Document ID: SEC-2015-1337-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: ICE Clear Europe Ltd.; CDS End-of-Day Price Discovery Policy
Posted Date: 2015-08-12T04:00Z

[Federal Register Volume 80, Number 155 (Wednesday, August 12, 2015)]
[Notices]
[Pages 48369-48371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-19757]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75624; File No. SR-ICEEU-2015-013]

Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change Relating to CDS End-of-Day Price 
Discovery Policy

August 6, 2015.
    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 24, 2015, ICE Clear Europe Limited (``ICE Clear Europe'' or 
``Clearing House'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been primarily 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. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    ICE Clear Europe proposes to amend its end-of-day price discovery 
policies and procedures for credit default swap (``CDS'') contracts to 
incorporate certain enhancements.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, ICE Clear Europe included 
statements concerning the purpose of and basis for 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, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    ICE Clear Europe proposes to amend its CDS End-of-Day Price 
Discovery Policy (the ``EOD Price Discovery Policy'') to make certain 
enhancements to the end-of-day submission and firm trade process for 
CDS contracts. ICE Clear Europe also proposes to adopt a new Price 
Submission Disciplinary Framework (the ``Disciplinary Framework'') that 
addresses missed price submissions by Clearing Members for CDS 
contracts. ICE Clear Europe does not otherwise propose to change its 
Clearing Rules or Procedures in connection with these amendments.
    Under the EOD Price Discovery Policy, ICE Clear Europe currently 
utilizes a ``cross and lock'' algorithm as part of its CDS price 
discovery process. Under this algorithm, standardized bids and offers 
derived from Clearing Member submissions are matched by sorting them 
from highest to lowest and lowest to highest levels, respectively. This 
sorting process pairs the Clearing Member submitting the highest bid 
price with the Clearing Member submitting the lowest offer price, the 
Clearing Member submitting the second highest bid price with the 
Clearing Member submitting the second-lowest offer price, and so on. 
The algorithm then identifies crossed and/or locked markets. Crossed 
markets are the Clearing Member pairs generated by the sorting and 
ranking process for which the bid price of one Clearing Member is above 
the offer price of the matched Clearing Member. The algorithm 
identifies locked markets, where the bid and the offer are equal, in a 
similar fashion.
    Whenever there are crossed and/or locked matched markets, the 
algorithm applies a set of rules designed to identify standardized 
submissions that are ``obvious errors.'' The algorithm sets a high bid 
threshold equal to the preliminary end-of-day (``EOD'') level plus one 
bid-offer width (``BOW''), and a low offer threshold equal to the 
preliminary EOD level minus one BOW. The algorithm considers a Clearing 
Member's standardized submission to be an ``obvious error'' if the bid 
is higher than the high bid threshold, or the offer is lower than the 
low offer threshold.
    Clearing Member pairs identified by the algorithm as crossed or 
locked markets may be required from time to

[[Page 48370]]

