Document ID: SEC-2021-0327-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: ICE Clear Europe, Ltd.
Posted Date: 2021-03-08T05:00Z

[Federal Register Volume 86, Number 43 (Monday, March 8, 2021)]
[Notices]
[Pages 13417-13427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-04678]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91240; File No. SR-ICEEU-2021-006]

Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change Relating to the ICE Clear Europe CDS 
Clearing Stress Testing Policy, CDS End of Day Price Discovery Policy, 
CDS Risk Model Description and CDS Risk Policy and CDS Parameters 
Review Procedures

March 2, 2021.
    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 February 23, 2021, ICE Clear Europe Limited (``ICE Clear Europe'' or 
the ``Clearing House'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule changes 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

    ICE Clear Europe Limited proposes to modify certain provisions of 
its CDS Clearing Stress Testing Policy, CDS End of Day Price Discovery 
Policy, CDS Risk Model Description and CDS Risk Policy (together, the 
``Documents'') and to adopt a new document titled CDS Parameters Review 
Procedures (the ``Parameters Procedures'').

II. Clearing Agency'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 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, 
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

(a) Purpose
    ICE Clear Europe is proposing to amend the Documents and institute 
the new Parameters Procedures principally to describe more fully 
certain existing Clearing House practices, as discussed herein. ICE 
Clear Europe is also proposing to make certain enhancements to CDS 
stress testing, specifically to incorporate the impact of the COVID-19 
pandemic into its stress testing framework.
CDS End of Day Price Discovery Policy
    The amendments to this policy would generally clarify the process 
to determine prices for a particular instrument when fewer than three 
Clearing Members have open interest in that instrument, in order to 
provide more reliable pricing in that scenario. The amendments would 
also make minor terminology updates to conform uses of defined terms, 
correctly reference various ICE Clear Europe personnel and operations 
and make similar typographical corrections throughout the document and 
add a new table.
    Currently, the CDS End of Day Price Discovery Policy states that if 
fewer than three CDS Clearing Members have cleared open interest in an 
instrument, ICE Clear Europe may require all CDS Clearing Members to 
provide a price submission for that instrument. ICE Clear Europe 
proposes to supplement this concept to provide more flexibility to 
ensure enough submissions to enable effective determination of reliable 
end-of-day prices and thereby facilitate an accurate and stable 
variation margin process. Specifically, the amendments are designed to 
produce more reliable prices by increasing the probability of receiving 
multiple submissions. As amended, the policy would state that ICE Clear 
Europe believes that tradeable quotes submitted by CDS Clearing Members 
are the preferred source of data and should be used where possible and 
reliable, meaning where there is more than one CDS Clearing Member with 
which the quote could be crossed. Where there are not enough CDS 
Clearing Members to enable tradeable quotes (i.e., quotes at which a 
member would transact) to be crossed with more than one CDS Clearing 
Member (i.e., fewer than three CDS Clearing Members

[[Page 13418]]

with open interest in the relevant instrument), then ICE Clear Europe 
would switch to rely on indicative quotes and would require these from 
all CDS Clearing Members. (For this purpose, an indicative quote is a 
reasonable estimate of the market price but does not necessarily 
reflect a price at which the member would transact.) When requesting 
indicative quotes in this manner, ICE Clear Europe would not require 
CDS Clearing Members to enter into firm-trades in these instruments. 
The minimum number of three CDS Clearing Members, below which 
indicative quotes would be used, would be subject to ongoing review by 
ICE Clear Europe as to whether this is the appropriate threshold given 
market circumstances.
    A new Table 4 showing an example of an assignment of index risk 
factors to market proxy groups would be added pursuant to the 
amendments relating to end-of-day bid-offer widths (``EOD BOWs'') for 
index instruments. The new table does not reflect a change in practice 
and is intended for clarity. The table would show the index risk 
factors for each of the CDX and iTraxx market proxy groups. A reference 
to Table 2 in the EOD BOWs section would be updated to Table 4. 
Existing references to Tables 4 through 7 would be respectively updated 
to Tables 5 through 8.
    In the governance section addressing material changes to the EOD 
price discovery methodology, spread-to-price conversion determinants or 
parameters, the amendments would clarify that review would be performed 
by the TAG (instead of the TAC) and the Product Risk Committee (instead 
of the Risk Committee). This amendment is intended to reflect current 
practice.
    Numerous minor typographical and similar updates would be made 
throughout the CDS End of Day Price Discovery Policy. For example, the 
term ``Clearing Participant'' would be updated to ``Clearing Member'', 
``CP'' would be updated to ``CM'' and ``Trading Advisory Committee'' 
(or ``TAC'') would be updated to ``Trading Advisory Group'' (or 
``TAG''), to be consistent with terminology used in the Rules and other 
ICE Clear Europe documentation. The statement that the trading desks at 
each self-clearing member (``SCM'') would be required to copy ICE Clear 
Europe on the intraday quotes they provide market participants via 
email would be updated to requested to copy. Certain outdated cross-
references would be removed. With respect to the red matters in the 
escalation and notification protocol for appetite metrics, the Board 
and Executive Risk Committee would be notified immediately instead of 
as soon as possible. Other minor clean-up changes would also be made to 
improve readability and clarity.
CDS Clearing Stress Testing Policy
    ICE Clear Europe is proposing to add new stress test scenarios to 
this policy and to make certain other clarifications and enhancements 
to the description of the stress-testing methodology in order to 
capture the large market moves experienced during the COVID-19 
pandemic, strengthen the CDS discordant stress test scenarios and 
better reflect the current governance structure related to stress 
testing.
Purpose
    The discussion of the purpose of Clear House stress testing 
practices, including as to how they are integrated into ICE Clear 
Europe's risk procedures and governance structure, would be revised to 
reflect the Clearing House's current governance framework, and 
specifically to reference the Model Oversight Committee (``MOC'') and 
to remove an outdated reference to the Board Risk Committee (``BRC''). 
The amendments would also provide that any terms not defined in the 
policy would be defined in the ICE Clear Europe CDS Risk Policy and the 
Rules, instead of only in the Rules.
Methodology
    The general methodology section of the policy would be amended to 
add a discussion of stress testing in the context of wrong way risk. 
For this purpose, positions in index risk factors and single-name risk 
factors that exhibit high levels of association with a Clearing 
Member's portfolio are combined in a sub-portfolio, which is subject to 
additional stress testing analysis. The amendments to this section do 
not reflect a change in Clearing House practice but are intended to 
better document existing practice.
    The amendments also revise the governance process where a scenario 
or portfolio in the standard set of stress scenarios is no longer 
applicable, or is superseded by new scenarios or portfolios, and the 
Clearing Risk Department wishes to retire or modify the outdated 
scenario or portfolio. In that case, the Clearing Risk Department would 
conduct an analysis to determine whether a change is significant, which 
would be reviewed by the Risk Oversight Department (``ROD''). The 
Board, or its delegated committee, would approve the significant 
decommissioning of scenarios, while the Model Oversight Committee 
(``MOC'') would approve the decommissioning of scenarios (if not 
significant) or recommend the decommissioning of scenarios to the Board 
if deemed significant. The amendment is intended largely to formalize 
current practice, and also reflect the role of the MOC under the 
Clearing House's Model Risk Governance Framework (the ``MRGF''). The 
existing description of the steps that the Clearing Risk Department 
would take in such a scenario (involving approval by the relevant risk 
committee) would be deleted. The amendments would also clarify that if 
the Clearing Risk Department wishes to add new scenarios or portfolios, 
the MOC must approve of the addition, but the Board's approval is not 
required. This is a change from the current procedure, under which it 
is sufficient to simply inform the CDS Risk Committee.
    Further, the amendments would also state explicitly that in stress 
testing and sensitivity testing, under the multiple Clearing Member 
default scenario, conditional uncollateralized loss-give-defaults 
(``LGDs'') resulting from Clearing Member single-name positions would 
also be explicitly incorporated. This reflects current practice.
Various Changes
    Various defined terms would be updated throughout the document. The 
CDS Product Risk Committee would be referred to as the CDS PRC instead 
of the CDS RC. Members or Clearing Members would be referred to as CMs. 
Throughout the document, references to Initial Margin would be updated 
to IM and references to Guaranty Fund would be updated to GF.
Changes to Predefined Scenarios; New COVID-19 Scenarios
    The introductory description of the predefined scenarios would be 
amended to clarify that the scenarios reflect a stress period of risk 
from 1 to 7 days (referred to in the policy as ``N''-day scenarios), 
taking into account the 5-day margin period of risk used in the 
existing margin methodology for house accounts and the 7-day margin 
period of risk used in the existing margin methodology for client 
accounts. The description of the magnitude of the base ``FX Stress 
Scenario'' would be amended to state that it reflects the greatest 
relevant N-day stress period (instead of five days).
    Overall, the changes to the stress testing scenarios, other than 
the addition of the new COVID-19 scenarios, are intended to more 
thoroughly describe the stress test

