each relevant CDS instrument based on specified 
averages of the quotes provided by CDS Clearing Members. ICE Clear 
Europe adjusts consensus BOWs by a ``scrape factor'' to reflect 
differences between the BOWs provided by clearing members in intraday 
quotes and BOWs achieved in the market.\11\ ICE Clear Europe also 
applies various other adjustments to the consensus BOWs to reflect 
differences in instrument liquidity at longer and shorter maturities, 
and at higher and lower coupons.\12\ Moreover, ICE Clear Europe 
currently uses the ISDA CDS Standard Model to convert price submissions 
for single-name CDS instruments from the form of a yearly premium of a 
CDS in basis points, per amount insured (``spread'') to price 
submissions in the form of an upfront payment as a percentage of a 
fixed premium (``price terms'').
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    \10\ Id.
    \11\ Id.
    \12\ Notice, 83 FR at 35049.
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    The proposed rule change would enhance the methodology ICE Clear 
Europe uses to determine BOWs for single-name instruments by amending 
the Price Discovery Policy to (1) compute a consensus BOW for each 
benchmark single-name instrument; (2) determine the final EOD BOW as 
the greater of an instrument's final systematic BOW and a dynamic BOW; 
(3) eliminate the use of the ISDA CDS Standard Model from the 
computation of BOWs for single-name instruments; and (4) update 
associated governance provisions.
    First, the proposed rule change would compute a consensus BOW for 
each benchmark single-name CDS instrument. Specifically, Ice Clear 
Europe would compute a consensus BOW for each benchmark instrument, as 
compared to how Ice Clear Europe currently only computes a consensus 
BOW for the most actively traded instrument.\13\ Likewise, rather than 
deriving consensus BOWs only from intraday quotes, ICE Clear Europe 
would compute consensus BOWs as a price-based floor plus a fraction of 
the single-name CDS instrument's currently observed level (based on the 
average of price-space levels submitted by CDS Clearing Members as part 
of the EOD price discovery process).\14\ ICE Clear Europe would 
continue to apply various factors to the most actively traded 
instrument's consensus BOW to reflect differences in liquidity at 
longer and shorter maturities and at higher and lower coupons.\15\ The 
proposed rule change would also extend 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.\16\
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    \13\ Id.
    \14\ Notice, 83 FR at 35049.
    \15\ Id.
    \16\ Id.
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    ICE Clear Europe would then apply scaling factors to the consensus 
BOWs.\17\ The amended Price Discovery Policy would refer to the BOWs, 
after application of scaling factors, as ``systematic BOWs''. \18\ The 
scaling factors would reflect differences in instrument liquidity at 
longer and shorter maturities, and at higher and lower coupons.\19\ To 
determine systematic BOWs for each benchmark instrument at the most 
actively traded coupon (``MATC''), ICE Clear Europe would apply scaling 
factors based upon the remaining time left in the CDS (``tenor 
scaling'') to the corresponding consensus BOWs.\20\ The tenor scaling 