time, under the EOD Price Discovery Policy, to enter into cleared CDS 
trades with each other (``Firm Trades''). Currently, ICE Clear Europe 
excludes standardized submissions it identifies as obvious errors from 
potential Firm Trades and does not use these submissions in its 
determination of published EOD levels.
    ICE Clear Europe proposes to impose certain consequences under the 
Firm Trade methodology for Clearing Members providing price discovery 
submissions deemed to be obvious errors. As revised, the process for 
determining potential Firm Trades will now include all standardized 
submissions, including those classified as obvious errors (and as a 
result submissions that are obvious errors may result in Firm Trades). 
However, obvious errors will not be used in the calculation of the 
final EOD level, as under the current framework. Thus, ICE Clear Europe 
will effectively execute its current EOD algorithm twice: initially in 
the same way it does today (eliminating obvious errors) to generate the 
final EOD levels, and again, without excluding obvious errors, to 
generate Firm Trades and related reversing transactions.\3\
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    \3\ A reversing transaction is a second cleared transaction with 
identical attributes to the initial Firm Trade, but with the buyer 
and seller counterparties reversed, and at that day's EOD price 
rather than the initial Firm Trade price.
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    To limit the potential exposure created through Firm Trades that 
include a bid or offer from an obvious error submission, ICE Clear 
Europe will adjust Firm Trade prices, where appropriate, to fall within 
a predefined band on either side of the EOD price such that the 
potential profit or loss (``P/L'') realized by unwinding the trade at 
the EOD level is capped.
    To prevent Clearing Members from receiving Firm Trades with large 
P/L impact in certain index instruments that are less actively traded, 
and for which it is therefore more difficult and/or more expensive to 
manage the associated risk, ICE Clear Europe will automatically 
generate reversing transactions at the end-of-day price level for 
specific index CDS instruments (i.e., for specific combinations of 
index/sub-index and series determined by the ICE Clear Europe risk 
department in consultation with the trading advisory committee). 
Currently, reversing transactions are only available for eligible 
single name CDS instruments.
    ICE Clear Europe is also revising the EOD Price Discovery Policy to 
remove the option for Clearing Members to provide end-of-day price 
submissions for single name CDS instruments in terms of spread and 
associated recovery rate. Under the revised approach, Clearing Members 
will be required to provide price submissions (or equivalent ``points 
upfront'' submissions) for all single name CDS instruments. Clearing 
Members may provide a recovery rate, which the Clearing House will use 
for purposes of its own analysis. Accordingly, the Clearing House will 
no longer need to convert spread submissions for single name 
instruments into a price level for purposes of the EOD price 
determination process. Various conforming changes have been made 
throughout the policy as a result.
    ICE Clear Europe also proposes to implement a new Disciplinary 
Framework, which addresses failures by a Clearing Member to provide 
required EOD price submissions for CDS Contracts in which they hold 
cleared open interest with the Clearing House (``Missed Submissions''). 
For purposes of the Disciplinary Framework, obvious errors (as 
described above) with respect to CDX index CDS contracts will also be 
treated as Missed Submissions (since such instruments are not subject 
to Firm Trade requirements). ICE Clear Europe will impose a cash 
assessment on Clearing Members for each Missed Submission, generally 
ranging from $1,000 to $4,000, depending on whether the Missed 
Submission related to an index or single-name, whether it occurred on 
an announced firm trade date and whether the related contract is 
actively traded. For single name CDS contracts, the framework also 
specifies an aggregate daily maximum assessment per Clearing Member for 
multiple Missed Submissions and a daily maximum assessment per Clearing 
Member per risk sub-factor.
    As part of a new summary assessment process, ICE Clear Europe will 
determine on a monthly basis whether a Clearing Member has any Missed 
Submissions and provide the Clearing Member a notice of assessment with 
details of such Missed Submissions. The notice of assessment will 
include information about the date, type, quantity and assessment 
amount for the relevant Missed Submission(s). The Disciplinary 
Framework also provides a procedure for a Clearing Member to dispute a 
notice of assessment. A Clearing Member will have fifteen days from the 
notice of assessment to dispute the notice or seek to have it waived or 
rescinded. The Clearing House may grant a waiver of an assessment for 
certain specified reasons. A conditional waiver may be granted for the 
first instance of a Missed Submission for a particular instrument, 
provided that the Clearing Member does not have another Missed 
Submission in that instrument within 90 days. The Clearing House may 
grant an unconditional waiver where Missed Submissions result from 
extraordinary circumstances outside of the Clearing Member's control, 
such as market-wide disruptions. The imposition of a cash assessment on 
a Clearing Member does not preclude ICE Clear Europe from taking any 
other disciplinary action against a Clearing Member under the Rules and 
Procedures, including for persistent failures to meet the requirements 
of the EOD Price Discovery Policy.
2. Statutory Basis
    ICE Clear Europe believes that the proposed amendments are 
consistent with the requirements of Section 17A of the Act \4\ and the 
regulations thereunder applicable to it. Section 17A(b)(3)(F) of the 
Act \5\ 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 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 EOD Price 
Discovery Policy, which is a key aspect of the risk management and 
daily settlement procedures of the Clearing House. In ICE Clear 
Europe's view, the changes will strengthen the incentive of Clearing 
Members to provide accurate end-of-day price submissions, by imposing 
new consequences under the Firm Trade Methodology for submissions that 
are obviously erroneous. The amendments will further incentivize 
accurate price submissions by imposing financial consequences on 
Clearing Members for Missed Submissions, through cash assessments under 
the new Disciplinary Framework. The amendments thus ensure Clearing 
Members are accountable for all price submissions and any failures to 
make submissions. This will promote the accuracy and integrity of the 
overall end-of-day pricing and settlement process. The amendments also 
contain certain other enhancements and clarifications to the end-of-day 
price submission process, as discussed above. Accordingly, ICE Clear 
Europe believes that the proposed rule change will promote the prompt 
and accurate clearance and settlement of securities transactions and 
derivative agreements,

[[Page 48371]]

contracts and transactions, within the meaning of Section 
17(A)(b)(3)(F).\6\
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    \4\ 15 U.S.C. 78q-1.
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    In addition, in ICE Clear Europe's view, the new Disciplinary 
Framework provides an appropriately tailored set of cash assessments 
for Missed Submissions by Clearing Members, in light of the importance 
of end-of-day price submissions to the Clearing House risk management 
and settlement procedures. The framework is thus consistent with the 
requirements of Section 17A(b)(3)(G) of the Act.\7\ The framework also 
provides a procedure for notifying Clearing Members of the details of 
any such assessments for Missed Submissions, and for Clearing Members 
to dispute and/or seek a waiver of such assessments. In ICE Clear 
Europe's view, this aspect of the framework is consistent with the 
requirements of Section 17A(b)(3)(H) of the Act.\8\
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    \7\ 15 U.S.C. 78q-1(b)(3)(G).
    \8\ 15 U.S.C. 78q-1(b)(3)(H).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed rule change would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The enhancements 
to ICE Clear Europe's price discovery process apply uniformly to all 
Clearing Members. As a result, ICE Clear Europe does not believe that 
the adoption of the policy amendments will adversely affect competition 
among Clearing Members, or the ability of market participants to clear 
contracts generally. The Clearing House also does not believe that the 
amendments will reduce access to clearing CDS contracts generally or 
limit market participants' choices for clearing CDS.
    The amendments may result in certain additional costs for Clearing 
Members that are required to enter into Firm Trades as a result of 
obvious errors in their submissions, or are subject to cash assessments 
as a result of Missed Submissions. ICE Clear Europe believes that these 
additional costs are warranted to enhance the integrity of the price 
submission process, and are in any event generally within the control 
of the Clearing Member. As a result, ICE Clear Europe does not believe 
the proposed amendments impose any burden on competition that is 
inappropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. ICE Clear Europe will notify the Commission of 
any written comments received by ICE Clear Europe.

III. Date of Effectiveness of the Proposed Rule Change 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 is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ICEEU-2015-013 on the subject line.

Paper Comments

     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-2015-013. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change 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 Web site 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 Web site at https://www.theice.com/clear-europe/regulation#rule-filings. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly.
    All submissions should refer to File Number SR-ICEEU-2015-013 and 
should be submitted on or before September 2, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-19757 Filed 8-11-15; 8:45 am]
 BILLING CODE 8011-01-P