80 FR 11246 - Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of a Proposed Rule Change Relating to CDS Procedures for CDX North America Index CDS Contracts

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 40 (March 2, 2015)

[Federal Register Volume 80, Number 40 (Monday, March 2, 2015)]
[Notices]
[Pages 11246-11250]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-04188]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74362; File No. SR-ICEEU-2015-005]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of a Proposed Rule Change Relating to CDS Procedures for CDX 
North America Index CDS Contracts

February 24, 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 February 12, 2015, ICE Clear Europe Limited (``ICE Clear Europe'') 
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 prepared primarily 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

    The principal purpose of the proposed rule change is to amend the 
ICE Clear Europe CDS Procedures (the ``CDS Procedures'') to incorporate 
contract terms for the CDX North America index CDS contracts (the

[[Page 11247]]

``CDX.NA Contracts'') to be cleared by ICE Clear Europe.

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 submits proposed amendments to its CDS Procedures 
to (i) revise the CDS Procedures to add a new section containing 
contract terms applicable to the CDX.NA Contracts that ICE Clear Europe 
proposes to accept for clearing; (ii) make conforming changes 
throughout the CDS Procedures to reference the CDX.NA Contracts; and 
(iii) make certain other clarifications, corrections and updates to the 
CDS Procedures (including for iTraxx Contracts and Single Name 
Contracts), as discussed in more detail herein. ICE Clear Europe also 
proposes to make certain modifications to its CDS Risk Model 
Description and CDS End-of-Day Price Discovery Policy (the ``CDS 
Pricing Policy'') to accommodate clearing of CDX.NA Contracts, as 
described herein.
    ICE Clear Europe proposes to amend Paragraphs 1, 4, 6, 9, 10 and 11 
of the CDS Procedures. Each of these changes is described in detail as 
follows. All capitalized terms not defined herein are defined in the 
ICE Clear Europe Clearing Rules (the ``Rules'').
    In paragraph 1 of the CDS Procedures, references have been added to 
the defined terms ``iTraxx Contract'' and ``CDX.NA Contract,'' as such 
terms are set out in revised paragraphs 9 and 10 of the CDS Procedures, 
respectively. The definition of ``Original Annex Date'' has been 
modified to apply to CDX.NA Contracts in substantially the same manner 
it applies to iTraxx Contracts. In addition, the definition of 
``Protocol Excluded Reference Entity'' in former paragraph 10.3 has 
been changed to ``Protocol Excluded Corporate Reference Entity'' and 
moved to paragraph 1, to reflect that such term is only used in the 
context of corporate reference entities. Accordingly, the definition 
has been revised to mean an Eligible Single Name Reference Entity that 
is a Standard European Corporate (as specified in the List of Eligible 
Single Name Reference Entities) and is an Excluded Reference Entity (as 
defined in the 2014 CDD Protocol). (Conforming changes have been made 
to references to that definition throughout the CDS Procedures.) In 
addition, a correction has been made to the cross-reference in 
definition of ``New Trade'' to properly refer to the definition set out 
in the applicable Contract Terms for the relevant contract.
    In addition, amendments were also made to use the defined terms 
``Component Transaction'' and ``Clearing'' (each as defined in the ICE 
Clear Europe Rules) throughout the Procedures in lieu of the undefined 
terms. Finally, various conforming references to the new or revised 
defined terms have been made throughout the CDS Procedures, various 
provisions of the CDS Procedures have been renumbered, and certain 
cross-references to prior paragraph 1.71 have been corrected.
    Various clarifications have been made in Paragraph 9 of the CDS 