factors would reflect the BOW of each tenor relative to the BOW of the 
most actively traded tenor.\21\ ICE Clear Europe would 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.\22\ Coupon scaling factors 
would adjust the BOW to reflect decreased market activity at coupons 
larger or smaller than the MATC, and accordingly would produce a wider 
BOW for such coupons as compared to the MATC.\23\
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    \17\ Id.
    \18\ Id.
    \19\ Id.
    \20\ Id.
    \21\ Id.
    \22\ Notice, 83 FR at 35049.
    \23\ Id.
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    ICE Clear Europe would also apply a variability factor, which would 
be an additional scaling factor to widen the BOW to account for 
volatile or fast-moving market conditions.\24\ The variability factor 
would be designed to reflect observed variability levels in intraday 
quotes.\25\ ICE Clear Europe would determine the amount of the 
variability factor on the basis of a market proxy variability band 
(numbering 0-3).\26\ ICE Clear Europe would assign a single-name 
instrument to a market proxy variability band based on the instrument's 
market-proxy group, as determined by ICE Clear Europe. ICE Clear Europe 
may apply a similar variability factor under the current approach on a 
discretionary basis.\27\ After applying this variability factor, ICE 
Clear Europe would arrive at the final systematic EOD BOW based on the 
applicable variability band.\28\
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    \24\ Id.
    \25\ Id.
    \26\ Id.
    \27\ Id.
    \28\ Id.
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    Second, ICE Clear Europe would determine the final EOD BOW as the 
greater of a single-name CDS instrument's final systematic EOD BOW, and 
a BOW established for the instrument based on the dispersion of price-
based EOD submissions by CDS Clearing Members for the given instrument 
(such BOW the ``dynamic BOW'').\29\
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    \29\ Notice, 83 FR at 35049.
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    Third, the proposed rule change would eliminate the use of the ISDA 
CDS Standard Model from the computation of BOWs for single-name CDS 
instruments. As ICE Clear Europe would now accept price submissions for 
single-name CDS instruments only in price terms, ICE Clear Europe would 
no longer need the ISDA CDS Standard Model to compute single-name 
BOWs.\30\ ICE Clear Europe would continue to use the ISDA CDS Standard 
Model for certain other purposes in which it may need to convert 
between spread and price terms, however, and therefore the proposed 
rule change would retain references to the model in the revised Price 
Discovery Policy.\31\ Similarly, because ICE Clear Europe would now 
accept price submissions for single-name CDS instruments only in price 
terms, the proposed rule change would remove the requirement for ICE 
Clear Europe to provide single-name BOWs in spread terms.\32\
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    \30\ Id.
    \31\ Notice, 83 FR at 35049 n.4.
    \32\ Notice, 83 FR at 35049.
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    Finally, the proposed rule change would revise the governance 
provisions