[[Page 13419]]

scenarios. The changes (including the addition of the COVID-19 
scenarios) are not expected to result in any changes in margin levels 
or other financial impact on the Clearing House or Clearing Members.
Extreme but Plausible Market Scenarios
    The amendments would update the description of the extreme but 
plausible market scenarios. The description of the 2008/2009 credit 
crisis scenario would be updated to state that the widening/tightening 
credit crisis spread scenarios are based on the greatest observed N-day 
(instead of five-day) relative spread increases/decreases expressed as 
percentages. The amendments would also clarify that the determination 
of the exact stress period is defined by the greatest observed spreads 
change of the Most Actively Traded Instruments (``MATI'') for each 
relevant sub-portfolio. The stress spread changes, defined for each 
Index, corporate and sovereign risk factor (``RF''), would be extracted 
from the market history for the MATI of the considered RF. Amendments 
would also clarify that the other three historically observed stress 
test scenarios from the 2008/2009 period would be based specifically 
around the period surrounding Lehman Brothers' default to capture the 
large market moves of that period. These amendments are intended to 
provide a more thorough description of these existing stress testing 
scenarios.
    The description of the Western European credit crisis scenarios 
would similarly be clarified to state explicitly that the scenarios 
replicate the stress market moves resulting from the concerns around 
the debt sustainability of several Eurozone countries. Widening/
Tightening Western European Credit Crisis Spread Scenarios would be 
based on the greatest observed Nday (instead of five-day) relative 
spread increases/decreases (which would no longer be restricted to the 
most actively traded instruments). Amendments would also clarify that 
the determination of the exact stress period would be defined by the 
greatest observed spreads change of the MATI for each sub-portfolio. 
The other three historically observed stress test scenarios would be 
based specifically around the second quarter of 2010 to capture the 
large market moves of that period. The spread shocks would be expressed 
in percentage for each RF. These amendments are intended to provide a 
more thorough description of these existing stress testing scenarios.
    The description of the Lehman Brothers Default Price Change 
Scenario would be expanded. The amendments would state that the 
scenario magnitudes are defined for each RF according to its sector 
classification and time to maturity of the considered instrument. The 
corresponding stress test Opposite LB Default Price Change Scenarios 
would be derived from the Lehman Brothers scenarios by means of 
multiplying the scenario result by a negative factor to reflect the 
reduced magnitudes of the observed price increases during the 
considered period. These amendments are intended to provide a more 
thorough description of these existing stress testing scenarios.
New COVID-19 Based Scenarios
    Given that moves in both spreads and prices were, generally, higher 
than other observed extreme but plausible stress test scenarios during 
the COVID-19 pandemic, ICE Clear Europe is proposing to add the 
following additional COVID-19 pandemic fear scenarios based on stress 
market moves experienced between February and April 2020:
     The COVID-19 Widening/Tightening Spread Scenarios, which 
would be based on the greatest observed N-day relative spread 
increases/decreases during the period. The determination of the exact 
stress period would be defined by the greatest observed N-day spread 
changes of the MATI for each sub-portfolio; and
     The COVID-19 Price Decrease Scenario would be defined in 
price space to maintain the stress severity during periods of low 
spread levels and high prices, when the IM requirements are expected to 
be lower. The scenario would be based on the greatest observed N-day 
relative price decreases during the aforementioned period. The 
determination of the exact stress period would be defined by the 
greatest observed N-day spread changes of the MATI for each sub-
portfolio. A corresponding stress test COVID-19 Price Increase Scenario 
would be derived from the price decrease scenario by applying factors 
for Indices and SNs to reflect the reduced magnitudes of the observed 
price increases during the considered period.
Discordant Scenarios
    The scope of discordant spread scenarios (for corporates and 
sovereigns) would be clarified. Specifically, the description of the 
corporate discordance spread scenarios would reflect that such 
scenarios are based specifically on discordant moves along the major 
European and North American 5Y on-the-run (OTR) indices. The amendments 
would also state that the corporate SNs and indices discordant spread 
scenarios, which reflect realizations when certain indices or sub-
indices for the EU region and certain U.S. OTR indices exhibited the 
greatest combined discordant change, would be created and applied to 
SNs and Indices. The amendments would further update references to 
indices used in stress scenarios and state that other stress scenarios 
would be based on discordant spread realizations across European 
Indices. The amendments would also note that other stress scenarios 
would reflect discordant spreads realizations among geographical 
regions. These amendments are intended to provide a more thorough 
description of existing stress testing scenarios.
Hypothetical Scenarios
    With respect to hypothetical scenarios, greater detail would be 
added to clarify that the curve inverting spread scenario is based on 
the largest widening shock among the 2008/2009 Credit Crisis Widening 
and the Western European Credit Crisis Widening for each RF. Similarly, 
the curve steepening spread scenario is based on the largest tightening 
shock among the 2008/2009 Credit Crisis Tightening and Western European 
Credit Crisis Tightening scenarios.
    New sectors and countries discordant scenarios would also be added. 
These scenarios would be designed to reproduce discordant moves across 
sectors and entities of different countries, noting that the large 
price moves in the oil benchmark products (especially WTI negative 
prices) in the first half of 2020 created asymmetric shocks to the 
energy and financials sectors compared to other sectors, which would be 
reflected in the Energy vs Other Sectors Discordant scenario. The five-
year spread shocks would be estimated at sector level, and the 
derivation of the shocks for the other tenors would be based on the 
tenor-specific inverting and steepening factors. The sector-specific 
shocks would then be applied to all RFs within the sector. The opposite 
stress scenario would also be considered for completeness. The spread 
shocks estimated for the clearable Western European Sovereigns would be 
applied to the European corporate SNs for each country. The opposite 
stress scenario would also be considered for completeness.
    Another hypothetical scenario, the forward-looking credit events 
scenarios, would be updated to clarify that the Clearing Member 
reference entity that would be considered would be different from the 
Clearing Member whose portfolio is subject to the stress test.