Procedures, which sets out the contract terms for iTraxx Contracts. 
Specifically, paragraph 9.1 was modified to clarify that it specifies 
the additional Contract Terms applicable to all iTraxx Contracts 
cleared by the Clearing House. Paragraph 9.2(c)(i), which applies to 
iTraxx Contracts which are governed by the Standard iTraxx 2014 CDS 
Supplement, has been modified to make certain additional clarifications 
relating to initial payments and spun-out trades. Paragraph 
9.2(c)(i)(B) has been added to reflect current clearing house (and 
market) practice that initial payments under cleared iTraxx Contracts 
(other than those for which a bilateral transaction is already recorded 
in Deriv/SERV) are made on the business day following the trade date 
(or, if later, the business day following the date of acceptance for 
clearing). New paragraph 9.2(c)(i)(D), which addresses the reference 
obligation for a spun-out trade following a restructuring credit event, 
is substantially the same as the corresponding language in paragraph 
9.3(c)(i)(D) for contracts subject to the Standard iTraxx Legacy CDS 
Supplement and was inadvertently omitted from prior amendments. A 
cross-reference in paragraph 9.2(c)(i)(E) has been updated. New 
paragraph 9.2(c)(i)(F) provides that paragraph 5.7 of the Standard 
iTraxx 2014 CDS Supplement, which contains restrictions on delivery of 
Credit Event Notices and Successor Notices, does not apply to iTraxx 
Contracts (as the appropriate restrictions in the context of a cleared 
transaction are already addressed in the Rules and CDS Procedures, 
including Rule 1505).
    As set forth in paragraph 9.2(c)(ii), changes have also been made 
to the terms of the iTraxx 2014 Confirmation with respect to iTraxx 
Contracts that are governed by the Standard iTraxx 2014 CDS Supplement. 
These amendments include a clarification that references to the 2014 
Credit Derivatives Definitions in the standard supplement and 
confirmation will be interpreted for cleared contracts as though they 
have the meaning ascribed to that term in the Rules and Procedures. In 
addition, a provision that there are no ``Omitted Reference Entities'' 
for purposes of the standard confirmation has been removed as that term 
is not used in the standard supplement and confirmation and is 
therefore unnecessary.
    Similar clarifications have been made in paragraph 9.3, which 
relates to iTraxx Contracts which are governed by the Standard iTraxx 
Legacy CDS Supplement. Specifically, new paragraph 9.3(c)(i)(B) 
contains the same clarification discussed above with respect to the 
initial payment date for a contract. Paragraph 9.3(c)(i)(D) contains a 
correction that the treatment therein of reference obligations for 
spun-out trades applies for reference entities subject to both Sections 
A and B of the Standard iTraxx Legacy CDS Supplement (that is, both 
protocol-excluded and non-excluded entities). Subparagraph (F) provides 
that restrictions under the standard supplement as to delivery of 
Credit Event Notices and Succession Event Notices do not apply, as the 
issue is otherwise addressed under the Rules and CDS Procedures, as 
discussed above. In paragraph 9.3(c)(ii)(E), a reference to there being 
no ``Omitted Reference Entities'' has also been removed for the reasons 
noted above.
    New paragraph 10 of the CDS Procedures has been added to set out 
the contract terms for CDX.NA Contracts. Paragraph 10.1 provides that 
different sub-provisions of paragraph 10 will apply to CDX.NA Contracts 
depending on whether the Original Annex Date for the relevant index 
series falls before or after the Protocol Effective Date.
    New paragraph 10.2 applies to CDX.NA Contracts with an Original 
Annex Date on or after the Protocol Effective Date (i.e., for 
transactions in the September 2014 or later versions of the index). New 
definitions have been added to subparagraph (a), including definitions 
for ``CDX.NA Contract'',

