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ICE Clear Europe Limited

Registered in England No.06219884

Registered office: Milton Gate, 60 Chiswell Street, London EC1Y 4SA

May 13, 2019

Mr. Christopher J. Kirkpatrick

Office of the Secretariat

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street, NW

Washington, DC 20581

Re: ICE Clear Europe Self-Certification Pursuant to Commission Rule 40.6 –

Amendments to Risk Management Model Description document

Dear Mr. Kirkpatrick:

ICE Clear Europe Limited (“ICE Clear Europe” or the “Clearing House”), a registered 

derivatives clearing organization under the Commodity Exchange Act, as amended (the 

“Act”), hereby submits to the Commodity Futures Trading Commission (the 

“Commission”), pursuant to Commission Rule 40.6 for self-certification, the 

amendments to its Risk Management Model Description1 document to incorporate 

certain risk model enhancements. ICEU is registered with the Commission as a 

derivatives clearing organization (“DCO”). The amendments are to become effective 

on the first business day following the tenth business day after submission, or such later 

date as ICE Clear Europe may determine. 

Concise Explanation and Analysis

The ICE Clear Europe CDS risk model includes explicit provision to account for the 

additional liquidation cost due to the exposure to Bid/Offer Width (“BOW”) as, in the 

event of Clearing Member default, the Clearing House might incur in additional costs 

to unwind the positions. Specifically, a bid/offer risk requirement, named liquidity 

charge, is introduced. Such liquidity charges are computed separately for single names 

and indices.

ICE Clear Europe proposes a revised approach to computing single name CDS liquidity 

charges. Specifically, ICE Clear Europe proposes to introduce minimum instrument 

 

1 Capitalized terms used but not defined herein have the meanings specified in the ICE Clear Europe

ICEU Risk Management Model Description document. 
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ICE Clear Europe Limited

Registered in England No.06219884

Registered office: Milton Gate, 60 Chiswell Street, London EC1Y 4SA

liquidity requirements independent of instrument maturities. ICE Clear Europe’s 

current spread-based liquidity charge approach features instrument liquidity 

requirements that decay with time to maturity for fixed credit spread levels. The 

proposed approach introduces minimum liquidity requirements for individual 

instruments, independent of time to maturity for the considered instruments, and thus 

establishes minimum liquidity charges that do not decay over time as contract maturity 

is approached. The proposed calculation for single name CDS liquidity charges at the 

instrument level incorporates a price-based bid-offer width floor component to provide 

stability and anti-procyclicality requirements, as well as a dynamic spread-based BOW 

component to reflect the additional risk associated with distressed market conditions. 

The values of such price-based BOW and spread-based BOW are fixed factors, which 

are subject to at least monthly reviews and updates by ICE Clear Europe Risk 

Management Department with consultation with the Risk Working Group. 

ICE Clear Europe also proposes enhancements to the liquidity charge calculation at the 

single name level. The current liquidity charge approach at the single name level 

accounts for the liquidation cost across the curve. All positions are aggregated and 

priced at each maturity interval separately as a synthetic forward CDS instrument. This 

current approach introduces potential sub-additivity at the single name level, as it may 

result in a higher liquidity charge than the sum of the single name instrument 

requirements.

Under the proposed calculation, liquidity charges at single name level will be computed 

by first calculating the liquidity requirements for each individual instrument position in 

the portfolio, and then summing all instrument liquidity requirements for positions with 

the same directionality, i.e. bought or sold protection. The liquidity charge requirements 

at the single name level will be the greatest liquidity requirement associated with either 

the sum of all bought protection position liquidity requirements, or the sum of all sold 

protection position liquidity requirements. Under this proposed approach, the 

portfolios’ liquidity charge cannot exceed the sum of the individual instrument’s 

requirements. There are no changes to the liquidity charge calculation at the portfolio 

level. ICE Clear Europe expects these enhancements will ensure more stable liquidity 

requirements for instruments across the curve. Further, the enhancements simplify ICE 

Clear Europe’s liquidity charge methodology, which promotes ease of understanding. 

As stated above, the current single name level liquidity requirements are based on 

forward CDS spread levels and are, in general, more difficult to calculate as forward 

spread levels are not observable across the term structure (“curve”). ICE Clear Europe, 

as part of its end-of-day price discovery process, provides end-of-day pricing data for 

instruments in which clients have open positions, which will, under the proposed 

approach, allow for easier replication for clients who wish to estimate liquidity charges 

for hypothetical and current positions.

Compliance with the Act and CFTC Regulations

The rule amendments are potentially relevant to the following core principles: (B) 

Financial Resources and (D) Risk Management, and the applicable regulations of the 

Commission thereunder. 

 Financial Resources. The revisions to the ICEU Risk Management Model 

Description document are consistent with the financial resources requirements 
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ICE Clear Europe Limited

Registered in England No.06219884

Registered office: Milton Gate, 60 Chiswell Street, London EC1Y 4SA

of Core Principle B. The proposed changes will enhance the financial resources 

available to the clearing house by promoting stability and conservative bias of 

requirements.

 Risk Management. The revisions to the ICEU Risk Management Model 

Description document are consistent with the risk management requirements of 

Core Principle D. The proposed changes provide clarity and enhance risk 

policies, resulting in enhanced stability and conservative bias of requirements, 

and thereby ensuring that ICEU possesses the ability to manage the risks 

associated with discharging its responsibilities.

As set forth herein, the amendments consist of changes to the Risk Management Model 

Description document. ICEU has respectfully requested confidential treatment for the 

ICEU Risk Management Model Description document which was submitted 

concurrently with this submission.

ICE Clear Europe hereby certifies that the amendments comply with the Act and the 

Commission’s regulations thereunder.

ICE Clear Europe has received no substantive opposing views in relation to the 

proposed rule amendments. 

ICE Clear Europe has posted a notice of pending certification and a copy of this 

submission on its website concurrent with the filing of this submission. 

If you or your staff should have any questions or comments or require further 

information regarding this submission, please do not hesitate to contact the undersigned 

at Giulia.honorati@theice.com or +44 20 7429 7127. 

Very truly yours,

Giulia Honorati

Manager Regulation & Compliance