[[Page 13420]]

They would also add that the reference entity is assumed to enter in a 
state of default and thus create Loss Given Default (``LGD'') and that 
a reference entity is selected that creates the largest LGD exposure, 
rather than the greatest one-year EOD spread level.
Extreme Market Scenarios
    The amendments would clarify that extreme steepening and extreme 
inverting scenarios would be created from crises steepening and crises 
inverting scenarios by doubling the shocks for inverting scenarios and 
applying a factor to steepening scenarios. The amendments would also 
incorporate the new COVID-19 historical scenarios into the 
determination of extreme scenarios, similar to the calculation of 
extreme scenarios based on the LB default scenario.
    With respect to the guaranty fund (``GF'') scenarios, greater 
specificity would be provided to clarify that the stress test scenarios 
would be designed to account for the occurrence of credit events for 
two Clearing Member risk factor groups (``RFGs'') and three non-
Clearing Member RFGs. The amendments would also clarify that the GF 
scenario considers an even more extreme case in which five RFGs undergo 
credit events (changing a reference from single names to the more 
accurate RFG). The chart setting out the quantile ratios for the 
student t distributions with different shape parameters would be 
removed as unnecessary.
    The GF adequacy analysis would be amended to state that as the 
number of defaults of reference entities is one of the major risks in 
the CDS clearing service, the Clearing Risk Department considers 
complementary extreme scenarios where a combination of up to five RFGs 
for up to five Clearing Members would be assumed to default before 
simulating spreads widening and tightening on the non-defaulting 
entities in order to fully deplete the GF. The amendments would explain 
that the scenario aims at providing estimates of the level of 
protection achieved through initial margin (``IM'') and GF in relation 
to multiple defaults. This amendment is intended to clarify the stress-
testing description but does not reflect a change in current stress 
testing practice.
Portfolio Selection
    The description of the process for determination of sample 
portfolios for stress testing would be updated to reflect that ICE 
Clear Europe would derive the portfolio from the currently cleared 
portfolios by considering only positions in index RFs and sectors that 
exhibit a high degree of association with the considered Clearing 
Member, in particular indices, sovereigns and financials RFs (rather 
than considering exactly the opposite positions from the currently 
cleared portfolio). The constructed sub-portfolios would be subject to 
the stress test analysis with the standard set of stress test 
scenarios. The aim of the stress analysis with the sample portfolios 
would be to provide estimates to the potential exposure of Clearing 
Members to RFs generating general wrong way risk (``WWR''). The current 
reference to special strategy sample portfolios would be deleted, and a 
new provision would address application of stress testing scenarios to 
expected future portfolios upon the launch of new services and RFs. The 
stress test analysis would be presented and reviewed by the CDS Product 
Risk Committee prior to launch of the new RFs.
Interpretation and Review of Stress-Testing Results
    The interpretation and review of the stress-testing results section 
would be amended to provide that enhancements to stress scenarios would 
be discussed and approved based on the governance outlined in the MRGF. 
The amendments would also clarify that the two greatest affiliate 
groups' (``Cover-2'') uncollateralized stress loss associated with 
scenarios characterized as extreme but plausible market scenarios 
should be covered by funded default resources (excluding potential 
assessments). If Cover-2 protection under these scenarios is not 
achieved, additional funds could be required to cover the shortfall and 
enhancements to the current risk methodology would be considered. The 
amendments would further provide that the Board and its delegated 
committees (instead of the CDS Risk Committee and Board Risk Committee) 
would be provided with information as to the stress test results as 
necessary or appropriate to perform their duties. The amendments are 
intended to allow the Board the flexibility to determine the 
appropriate committees for review of stress testing.
    Certain outdated statements would be removed, including matters 
relating to governance that are addressed in the MRGF as well as 
outdated references to certain examples or specific committees. As 
discussed in the methodology section above, any related deficiency 
analysis and review would be undertaken by the MOC instead of the 
Executive Risk Committee, in accordance with the procedures of the 
MRGF. The stress testing report would be presented to the CDS Product 
Risk Committee instead of the CDS Risk Committee during scheduled 
meetings (instead of scheduled monthly meetings).
    The amendments would specifically remove the following statements:
     The statement as to the stress scenarios that lead to 
model review include;
     the statement that the hypothetical losses generated in 
response to stress scenarios are compared to the available margins on 
deposit and Guaranty Fund contributions and if applicable, the ICE 
Clear Europe contribution to the risk waterfall and the funds available 
through the one-time limited assessment from each Clearing Member;
     the statement that ICE Clear Europe is responsible for 
identifying in which zone a particular stress test result falls; and
     statements as to certain functions of the Clearing Risk 
Department, Clearing Risk senior management, ERC, CDS RC, the BRC and 
the Board, which have been replaced by the role of the MOC and the 
other revised governance arrangements discussed above.
Policy Governance and Reporting
    The policy governance and reporting section would be amended to 
remove the requirement that the policy be reviewed annually by the CDS 
Risk Committee and only would require review by the Board Risk 
Committee. Material changes to the policy would be discussed by the MOC 
(instead of the ERC) and approved by the Board on the advice of the CDS 
Product Risk Committee and the Board Risk Committee prior to 
implementation. These amendments are intended to be more consistent 
with other Clearing House governance processes and formalize existing 
arrangements to ensure that appropriate bodies are engaged in policy 
governance.
Appendix
    The FX stress test scenario amendments would reflect the greatest 
N-day relative depreciation (instead of five-day) and would remove the 
specific dates. This is intended to be a conforming change consistent 
with the other amendments to use an N-day period described above.
CDS Risk Policy
    The amendments to this policy would describe more fully the 
existing use of the Clearing House's Monte Carlo (``MC'') simulation 
approach in the context of establishing initial margin and GF 
requirements. The amendments would also generally clarify the use and

