80_FR_16530 80 FR 16471 - Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change Relating to Physical Settlement of CDS Contracts

80 FR 16471 - Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change Relating to Physical Settlement of CDS Contracts

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 59 (March 27, 2015)

Page Range16471-16475
FR Document2015-06992

Federal Register, Volume 80 Issue 59 (Friday, March 27, 2015)
[Federal Register Volume 80, Number 59 (Friday, March 27, 2015)]
[Notices]
[Pages 16471-16475]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-06992]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74563; File No. SR-ICC-2015-004]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change Relating to Physical Settlement of CDS 
Contracts

March 23, 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 March 11, 2015, ICE Clear Credit LLC (``ICC'' or the 
``clearinghouse'') 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 ICC. 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 purpose of the proposed rule change is to amend ICC rules to 
modify the terms and conditions for physical settlement of cleared CDS 
Contracts, and to adopt certain new delivery procedures relating to 
physical settlement.

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

    In its filing with the Commission, ICC 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. ICC has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of these statements.

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

    ICC submits proposed amendments to the ICC Clearing Rules (``ICC 
Rules'') relating to physical settlement of CDS Contracts. Upon the 
occurrence of a credit event under a cleared CDS Contract, the contract 
is typically settled in cash in accordance with the terms of the ICC 
Rules, which incorporate the applicable ISDA Credit Derivatives 
Definitions (the ``ISDA Definitions'') and the market-standard credit 
default swap auction methodology for determining the cash settlement 
price. However, in certain circumstances, such as where the Credit 
Derivatives Determinations Committee decides not to hold a cash 
settlement auction for a particular credit event, or such an auction is 
cancelled under the terms of the auction methodology (including because 
of a failure to determine the auction settlement price), the CDS 
Contracts provide for a fallback settlement method of physical 
settlement. Under physical settlement of a CDS contract generally, the 
protection buyer will be entitled to deliver one or more qualifying 
deliverable obligations to the protection seller, in which case the 
protection seller will be required to pay the protection buyer a 
defined physical settlement amount. Under the current ICC Rules, if 
physical settlement applies,\3\ the clearinghouse will match clearing 
participants (``Participants'') that are protection buyers with 
Participants that are protection sellers in the relevant contract, and 
the two Participants will be responsible for effecting physical 
settlement between them. ICC does not itself perform or guarantee 
performance of physical settlement between the matched Participants. 
Once matching occurs, the contract is purely a bilateral contract 
between the matched Participants, and the clearinghouse has no further 
rights or obligations with respect to the contract. ICC does, however, 
collect and hold physical settlement margin as collateral agent on 
behalf of the protection buyer to secure the protection seller's 
obligations to the protection buyer under physical settlement.
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    \3\ ICC notes that to date, physical settlement has not been 
necessary for any of the CDS Contracts cleared by ICC.
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    At the request of its Participants, and following extensive 
consultation with them, ICC proposes to amend the ICC Rules relating to 
physical settlement such that the clearinghouse will be responsible for 
financial performance of physical settlement. ICC understands that 
Participants and other market participants view the current approach, 
in which cash settlement of credit events is guaranteed by the 
clearinghouse but physical settlement is not, as creating a potentially 
anomalous result in the unlikely case that physical settlement may 
apply. The application of physical settlement would be a circumstance 
that is generally not within any Participant's control, and under the 
current rules may expose Participants to a significantly different 
credit risk profile than under cash settlement (where the Participant 
is exposed to the credit of the clearinghouse). In light of these 
discussions, ICC has determined that it is appropriate to extend the 
clearing guarantee to the financial performance of physical settlement. 
ICC notes that under the amended approach, it would still require 
payments and deliveries in the ordinary course under physical 
settlement to be made directly between the matched buying Participant 
and selling Participant, with the clearinghouse only being obligated to 
make direct payments in the case of certain defined settlement failure 
scenarios. ICC believes that this proposed rule change will further the 
general policy goals of central clearing for CDS transactions, and is 
consistent with the clearinghouse's financial

[[Page 16472]]