[[Page 46007]]

of the Price Discovery Policy. Under the revisions, and consistent with 
the amendments to the methodology described above, ICE Clear Europe's 
clearing risk department, in consultation with the trading advisory 
committee, would establish the parameters used in the EOD price 
discovery process.\33\ ICE Clear Europe's clearing risk department 
would also be responsible for determining the price-based floors and 
scaling factors used to establish BOWs.\34\
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    \33\ Id.
    \34\ Notice, 83 FR at 35049.
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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.\35\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act,\36\ and Rules 17Ad-22(e)(2)(i), (e)(6)(ii), and (e)(6)(iv) 
thereunder.\37\
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    \35\ 15 U.S.C. 78s(b)(2)(C).
    \36\ 15 U.S.C. 78q-1(b)(3)(F).
    \37\ 17 CFR 240.17Ad-22(e)(2)(i), (e)(6)(ii), and (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 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, as well as 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.\38\
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    \38\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, the proposed rule change would enhance ICE 
Clear Europe's EOD price discovery process for single-name CDS 
instruments by amending the Price Discovery Policy to (1) compute a 
consensus BOW for each benchmark single-name instrument; (2) determine 
the final EOD BOW as the greater of an instrument's final systematic 
BOW and a dynamic BOW; (3) eliminate the use of the ISDA CDS Standard 
Model from the computation of BOWs for single-name instruments; and (4) 
update associated governance provisions.
    Taken as a whole, the Commission believes the proposed rule change 
would enhance ICE Clear Europe's ability to determine the EOD BOW for 
single-name CDS instruments. The Commission believes the proposed rule 
change would permit ICE Clear Europe to determine BOWs more 
consistently across single-name instruments on all reference entities, 
including those for which only sparse intraday data is available, by 
computing a consensus BOW for each benchmark single-name instrument. In 
addition, by extending the application of price-based BOW floors to the 
entire set of benchmark tenors instead of solely the 0/3 month, 6 
month, and 1-year benchmark tenors, the Commission believes that ICE 
Clear Europe would be able to more consistently compute the EOD BOW for 
a wider range of single-name CDS instruments. Moreover, the Commission 
believes that the adoption of a new dynamic BOW would help the BOW to 
better reflect current market conditions given that the dynamic BOW 
would widen BOWs in response to the observed dispersion of price-space 
levels submitted in the EOD price discovery process. Finally, the 
Commission believes that updating the associated governance provisions 
would help ensure that the EOD price discovery process remains 
effective by making clear the responsibilities for establishing the 
parameters, price-based floors, and scaling factors used in the EOD 
price discovery process.
    Consequently, the Commission believes that the proposed rule change 
would help improve ICE Clear Europe's EOD pricing process as a whole by 
considering additional relevant information and a wider range of 
instruments. Based on these improvements, the Commission believes that 
the proposed rule change would also help improve the operation and 
effectiveness of ICE Clear Europe's margin system because ICE Clear 
Europe uses EOD prices to calculate and collect such margin. Given that 
an effective margin system is necessary to manage ICE Clear Europe's 
credit exposures to its Clearing Members and the risks associated with 
clearing security based swap-related portfolios, the Commission 
believes that the proposed rule change would help improve ICE Clear 
Europe's ability to avoid losses that could result from the 
mismanagement of such credit exposures and risks. Because such losses 
could disrupt ICE Clear Europe's ability to promptly and accurately 
clear security based swap transactions, the Commission believes that 
the proposed rule change, by improving the EOD price input to ICE Clear 
Europe's margin system and thereby improving the operation and 
effectiveness of such margin system, would help promote the prompt and 
accurate clearance and settlement of securities transactions.
    Similarly, given that mismanagement of ICE Clear Europe's credit 
exposures to its Clearing Members and the risks associated with 
clearing security based swap-related portfolios could cause ICE Clear 
Europe to realize losses on such portfolios and threaten ICE Clear 
Europe's ability to operate, thereby threatening access to securities 
and funds in ICE Clear Europe's control, the Commission believes that 
the proposed rule change would help assure the safeguarding of 
securities and funds which are in the custody or control of ICE Clear 
Europe or for which it is responsible. Finally, for both of these 
reasons, the Commission believes the proposed rule change is consistent 
with protecting 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 ICE 
Clear Europe's custody and control, and, in general, protect investors 
and the public interest, consistent with the Section 17A(b)(3)(F) of 
the Act.\39\
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    \39\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(2)(i)

    Rule 17Ad-22(e)(2)(i) requires that ICE Clear Europe establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for governance arrangements that are 
clear and transparent.\40\
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    \40\ 17 CFR 240.17Ad-22(e)(2)(i).
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    As discussed above, the proposed rule change would revise ICE Clear 
Europe's Price Discovery Policy to update the responsibilities of ICE 
Clear Europe's clearing risk department. Under the revised Price 
Discovery Policy, the clearing risk department, in consultation with 
the trading advisory committee, would establish the parameters used in 
the EOD price discovery process, including determining the price-based 
floors and scaling factors used to establish BOWs. The Commission 
believes that the proposed rule change would thus help ICE Clear Europe 
assign responsibility within ICE Clear Europe's existing governance 
structure for important aspects of EOD price discovery, such as setting 
parameters and scaling factors. The Commission further believes that

[[Page 46008]]

the proposed rule change would help improve the effectiveness of the 
EOD price discovery process by specifically requiring the clearing risk 
department to consult the trading advisory committee, which would 
provide insight into current market dynamics and conditions.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(e)(2)(i).\41\
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    \41\ 17 CFR 240.17Ad-22(e)(2)(i).
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C. Consistency With Rule 17Ad-22(e)(6)(ii)