[[Page 13421]]

source of intraday prices and make other drafting improvements and 
clarifications, including through revising certain descriptions and 
providing certain defined terms. The amendments simplify certain cross 
references to the CDS Risk Model Description throughout the policy by 
removing unnecessary section references (to facilitate keeping the CDS 
Risk Policy up to date). In general, the amendments are intended to 
provide a clearer explanation of the Clearing House's methodology for 
IM and GF requirements and are not intended to materially change the 
methodology or to change the levels of IM and GF requirements.
    With respect to IM, the amendments would clarify the description of 
the IM methodology by stating that the risk protection measure is based 
on using a combined approach featuring a stress-based spread response 
Value-at-Risk (``VaR'') measure and a Monte Carlo (``MC'') simulation 
spread response VaR measure. They would also add that model performance 
would be monitored through stress testing and sensitivity analyses. The 
amendments are intended to more clearly reflect existing practices, and 
would not change the IM methodology.
    With respect to the spread response requirements description, the 
amendments would provide greater clarity that the spread response risk 
requirement that captures credit spread fluctuations is a stress-based 
spread response that computes Profit/Loss (``P/L'') distributions from 
a set of simulated hypothetical (forward looking) credit spreads 
scenarios.
    The description of the stress-based spread response scenarios would 
be modified by rewording the introduction to improve readability and to 
clarify the applicable benchmark tenors estimated for all the Risk Sub-
factors, replacing certain outdated references to tenors. The 
amendments are intended to reflect and more clearly describe current 
practices.
    A new section would be added to describe in more detail the Monte 
Carlo simulation approach currently used by the Clearing House. The 
amendments would provide that in this approach, ICE Clear Europe 
generates spread scenarios by means of student-t copulas to connect the 
univariate distributions that describe spread fluctuations. The 
student-t copulas reflect historical estimates of Kendall [tau] 
correlation coefficients to simulate spread log-returns.
    The simulated copula scenarios are used to arrive at hypothetical 
spread levels by means of estimated univariate spread log-return 
distributions. Each instrument would be repriced at the simulated 
spread levels to generate a scenario instrument P/L based on post-index 
decomposition positions. For each scenario, instrument P/Ls would be 
aggregated according to pre-defined RFs and sub-portfolio position sets 
in order to obtain RF and sub-portfolio P/Ls.
    These distributions would be used to estimate the RF and sub-
portfolio 99.5% VaR measures at a chosen risk horizon. The portfolio 
level integrated Spread Response would be estimated as a weighted sum 
of RF and sub-portfolio 99.5% VaR measures.
    The description of the anti-procyclicality considerations would be 
updated to provide that the stress price changes would be derived from 
the price-based extreme but plausible stress test scenarios under the 
revised CDS Stress Testing Policy, as described above, instead of only 
from the market behavior during and after the Lehman Brothers default 
period.
    Throughout the policy, references to the risk department would also 
be updated to the Clearing Risk Department.
    The amendments also provide that the Clearing Risk Department may 
recommend margin methodology changes based on the governance procedures 
outlined in the MRGF, consistent with the requirements of that 
framework. The amendments would also note that in the event that ICE 
Clear Europe is accepting sizable positions through the weekly back-
loading process in the context of margin calls, it will pre-collect IM 
and mark-to-market changes, instead of just IM.
    With respect to mark-to-market margin (``MTMM''), the description 
regarding the determination of cash owing, the payment of MTMM, the 
timing of margin calculations and the making of MTMM calls would be 
removed as unnecessary operational detail. These matters are also 
generally covered in the CDS Risk Policy and Finance Procedures. 
Similarly, the discussion of the requirements and rights of a Clearing 
Member upon a change in MTMM balance (i.e. to pay or be credited cash) 
would be deleted as unnecessary detail.
    With respect to intra-day monitoring, the amendments would provide 
that ICE Clear Europe would ensure the quality of the intraday prices 
by monitoring and comparing the quotes received with the intraday 
prices of the transactions cleared at ICE CDS clearing houses. ICE 
Clear Europe could also compare intraday prices with those of another 
third-party provider. The comparison process would be carried out 
before issuing intraday margin calls. The description of the intraday 
risk limit calculation would be updated such that it would be based on 
40% of the total IM requirements, with a minimum amount corresponding 
to the minimum GF contribution and would be capped at a monetary amount 
reviewed in conjunction with the ICE Clear Europe senior management and 
the CDS Product Risk Committee. The precise monetary amount would be 
removed from the policy to give the Clearing House flexibility if it 
determined it was appropriate to review and reconsider this amount in 
the future in conjunction with senior management and the BRC. There is 
currently no plan to change the existing EUR 100 million cap in 
practice. The procedure for intra-day margin calls would be further 
clarified by removing a statement that where there has been a 50% 
erosion of the Intraday Risk Limit, the Risk Department will 
investigate the matter. In ICE Clear Europe's view, a separate step at 
the 50% erosion level is unnecessary, as ICE Clear Europe will not take 
any particular action at that level. Once the erosion exceeds 50%, the 
Clearing Risk Department is required to inform the relevant CDS 
Clearing Member that it may be subject to an intraday margin call (and 
in so doing the Clearing Risk Department will make any necessary 
investigations of the matter).
    The statement that the Risk Management Department will notify the 
ICE Clear Europe Treasury Department of the ``special'' margin call 
would be removed as an operational detail not necessary for the policy. 
Generally, the Clearing Risk Department sets the margin level and would 
communicate it to other departments in the ordinary course, as it does 
for any change of margin level.
    With respect to the GF, the amendments would update the drafting of 
certain language (including the reference to the ``Cover 2'' 
requirement) to remove certain unnecessary detail. With respect to 
related anti-procyclicality considerations, the amendments would refer 
to the extreme but plausible price-based stress test scenarios 
described in the revised CDS Clearing Stress Testing Policy, as 
discussed above. Amendments would also provide that the GF allocation 
process is performed by the Clearing Risk Department on a weekly basis 
rather than every Thursday and based on the previous business day's 
close of business positions rather than Wednesday's close of business 
positions. The amendments would also

[[Page 13422]]