[[Page 11248]]

``CDX.NA Publisher'', ``CDX.NA Terms Supplement'', ``Eligible CDX.NA 
Index'', ``List of Eligible CDX.NA Indices'', and ``Relevant CDX.NA 
Terms Supplement'', which largely track the analogous definitions in 
paragraph 9 with respect to iTraxx Europe Contracts. Paragraph 10.2(b) 
incorporates defined terms from the Relevant CDX.NA Terms Supplement 
and also contains an inconsistency provision which provides that 
paragraph 10.2 governs over the CDX.NA 2014 CDS Supplement and CDX.NA 
2014 Confirmation. Paragraph 10.2(c) contains certain amendments to the 
Standard CDX.NA 2014 CDS Supplement and CDX.NA 2014 Confirmation, which 
are generally consistent with the amendments to the iTraxx 2014 Terms 
Supplement and iTraxx 2014 Confirmation in paragraph 9.2(c) and are 
generally designed to accommodate the requirements of clearing and make 
the standard contract terms consistent with the Rules and Procedures. 
In addition, paragraph 10.2(c)(i)(E) addresses the application of the 
defined term ``Index Party'' in the standard supplement in the context 
of a cleared transaction, and paragraphs 10.2(c)(ii)(E)-(F) have been 
added to refer to certain transaction terms specified in the List of 
Eligible CDX.NA Indices for the relevant index and tenor. Paragraph 
10.2(c)(i)(G) clarifies that as with iTraxx Contracts, de minimis cash 
settlement under the standard supplement does not apply. Paragraph 
10.2(c) also indicates the transaction terms that must be specified in 
the submission of a trade for clearing.
    New paragraph 10.3 applies to CDX.NA Contracts with an Original 
Annex Date before the Protocol Effective Date (i.e., for transactions 
in older versions of the index). Paragraph 10.3 contains definitions 
and provisions generally similar to those in paragraph 10.2, and makes 
comparable amendments to the Standard CDX.NA Legacy CDS Supplement and 
the CDX.NA Legacy Confirmation.
    New paragraph 10.4 contains procedures for updating the CDX.NA 
index version following a Credit Event or Succession Event. These 
provisions are generally consistent with the comparable provisions for 
iTraxx contracts in paragraph 9.8. New paragraph 10.4(b) adds a similar 
procedure for implementing a new version of the CDX.NA standard terms 
supplement, if and when published, where contracts referencing the old 
and new versions of the supplement are determined by the Clearing House 
to be fungible.
    Existing paragraph 10, which contains contract terms for Single 
Name Contracts, has been renumbered as paragraph 11 and cross 
references have been updated accordingly. In addition, various 
clarifying amendments have been made to this paragraph. The definitions 
of ``STEC Contract'' and ``Non-STEC Single Name Contract'' have been 
amended to clarify that the relevant Reference Entity type will be 
specified in the List of Eligible Single Name Reference Entities. The 
definition of ``Single Name Contract Reference Obligations'' has been 
amended to clarify that the applicable reference obligation will be 
specified in the List of Eligible Single Name Reference Entities and 
may differ between 2003-type CDS Contracts and 2014-type CDS Contracts. 
For 2014-type CDS Contracts, the reference obligation may be designated 
as the Senior Level Standard Reference Obligation that is specified 
from time to time on the SRO List published under the 2014 ISDA 
Definitions.
    Paragraph 11.6(a)(i)(C) is amended by adding a subsection (2) that 
makes a clarification as to the initial payment date for Single Name 
Contracts that corresponds to the change in payment date discussed 
above for iTraxx Contracts. A change is made in paragraph 11.6(a)(ii) 
to conform to the changes made to the definition of Single Name 
Contract Reference Obligation discussed above.
    In general, the Clearing House's existing risk methodology 
applicable to index CDS will also apply to the CDX.NA Contracts. 
However, ICE Clear Europe proposes to make certain amendments to its 
CDS Risk Model Description and CDS Pricing Policy to address CDX.NA 
Contracts.
    In the CDS Risk Model Description, the index decomposition offset 
methodology, which is used to determine portfolio margin benefits from 
correlated long and short positions, is proposed to be modified to 
address multi-region risk factors. Under the revised methodology, 
portfolio margin benefits are provided first for risk factors within 
the same region. After the same-region risk analysis is completed, any 
cross-region benefits for index risk factors are determined. Cross-
region benefits apply only to index risk factors. The revised 
description thus addresses scenarios in which margin offsets may be 
provided between appropriately correlated positions in iTraxx Contracts 
and positions in CDX.NA Contracts. The revisions also provide that 
where risk factor profits and losses are calculated in different 
currencies, they will be converted into the same base currency (Euro) 
for purposes of calculation of portfolio margin benefits.
    ICE Clear Europe also proposes to amend its CDS Pricing Policy to 
cover the CDX.NA Contracts. The amendments include submission 
requirements with respect to CDX.NA Contracts and changes to reflect 
that certain determinations with respect to firm trades for CDX.NA 
Contracts are made as of the North American end-of-day.
2. Statutory Basis
    ICE Clear Europe believes that the proposed rule change, and in 
particular the proposed clearing of the proposed CDX.NA Contracts, is 
consistent with the requirements of Section 17A of the Act \3\ and 
regulations thereunder applicable to it, including the standards under 
Rule 17Ad-22.\4\ The proposed change is principally designed to permit 
the clearing of CDX.NA index CDS Contracts, as well as make certain 
clarifications and other amendments to the CDS Procedures applicable to 
other CDS Contracts. The CDX.NA Contract is a broad-based index CDS 
contract generally similar to the iTraxx Contract currently cleared by 
the Clearing House, with similar terms and conditions. The new index 
CDS contracts will be cleared in the same manner as the iTraxx 
Contracts, consistent with ICE Clear Europe's existing clearing 
arrangements and related financial safeguards and protections. In ICE 
Clear Europe's view, clearing of the CDX.NA Contracts, under such terms 
and arrangements, is consistent with the prompt and accurate clearance 
and settlement of securities transactions and derivative agreements, 
contracts and transactions cleared by ICE Clear Europe, the 
safeguarding of securities and funds in the custody or control of ICE 
Clear Europe and the protection of investors and the public interest, 
within the meaning of Section 17A(b)(3)(F) of the Act.\5\ The 
additional changes set forth in the proposed amendments, which 
generally make clarifications and corrections to the CDS Procedures for 
existing iTraxx and Single Name Contracts, are also consistent with 
this standard.
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    \3\ 15 U.S.C. 78q-1.
    \4\ 17 CFR 240.17Ad-22.
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed amendments to the CDS Procedures, including clearing 
of the CDX.NA Contracts, will also satisfy the relevant requirements of 
Rule 17Ad-22,\6\ as discussed below.
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    \6\ 17 CFR 240.17Ad-22.
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    Financial Resources. ICE Clear Europe will apply its existing 
margin methodology for index CDS contracts to