    Rule 17Ad-22(e)(6)(ii) requires that ICE Clear Europe 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 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.\42\
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    \42\ 17 CFR 240.17Ad-22(e)(6)(ii).
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    As discussed above, the proposed rule change would enhance ICE 
Clear Europe's EOD price discovery by amending the Price Discovery 
Policy to (1) compute a consensus BOW for each benchmark single-name 
instrument; (2) determine the final EOD BOW as the greater of an 
instrument's final systematic BOW and a dynamic BOW; and (3) eliminate 
the use of the ISDA CDS Standard Model from the computation of BOWs for 
single-name instruments.
    The Commission believes that these changes, taken together, would 
help enhance ICE Clear Europe's ability to determine the EOD BOW for 
single-name CDS instruments. By eliminating the use of the ISDA CDS 
Standard Model from the computation of single-name BOWs, accepting 
submissions only in price terms, and computing a consensus BOW for each 
benchmark single-name CDS instrument, the Commission believes the 
proposed rule change would help ICE Clear Europe to determine BOWs more 
consistently across single-name instruments on all reference entities, 
including those for which little intraday data is available. In 
addition, as noted above, the dynamic BOW would widen BOWs in response 
to the observed dispersion of price-space levels submitted in the EOD 
price discovery process. Thus, by determining the final EOD BOW as the 
greater of an instrument's final systematic BOW and a dynamic BOW, the 
Commission believes the proposed rule change would help the BOW to 
better reflect current market conditions.
    Consequently, the Commission believes that the proposed rule change 
would help improve ICE Clear Europe's EOD pricing process by taking 
into account additional relevant information and considering a wider 
range of instruments in the pricing process. Because ICE Clear Europe 
uses EOD prices to mark participant positions to market and establish 
and collect margin, including variation margin, the Commission believes 
that improvements to the EOD pricing process would also enhance ICE 
Clear Europe's covering of credit exposures to its participants and 
collection of margin. Moreover, the Commission believes the governance 
enhancements described above would help ensure that ICE Clear Europe's 
clearing risk department maintains an effective EOD price discovery 
process and takes into account current market conditions by consulting 
with the trading advisory committee. The Commission therefore believes 
that the proposed rule change would help establish and maintain written 
policies and procedures reasonably designed to cover ICE Clear Europe's 
credit exposures to its participants by establishing a risk-based 
margin system that marks participant positions to market and collects 
margin, including variation margin.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(e)(6)(ii).\43\
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    \43\ 17 CFR 240.17Ad-22(e)(6)(ii).
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D. Consistency With Rule 17Ad-22(e)(6)(iv)

    Rule 17Ad-22(e)(6)(iv) requires that ICE Clear Europe 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 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.\44\
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    \44\ 17 CFR 240.17Ad-22(e)(6)(iv).
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    As discussed above, the proposed rule change would help improve the 
pricing data that ICE Clear Europe uses in its margin system. 
Specifically, the proposed rule change would, as discussed above, 
enhance the computation of BOWs for single-name CDS instruments by 
amending the Price Discovery Policy to (1) compute a consensus BOW for 
each benchmark single-name instrument; (2) determine the final EOD BOW 
as the greater of an instrument's final systematic BOW and a dynamic 
BOW; and (3) eliminate the use of the ISDA CDS Standard Model from the 
computation of BOWs for single-name instruments. Because ICE Clear 
Europe uses BOWs to determine EOD price levels, the Commission believes 
that improvements in the collection and calculation of BOWs would 
improve the accuracy and reliability of ICE Clear Europe's EOD price 
levels. Finally, because ICE Clear Europe uses its EOD price levels to 
mark participant positions to market and establish and collect margin, 
including variation margin, the Commission believes that the proposed 
rule change would help ensure that the ICE Clear Europe's margin system 
uses reliable sources of timely price data.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(e)(6)(iv).\45\
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    \45\ 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 \46\ and Rules 17Ad-22(e)(2)(i), (e)(6)(ii), and (e)(6)(iv) 
thereunder.\47\
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    \46\ 15 U.S.C. 78q-1.
    \47\ 17 CFR 240.17Ad-22(e)(2)(i), (e)(6)(ii), and (e)(6)(iv).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\48\ that the proposed rule change (SR-ICEEU-2018-009) be, and hereby 
is, approved.\49\
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    \48\ 15 U.S.C. 78s(b)(2).
    \49\ 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.\50\
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    \50\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-19640 Filed 9-10-18; 8:45 am]
 BILLING CODE 8011-01-P
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