clarify that the requirement that a portion of the GF be in USD is 
intended to accommodate all USD-denominated CDS contracts, not merely 
sovereign CDS contracts . . . The current numerical example of GF 
calls/collection would be removed as unnecessary.
    With respect to back-testing, the amendments provide if the model 
calibration consistently demonstrates exceptions outside of the 
coverage level, the Clearing Risk Department would review the models 
and recommend revisions following the governance procedures outlined in 
the MRGF.
    Pursuant to the amendments, the stress-testing section would add 
that the historical data would account for COVID-19 outbreak fear, 
consistent with the changes to the CDS Stress Testing Policy discussed 
above.
    The amendments would update certain terms throughout the document 
as follows: ICE Clear Europe would be referred to as ICEU; Member, 
member or Clearing Member would generally be updated to CM; Risk Model 
Description would be updated to CDS Risk Model Description; CDS Risk 
Committee would be updated to CDS Product Risk Committee; Risk 
Department, Risk Management Department or Clearing Risk department 
would be updated to Clearing Risk Department; General Wrong Way Risk 
would be referred to as ``GWWR''; Guaranty Fund would be updated to GF, 
Specific Wrong Way Risk would be abbreviated as SWWR; Model Oversight 
Committee would be given the acronym ``MOC''; the Model Risk Governance 
Framework would be given the acronym ``MRGF''; Initial Margin would be 
updated to IM; Dollar would be updated to USD; CDS Back Testing 
Framework would be updated to Policy; a Risk Oversight Committee 
reference would be updated to ROC; CDS Risk Product Committee and CDS 
RC would be respectively updated to CDS Product Risk Committee and CDS 
PRC; and Risk Committee would be updated to CDS PRC. Certain other 
typographical corrections would be made.
CDS Risk Model Description
    This document was amended in May 2019 (the ``2019 Amendments'') and 
additional amendments are currently being proposed (the ``Current 
Amendments''). As discussed below, the Current Amendments would:
     Clarify the treatment of volatility estimates for the 
Recovery Rate Sensitivity Requirement (``RRSR''), risk factor 
calibration and the raw data cleansing process; and
     add detail regarding the use of ICE Clear Europe cleared 
volume in the Concentration Charge threshold review.
     As discussed below, the 2019 Amendments:
     enhanced the calculation of the WWR threshold;
     clarified the parameter estimation of the recovery rate 
sensitivity requirement;
     clarified the discussion around model testing;
     added a section to explicitly refer to the assumption 
around the use of the same time series for IM and GF distributions in 
the CDS Risk Model; and provided that the interest rate sensitivity 
requirement of the model reflects a time horizon of five days for house 
accounts and seven days for client accounts.
    With the exception of the changes to the calculation of the WWR 
threshold, the amendments are in the nature of clarification and 
improving descriptions of the Clearing House's existing methodology, 
and do not constitute a change in the methodology. The enhancement of 
the calculation of the WWR threshold, as discussed below, while a 
change from prior practice, is expected to have an immaterial effect on 
margin levels.
The 2019 Amendments
    The following is a description in further detail of the 2019 
Amendments to the CDS Risk Model.
Model Design and Development
    The amendments updated the description of the interest rate 
sensitivity requirement component of the IM model to add that the 
changes captured in the discount default-free terms structure used for 
pricing the cleared instruments are over a certain time horizon (five 
days for house accounts and seven days for client accounts). This 
amendment documented existing practice.
Initial Margin Methodology
    With respect to IM, the amendments updated the loss given default 
risk analysis to specify initial values of certain parameters and to 
note that certain parameters are reviewed by the Risk Working Group on 
at least a monthly basis.
    With respect to the haircut applied as part of the multi-currency 
portfolio treatment methodology, the amendments clarified that in order 
to provide consistency and uniformity in the parameters applied to the 
CDS risk model, ICE Clear Europe adopted the same (more conservative) 
haircut in line with ICE Clear Credit LLC. This amendment did not 
change existing practice and was intended to strengthen the IM 
methodology by documenting existing practice.
    Similarly, with respect to the foreign exchange haircut applied to 
periodic adjustments to the GF, the amendments also clarified that in 
order to provide consistency and uniformity in the parameters applied 
to the CDS risk model, ICE Clear Europe adopted the same (more 
conservative) haircut in line with ICE Clear Credit LLC. This amendment 
also did not change existing practice and was intended to strengthen 
the IM methodology by documenting existing practice.
Monte Carlo Implementation
    Amendments were made to clarify and simplify the overall 
description of the Monte Carlo implementation. The amendments were not 
intended to reflect a change from current practice, but rather provide 
a clearer description of the existing implementation. Specifically, ICE 
Clear Europe believes that the revised description provides a more 
practical, and less theoretical, explanation of the Monte Carlo 
implementation that will facilitate replication and validation of the 
implementation by third parties.
    Among other clarifications, the revised description states 
explicitly that the final spread response requirement would be the most 
conservative requirement in the specified stress-based spread response 
equation, which is consistent with current practice. Certain 
subsections of the Monte Carlo description, including those relating to 
the discussion of matrix decomposition, were deleted as unnecessary in 
light of the description of the implemented model. The amendments 
updated the copula simulation description to provide further detail as 
to the determination and use of the linear correlation matrix and 
construction of student-t random variables and vectors for the 
production of relevant scenarios. The existing description of the 
conditional block matrix simulation framework and full matrix 
simulation framework were revised to provide a more simplified 
description of the two-step conditional simulation approach that is 
currently used by the Clearing House. A section describing copula 
parameter estimation for purposes of multivariate distribution was 
added while the description of simulation for standardized spread log 
returns was removed as unnecessary. The model parameters section was 
removed (with relevant parameters being addressed in the Parameters 
Procedures as discussed below). Overall, these changes were

[[Page 13423]]

intended to more clearly reflect the current model, and would not 
represent a change in methodology.
    The Risk Measures section was amended to reflect existing practice 
that each cleared portfolio would be initially split into sub-
portfolios based on common features in order to obtain risk estimates 
reflective of the market behavior and default management practices. The 
definitions of the sub-portfolios and their respective risk horizons 
would be periodically reviewed by the ICE Clear Europe Risk Management 
department and updated upon consultation with the Product Risk 
Committee.
    More detail was provided with respect to the use of simulated P/L 
scenarios, combined with the post-index-decomposition positions related 
to a given RF, to generate a currency-specific RF P/L vector. Each risk 
factor will be attributed to only one sub portfolio and all instruments 
related to a given risk factor would be denominated in the same 
currency. The multi-currency risk aggregation approach will be applied 
to risk factors within the European Corporate and U.S. Corporate sub-
portfolios denominated in EUR and USD currencies, respectively. A 
diagram would be added to demonstrate a bivariate simulation aspect of 
the risk aggregation approach. This change was intended to document 
existing practices.
    The Monte Carlo Engine Setups subsection and Conclusion subsection 
to the Monte Carlo Implementation section were deleted for improved 
clarity as content relevant to the implementation is addressed more 
clearly in other sections, and the prior description of the system or 
engine does not, in ICE Clear Europe's view, add useful information 
beyond the other aspects of model description.
    Overall, these amendments generally did not represent a change in 
current operation of the MC component of the risk model.
Time Series for IM and GF Distribution
    A section explaining the existing use of the same time series for 
IM and GF distribution was added. The approach is designed to be 
conservative and ensure that the portfolio loss at 99.75% quantile 
(used for GF determination) would be always greater than 99.5% quantile 
loss (used for IM determination). The approach also avoids unnecessary 
operational complexity. The validity of the assumption is monitored 
through the stress test impact analysis. The amendments were intended 
to document existing practices and therefore were not expected to have 
a material impact.
Current Amendments
    The following is a description in further detail of the Current 
Amendments to the CDS Risk Model.
Initial Margin Methodology
    The amendments clarify the source of certain market risk transfer 
activity data used in the concentration charge threshold 
parameterization. The amendments also update the loss threshold 
calculation in the determination of specific WWR and general WWR (to be 
based on price minus recovery rate as opposed to one minus recovery 
rate). Although the change makes the WWR calculation more precise, the 
monetary impact on margin requirements is expected to be immaterial 
(and near zero). The amendments would generally strengthen the 
precision of the Initial Margin methodology based upon independent 
validation findings.
    The amendments would provide additional detail with respect to the 
volatility floor value used in the IM methodology. The amended 
description would provide that the volatility floor is estimated based 
on the average overlapping five-day absolute change of recovery rates 
(RRs) for a set of defaulted names. The defaulted names have a long 
time series of observed RRs (i.e. more than a year) and comprise a 
stress period of 2009-2012. The Clearing Risk Department would be able 
to review the estimated parameters in case of the availability of 
sufficient long time series of observed RRs. This is consistent with 
existing practice and intended to strengthen the IM methodology by more 
clearly documenting the practice.
    The amendments would also clarify that with respect to the 
concentration charge threshold, the market risk transfer activity data 
obtained from the Depository Trust & Clearing Corporation specifically 
contains both bilateral positions and ICE cleared positions. This is 
consistent with existing practice and intended to strengthen the IM 
methodology by more clearly documenting the practice.
Anti-Procyclicality Measures
    The amendments would modify the approach to anti-procyclicality of 
spread response requirements to be calibrated based on historically 
observed extreme but plausible stress test scenarios in price space 
defined in the revised CDS Stress Testing Policy, as discussed above, 
which include various stress scenarios including the Lehman Brothers' 
default and COVID-19 outbreak. This broadens the current anti-
procyclicality approach, which is based specifically on the Lehman 
Brothers' default scenario. The amendments are intended to enhance the 
anti-procyclicality approach to address multiple price-based scenarios 
as the Lehman Brothers' default scenario alone may not be sufficient. 
In particular, the amendments are intended to incorporate the Covid-19 
stress scenario, in light of experience during the pandemic. Amendments 
also reflect the 20% portfolio gross margin floor required under 
relevant European regulation.\3\
---------------------------------------------------------------------------