[[Page 11249]]

the CDX.NA Contracts, with the modifications described herein to the 
CDS Risk Model Description. In ICE Clear Europe's view, the Clearing 
House's margin requirements, as revised, will provide sufficient margin 
to cover its credit exposure to its clearing members from clearing such 
contracts, consistent with the requirements of Rule 17Ad-22(b)(2) and 
Rule 17Ad-22(d)(14).\7\ In addition, ICE Clear Europe believes the CDS 
Guaranty Fund, under its existing methodology, will, together with the 
required margin, provide sufficient financial resources to support the 
clearing of CDX.NA Contracts, consistent with the requirements of Rule 
17Ad-22(b)(3).\8\
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    \7\ 17 CFR 240.17Ad-22(b)(2), (d)(14).
    \8\ 17 CFR 240.17Ad-22(b)(3).
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    Operational Resources. ICE Clear Europe will have the operational 
and managerial capacity to clear the CDX.NA Contracts as of the 
commencement of clearing, consistent with the requirements of Rule 
17Ad-22(d)(4).\9\ ICE Clear Europe believes that its existing systems 
used for index CDS contracts are appropriately scalable to handle the 
clearing of the CDX.NA Contracts.
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    \9\ 17 CFR 240.17Ad-22(d)(4).
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    Settlement. ICE Clear Europe will use its existing settlement 
procedures (including for physical settlements), account structures and 
approved financial institutions as used in other index CDS for the 
CDX.NA Contracts. Although CDX.NA Contracts will be denominated in US 
dollars, ICE Clear Europe's existing settlement systems are sufficient 
to handle such settlements in such currency. ICE Clear Europe believes 
that clearing of such contracts will therefore be consistent with the 
requirements of Rule 17Ad-22(d)(5), (12) and (15).\10\
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    \10\ 17 CFR 240.17Ad-22(d)(5), (12) and (15).
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    Default Procedures. ICE Clear Europe's existing Rules and default 
management policies and procedures for CDS will apply to the CDX.NA 
Contracts. ICE Clear Europe believes that the Rules and procedures 
allow for it to take timely action to contain losses and liquidity 
pressures and to continue meeting its obligations in the event of 
clearing member insolvencies or defaults, including in respect of 
CDX.NA Contracts, in accordance with Rule 17Ad-22(d)(11).\11\
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    \11\ 17 CFR 240.17Ad-22(d)(11).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed rule change, 
including the clearing of the CDX.NA Contracts, would have any impact, 
or impose any burden, on competition not necessary or appropriate in 
furtherance of the purpose of the Act. ICE Clear Europe does not 
anticipate that its commencement of clearing for the CDX.NA Contracts, 
or the other amendments with respect to its other CDS contracts, will 
adversely affect the trading market for those contracts or for CDS more 
generally. Specifically, allowing clearing of the CDX.NA Contracts will 
provide market participants with the additional choice to have their 
transactions in these types of contracts cleared, and should generally 
promote the further development of the market for these contracts. ICE 
Clear Europe does not believe that the other amendments will materially 
affect the cost of clearing for the relevant contracts or adversely 
affect access to clearing in those contracts for Clearing Members or 
their customers. Moreover, ICE Clear Europe will apply its existing 
fair and objective criteria for eligibility to clear CDS to clearing of 
the CDX.NA Contracts. Accordingly ICE Clear Europe does not believe 
that the amendments will impose any burden on competition not necessary 
or appropriate 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 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 [email protected]. Please include 
File Number SR-SR-ICEEU-2015-005 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-2015-005. 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.
    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-2015-005 
and should be submitted on or before March 23, 2015.


[[Page 11250]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Jill M. Peterson,
Assistant Secretary.
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    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2015-04188 Filed 2-27-15; 8:45 am]
BILLING CODE 8011-01-P