    \3\ European Market Infrastructure Regulation (EMIR) Article 27.
---------------------------------------------------------------------------

Monte Carlo Implementation
    The amendments would clarify that in the MC implementation, 
distributions are based on simulated constant maturity CDS spread 
scenarios, and that instrument profits or losses are calculated by re-
pricing instruments at their coupons as well as their implied recovery 
rates.
    This change is intended to document existing practices.
Data
    The amendments would clarify certain data fallbacks used by the 
Clearing House when the normal established EOD spread data is not 
available. Consistent with current practice, the amendments would 
provide that if CDS spreads are not available using the usual data 
sources, then the ICE Clear Europe Clearing Risk Department would use 
proxy log-returns of existing clearable risk sub-factors from a similar 
or correlated industry/sector. In case ICE Clear Europe rolls out risk 
factors already cleared at ICE Clear Credit, the existing CDS spreads 
time series would be used directly after reviewing the back-test 
results. The amendments would also clarify that certain CDS spread time 
series are available by risk sub-factor for the relevant benchmark 
tenors.
    The amendments would provide additional detail as to the 
collection, analysis and back testing of relevant data for new risk 
sub-factors. Pursuant to the amendments, if new risk subfactors are to 
be rolled out, ICE Clear Europe would collect prices from the Clearing 
Members on the benchmark tenors as per normal EOD price discovery 
process before making the contracts clearing eligible. The Clearing 
Risk department would be responsible for reviewing the fixed maturity 
time

[[Page 13424]]

series data on the benchmark tenors until the first day of the price 
collection.
    The backfilling of missing data would be performed in log-return 
space derived from the available EOD fixed-maturity spread levels. In 
general, the 5Y tenor time series would always be available. If the 
original log-returns time series presents incomplete data for less 
actively traded tenors for only a few days, then interpolation/
extrapolation techniques would be applied to derive the missing data.
    Once fixed maturity time series are complete, ICE Clear Europe 
Clearing Risk Department would perform back-tests on hypothetical 
trading strategies and stress tests on hypothetical portfolios (i.e., 
by injecting bilateral positions extracted from DTCC on the sub-risk 
factor to roll out into cleared portfolios of Clearing Members) in 
order to further ensure that time series for the new risk sub-factors 
are appropriate to calibrate the risk models. The results of the 
analyses would be presented to the CDS Product Risk Committee.
    Fixed maturity time series would be transformed to constant 
maturity time series (``CMTS'') to eliminate the impact of semi-annual 
rolls. The amendments provide further detail as to the manner in which 
CMTS series are determined and used for index and single-name risk 
factors. These amendments are intended to provide further clarity to 
the process as described in the Risk Model Description, but not 
significantly change current Clearing House practice, consistent with 
the existing Risk Model Description.
    The amendments would also provide that back-testing results would 
be available to assess the quality of time series as well as the 
performance of the calibrated models (instead of just the latter).
    Overall, these amendments relating to data are intended to better 
document existing practices and therefore are not expected to change 
Clearing House operation.
Testing
    The Testing section would be amended to provide that tests would be 
broadly grouped into the following categories: Stress tests; back-
tests; sensitivity tests; anti-procyclicality tests; and benchmarking. 
The amendments are generally intended to reflect, and be consistent 
with the ICE Clear Europe CDS Back-Testing Policy, CDS Clearing Stress-
Testing Policy, CDS Parameters Review Procedures and Pro-cyclicality 
Framework, and further details of testing are provided in those 
documents. With respect to benchmarking, as currently described in the 
Risk Management Model Description, ICE Clear Europe would benchmark the 
spread response model against the Model Carlo simulation approach. 
Certain existing details regarding back testing of the core model 
components, comparing the calibrated recovery rates used in the jump to 
default requirement and actual market data, assessing whether the 
assumed stress scenario adopted to size the GF is fit for purpose, 
testing the liquidity component of the model, assessing measures to 
mitigate the procyclicality of the margins and testing margin 
sensitivity would be removed as that detail is contained in the ICE 
Clear Europe Back-Testing Policy, CDS Clearing Stress-Testing Policy, 
CDS Parameters Review Procedures and Pro-cyclicality Framework. The 
amendments do not represent a substantive change in ICE Clear Europe's 
approach to testing but are intended to clarify the Risk Model 
Description and to enhance it by more clearly stating relevant 
assumptions.
Other Changes Throughout the Documents
    Minor typographical and drafting updates are also proposed 
throughout the Documents, including updating references to Clearing 
Participants (or CPs) to Clearing Members (or CMs) to be consistent 
with the Rules, references to Trading Advisory Committee (or TAC) or 
Trading Advisory Group (or TAG) to reflect that the TAG is not 
technically a Clearing House committee, and Risk Committee to Product 
Risk Committee or CDS Product Risk Committee, as appropriate, to 
reflect the correct name of that existing committee.
CDS Parameters Review Procedures
    ICE Clear Europe proposes to formalize certain existing practices 
and procedures for calibrating and reviewing the core parameters and 
underlying assumptions of its Risk Management (``RM'') model that are 
not explicitly described in its CDS Risk Model Description and CDS Risk 
Policy into a new Parameters Procedures document. The Parameters 
Procedures thus generally are not expected to change existing Clearing 
House practice.
Parameters Setting and Calibration
    ICE Clear Europe's Parameters Procedures would discuss the process 
of setting and reviewing the model core parameters and their underlying 
assumptions. The model requirements include Spread Response (``SR'') 
requirements, Jump-To-Default (``JTD'') requirements, basis risk 
requirements, interest rate (``IR'') sensitivity requirements, 
liquidity charge requirements, and concentration charge requirements.
Spread Response
    The Parameters Procedures would describe the parameters (and 
related process for reviewing and updating those parameters) that are 
associated with the Spread Response components of the CDS risk model, 
including as to applicability (index or single name or both), level of 
granularity (e.g., risk factor), update frequency and the source of the 
parameter estimations.
    Time series associated with constant maturity benchmark tenors 
would be analysed and the distributions that describe the fluctuations 
of the benchmark tenors calibrated. The statistical parameters update 
would be performed at least on a monthly basis and controlled and 
managed through ICE Clear Europe internal systems.
    The monitoring of the stress period selected for the scale 
parameter would be performed on a monthly basis in accordance with the 
CDS Risk Model Description. Proposed changes to the stress period would 
be reviewed by the Clearing House's Clearing Risk Department with its 
Risk Working Group and MOC.
Jump-to-Default Requirement Parameters
    The parameters impacting the JTD requirement are categorized as 
either LGD or WWR parameters. The Parameters Procedures would explain 
how, in order to measure credit event losses, the Clearing House's Risk 
Department constructs JTD scenarios in terms of anticipated recovery 
rate (``RR'') levels (``RR scenarios''). The Parameters Procedures 
would describe RR scenarios and estimations for corporate SNs, sectors, 
and sovereign reference entities, and notes foreign exchange rate risk 
considerations with respect to sovereign reference entities. The 
Parameters Procedures would require ICE Clear Europe to estimate and 
review the LGD parameters at least monthly and describes the associated 
governance process, noting the reviewers and any prerequisites to the 
implementation of parameter updates.
    The Parameters Procedures would also detail the process of setting 
and reviewing the WWR parameters. The Parameters Procedures would 
contain information regarding the parameters that would be used to 
quantify WWR dependence and to compute WWR JTD requirements.

[[Page 13425]]

Basis Risk Requirements
    The Parameters Procedures would discuss how the Clearing House's 
Risk Department maintains and monitors hypothetical portfolios 
representing basis trades between cleared index and single-name 
instruments. Basis risk is calibrated by comparing the P/Ls of such 
portfolios to estimated IM requirements, excluding any concentration 
charges.
Interest Rate Sensitivity Requirements
    The Parameters Procedures would contain information on the 
estimation and the review of the parameters that serve as inputs to the 
IR sensitivity component of the risk model. The IR sensitivity 
component accounts for the risk associated with changes in the default-
free discount term structure used to price CDS instruments. With 
respect to the IR sensitivity requirement parameters, the Parameters 
Procedures would specify how the risk department estimates the up and 
down parallel shifts for the US Dollar and Euro default-free discount 
term structures. The Parameters Procedures would direct ICE Clear 
Europe to estimate and review the IR sensitivity requirement parameters 
at least monthly.
Liquidity Charge
    The Parameters Procedures would explain the process of setting and 
reviewing parameters for the liquidity charge component of the risk 
model. With respect to index instruments, the Parameters Procedures 
would address the determination of bid/offer parameters from the 
default spread width matrix and other assumptions about liquidation 
cost of an index portfolio, and address procedures for review of that 
matrix. The Parameters Procedures would also describe the parameters 
used in determining bid/offer widths for single names, including the 
use of price-based floor levels and spread-based volatility measures. 
The Parameters Procedures require the Clearing House to review the 
liquidity charge parameters at least monthly.
Concentration Charge
    The Parameters Procedures would discuss the estimation and the 
review of the concentration charge parameters, including detailing how 
the Risk Department establishes series-specific or SN-specific 
concentration charge threshold levels for each index or SN Risk.
    Factor (``RF''), and how the Risk Department estimates 
concentration charge growth rates that determine how quickly 
concentration charges increase with position size. The Parameters 
Procedures direct the Clearing House to estimate and review the 
concentration charge parameters at least monthly.
Sensitivity Analysis
    The Parameters Procedures would detail the sensitivity analyses 
that the Clearing House performs to explore the sensitivity of the RM 
system's outputs to certain model core parameters that are calibrated 
on an ad-hoc basis and to alternative data analyses and parameter 
estimation techniques. The Parameters Procedures also provide for 
summary reports of relevant analyses to be provided to the Risk 
Oversight Department or other relevant groups.
Portfolio Benefits Parameters
    The portfolio benefits parameters control portfolio benefits during 
the computation of the SR with the stress based VaR approach. The 
Parameters Procedures would describe the methods for monitoring the 
benefits and performing sensitivity analysis of potential parameter 
changes that would reduce benefits.
Dependence Structure Shifts
    The Parameters Procedures also address sensitivity analysis of 
portfolio benefits implemented during the computation of the SR under 
the MC simulation approach, based on different dependence structures. 
The approach is intended to guide the Risk Department in situations 
where back-testing results indicate excessive portfolio benefits.
SWWR Threshold Shift
    The Parameters Procedures would address sensitivity analysis with 
respect to model parameters that control the permitted level of index 
derived SWWR, to provide guidance to the Risk Department in situations 
when a decision to fully collateralize SWWR is made upon a consultation 
with the Model Oversight Committee and the Product Risk Committee.
GWWR Correlation Shifts
    Sensitivity analysis also considers GWWR arising from Clearing 
Members exposed to Western European Sovereigns when the Kendall tau 
rank-order correlation between the Member and the Sovereign entity is 
above a threshold. The sensitivity analysis would be to provide 
guidance to the risk departments in situations when an increase of the 
dependence among members and sovereigns might lead to changes in risk 
requirements.
MAD Level Shifts
    The Parameters Procedures would describe sensitivity analysis on 
MAD levels, which is performed by shifting all MAD estimates to their 
stress levels to provide information about the response of risk 
requirements to potential volatility shifts and to assess the viability 
of certain parameter-setting assumptions. This sensitivity analysis 
would be to provide guidance to the Risk Department about potential 
risk requirement changes in stress periods due to increase in 
volatility shifts.
EWMA Sensitivity Analysis
    The Parameters Procedures would address sensitivity analysis 
relating to the setting of the exponentially weighted moving average 
(``EWMA'') decay rate (``EWMA factor''), which may affect the 
procyclicality of the model.
Statutory Basis
    ICE Clear Europe believes that the amendments to the Documents and 
the adoption of the Parameters Procedures are consistent with the 
requirements of Section 17A of the Act \4\ and the regulations 
thereunder applicable to it. In particular, 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 
or for which it is responsible, and the protection of investors and the 
public interest.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78q-1.
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The amendments to the Documents and the adoption of the Parameters 
Procedures are generally designed to enhance and clarify the 
descriptions of key ICE Clear Europe risk models and documentation used 
in determining CDS margin and GF requirements, particularly in the CDS 
Risk Policy, CDS Risk Model Description and CDS End-of-Day Pricing 
Policy. Although these changes are largely not intended to represent a 
change in Clearing House practices, they should enhance the clarity and 
ongoing monitoring and implementation of these policies. The amendments 
also make a number of changes to the CDS Stress Testing Policy, which 
are intended to add new stress scenarios relating to the COVID-19 
pandemic, in light of experience in early 2020, and clarify more 
generally that certain extreme scenarios should not be limited to 
scenarios relating to the Lehman Brothers default. The amendments also 
adopt a new set of Parameters Procedures, which is

[[Page 13426]]

intended to codify and formalize the Clearing House's approach to 
setting the key parameters used in the CDS risk model, conducting 
related sensitivity analyses of the impact of such parameters and 
reviewing such parameters on an ongoing basis. As such, the Parameters 
Procedures support ICE Clear Europe's ability to maintain sufficient 
margin requirements and enhance ICE Clear Europe's approach to 
identifying potential parameter changes that are appropriate to 
maintain the operation of the risk model and thereby ensure that the 
Clearing House continues to maintain sufficient financial resources to 
withstand defaults by Clearing Members. Therefore, the amendments to 
the Documents, and the adoption of the Parameters Procedures, will help 
ICE Clear Europe ensure that it maintains adequate financial resources 
to support its CDS operations, enhance the stability of the Clearing 
House and overall promote the prompt and accurate clearance and 
settlement of securities transactions and, derivative agreements, 
contracts, and transactions, the safeguarding of securities and funds 
in ICE Clear Europe's custody or control or for which ICE Clear Europe 
is responsible, and the public interest in the sound operation of 
clearing agencies. Accordingly, the amendments are consistent with the 
requirements of Section 17A(b)(3)(F).\6\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    For similar reasons, the amendments and the Parameters Procedures 
also are consistent with relevant requirements of Rule 17Ad-22. Rule 
17Ad-22(e)(3)(i) \7\ requires clearing agencies to maintain a sound 
risk management framework that identifies, measures, monitors and 
manages the range of risks that it faces. The various amendments 
throughout the Documents as well as the new Parameters Procedures 
document are all intended to clarify the operation of ICE Clear 
Europe's risk management systems and provide for enhanced stress 
testing. They provide greater clarity with respect to various risk 
management tools, ensure that COVID-19 and other extreme but plausible 
stress scenarios are accounted for and ensure current governance 
practices are clearly set out, all of which facilitate ICE Clear 
Europe's compliance with Rule 17Ad22(e)(3)(i).\8\
---------------------------------------------------------------------------

    \7\ 17 CFR 240.17 Ad-22(e)(3)(i).
    \8\ 17 CFR 240.17 Ad-22(e)(3)(i).
---------------------------------------------------------------------------

    In addition, ICE Clear Europe believes that the adoption of the 
Parameters Procedures are consistent with the relevant requirements of 
Rule 17Ad-22(e)(4)(vi)(B),\9\ which requires ICE Clear Europe to 
identify, measure, monitor and manage its credit exposures to 
participants and those arising from its payment, clearing, and 
settlement processes, including by testing the sufficiency of its total 
financial resources available to meet the minimum financial resource 
requirements, including by conducting a comprehensive analysis of 
underlying parameters and assumptions on at least a monthly basis. The 
Parameters Procedures would also provide a clear framework for ICE 
Clear Europe to estimate and review the model core parameter settings 
and perform and review sensitivity analyses related to certain 
parameter settings on at least a monthly basis. The amendments to the 
CDS Stress Testing Policy will, as discussed above, enhance the stress 
testing of the Clearing House by incorporating a wider range of extreme 
scenarios (including those reflecting recent market events) in stress 
testing, which are reviewed on at least a monthly basis. Other 
amendments would clarify how the Clearing Risk Department would address 
a scenario or portfolio in the standard set of stress scenarios no 
longer being applicable, or being superseded by new scenarios or 
portfolios, where the Clearing Risk Department wishes to retire or 
modify the outdated scenario or portfolio or add a new scenario. The 
amendments serve to promote the soundness of the Clearing House's risk 
management model and system and ensure that the Clearing House 
possesses the ability to manage the risks associated with discharging 
its responsibilities, consistent with the requirements of Rule 17Ad-
22(e)(4)(vi)(B).\10\
---------------------------------------------------------------------------

    \9\ 17 CFR 240.17Ad-22.
    \10\ 17 CFR 240.17Ad-22(e)(4)(vi)(B).
---------------------------------------------------------------------------

    Rules 17Ad-22(e)(2)(i) and (v) \11\ requires that clearing agencies 
provide for governance arrangements that are clear and transparent and 
specify clear and direct lines of responsibility. References to the 
roles of certain committees and departments with respect to reviews and 
approvals throughout the Documents have been updated to better reflect 
existing practice with respect to the roles of groups. Where 
appropriate, references to the MRGF, which sets out further governance 
details, have been added throughout the documents. The amendments 
provide additional clarity with respect to Clearing House governance 
and lines of responsibility consistent with Rules 17Ad-22(e)(2)(i) and 
(v).\12\
---------------------------------------------------------------------------

    \11\ 17 CFR 240.17 Ad-22(e)(2)(i) and (v).
    \12\ 17 CFR 240.17 Ad-22(e)(2)(i) and (v).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(iv) \13\requires that clearing agencies cover 
their credit exposures to 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. Amendments to 
the CDS Model Risk Description would more clearly state the procedures 
for determining relevant prices should input data not be available from 
back-up sources, further strengthening ICE Clear Europe's strategies to 
ensure it has access to reliable sources of timely price data in 
compliance with this requirement. The amendments would also provide 
further detail regarding the treatment of data collected and the 
backfilling of missing data. The amendments to the CDS Risk Policy 
would also strengthen the quality of intraday prices through enhanced 
intraday monitoring through additional comparisons of intraday prices 
with other ICE CDS clearing houses and third-party providers. Together, 
the amendments strengthen ICE Clear Europe's compliance with Rule 17Ad-
22(e)(6)(iv).\14\
---------------------------------------------------------------------------

    \13\ 17 CFR 240.17Ad-22(e)(6)(iv).
    \14\ 17 CFR 240.17Ad-22(e)(6)(iv).
---------------------------------------------------------------------------

    Rules 17Ad-22(e)(6)(i) to (iii) \15\ require that clearing agencies 
establish a risk-based margin system that (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; and (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. The proposed amendments would provide more detail 
regarding the IM methodology set out in the CDS Risk Policy, 
facilitating the maintenance of sufficient margin levels. The CDS Risk 
Policy amendments would also provide that in the event that ICE Clear 
Europe is accepting sizable positions through the weekly back-loading 
process in the context of margin calls, it will pre-collect IM and 
mark-to-market changes, instead of just IM, to further ensure 
sufficient margin collection. Amendments to the IM methodology in the 
CDS Risk Model Description would

[[Page 13427]]

also enhance various aspects of the related risk analysis and related 
calculations. Overall, these amendments strengthen ICE Clear Europe's 
margin system and compliance with Rules 17Ad-22(e)(6)(i) to (iii).\16\
---------------------------------------------------------------------------

    \15\ 17 CFR 240.17Ad-22(e)(6)(i) to (iii).
    \16\ 17 CFR 240.17Ad-22(e)(6)(i) to (iii).
---------------------------------------------------------------------------

(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 amendments to 
the Documents and the new Procedures apply to all CDS Contracts. In 
general, the amendments are intended to clarify the description of the 
CDS risk model, and not substantially change the practices of the 
Clearing House with respect to the calculation of CDS margin and GF 
requirements. As such, the amendments will apply to all CDS Clearing 
Members and are unlikely, in ICE Clear Europe's view, to materially 
affect the cost of clearing for CDS products or affect access to 
clearing for CDS products at ICE Clear Europe or the market for cleared 
services generally. Certain amendments to the CDS Stress Testing 
Framework would add new stress-testing scenarios in light of recent 
events, including COVID-19 related scenarios. To the extent such 
amendments may have any impact on margin levels, ICE Clear Europe 
believes such changes will be appropriate in furtherance of the risk 
management of the Clearing House in light of the market movements 
observed during the pandemic. 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 rule changes have not 
been solicited or received. ICE Clear Europe will notify the Commission 
of any written comments received by ICE Clear Europe with respect to 
the proposed rule changes.

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-2021-006 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-2021-006. 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 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 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-2021-006 and should be 
submitted on or before March 29, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-04678 Filed 3-5-21; 8:45 am]
BILLING CODE 8011-01-P