resources, risk management procedures and operational capabilities.\4\
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    \4\ ICC notes that a substantially similar approach to physical 
settlement is used in the ICE Clear Europe Limited CDS clearing 
service.
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    ICC proposes to make certain amendments to Chapters 1, 4, 5, 21 and 
22 of the ICC Rules. ICC also proposes to adopt a related set of 
Delivery Procedures and Physical Settlement and Notices Terms. ICC also 
proposes to make certain related and conforming changes to its Risk 
Management Framework. All capitalized terms not defined herein are 
defined in the ICC Rules.
    In Chapter 1 of the ICC Rules, the definition of ``Client-Related 
Initial Margin'' has been amended so that it now includes Physical 
Settlement Margin collected with respect to Client-Related Positions. 
As discussed below, such Physical Settlement Margin will now secure the 
obligations of a Participant to ICC in connection with physical 
settlement. Similarly, in Rule 403, the definition of ``Physical 
Settlement Margin'' has been amended to refer to such obligations to 
ICC (as opposed to the obligations to the matched Participant under the 
current ICC Rules). In Rule 502(b), a conforming reference to Physical 
Settlement Margin has been updated. A conforming change is also made in 
Rule 2101-02(a)(iv).
    In Chapter 22 (which covers physical settlement), a new Rule 2200 
is added with definitions relating to the revised physical settlement 
provisions, including ``Matched Delivery Buyer'' and ``Matched Delivery 
Seller,'' and the related terms ``Matched Delivery Contract,'' 
``Matched Delivery Buyer Contract,'' ``Matched Delivery Seller 
Contract'' and ``MP Delivery Amount.'' As discussed below, these terms 
are used in connection with the matching of buying Participants and 
selling Participants in the revised settlement procedures. A new 
definition of ``Asset Package Delivery Notice'' has also been added to 
address notices in connection with Asset Package delivery under the 
2014 ISDA Credit Derivatives Definitions (the ``2014 ISDA 
Definitions'').
    Rule 2201(a), which provides for matching of buying Participants 
and selling Participants into a Matched Delivery Pair in the case of 
physical settlement, has been revised to address scenarios where a 
Participant's CDS contracts must be split and matched with multiple 
other Participants for purposes of physical settlement. Conforming 
changes to use applicable defined terms (such as Relevant Restructuring 
Credit Event) have also been made. Rule 2201(b), which addresses 
delivery of certain notices between a Matched Delivery Pair, has been 
revised to include references to Asset Package Delivery Notices. Rule 
2201(c) has been deleted at the request of Participants as being 
inconsistent with the terms of uncleared CDS and unnecessary in light 
of the provisions of the ISDA Definitions and Rule 2202.
    Rule 2202, which addresses resolution of disputes related to 
permissible deliverable obligations, has been revised to incorporate 
the concept of Asset Package Delivery under the 2014 ISDA Definitions, 
as well as related concepts of Prior Deliverable Obligations, Package 
Observable Bonds and Asset Package Delivery Notices. Rules 2202(b) and 
(c) have also been revised to address the consequences of a selling 
Participant's refusal to accept delivery of a particular obligation, 
including for the offsetting transaction between ICC and the buying 
Participant.
    Rule 2203 has been replaced with new provisions addressing the 
clearinghouse's role in physical settlement. When a Matched Delivery 
Pair is established, the CDS Contract between the Matched Delivery 
Buyer and ICC is referred to as the Matched Delivery Buyer Contract, 
and the corresponding CDS Contract between ICC and the Matched Delivery 
Seller is referred to as the Matched Delivery Seller Contract. Under 
the revised physical settlement approach, ICC remains party to each 
such contract, but requires certain notices, payments and deliveries to 
take place directly between the Matched Delivery Buyer and Matched 
Delivery Seller. Accordingly, under Rule 2203(a), for each Matched 
Delivery Buyer Contract, ICC designates the Matched Delivery Seller to 
receive on ICC's behalf notices and deliveries from the Matched 
Delivery Buyer and to make payments on ICC's behalf to the Matched 
Delivery Buyer. Similarly, under Rule 2203(b), for each Matched 
Delivery Seller Contract, ICC designates the Matched Delivery Buyer to 
deliver on ICC's behalf notices and deliveries to the Matched Delivery 
Seller, and to receive on ICC's behalf payments from the Matched 
Delivery Seller. The result is that notices, payments and deliveries 
will be made directly between the Matched Delivery Buyer and Matched 
Delivery Seller, in satisfaction of the parties and ICC's respective 
obligations under both the Matched Delivery Buyer Contract and Matched 
Delivery Seller Contract. Rule 2203(c) further clarifies that the 
exercise of rights by Matched Delivery Buyer against ICC will be deemed 
the exercise by ICC of the corresponding rights against Matched 
Delivery Seller, and vice versa. Rules 2203(d) and (e) provide for 
copies of relevant notices to be provided to ICC, as well as notice of 
the completion of settlement between the Matched Delivery Buyer and 
Matched Delivery Seller. Rule 2203(f) clarifies the obligations of the 
respective parties to a Matched Delivery Contract, and addresses a 
scenario where an Asset Package being delivered is deemed to have a 
value of zero under the 2014 ISDA Definitions. Rule 2203(g) allocates 
costs and expenses that may be incurred by ICC in connection with 
physical settlement.
    Rule 2204, as revised, addresses physical settlement of certain 
deliverable obligations that do not settle in the ordinary course on a 
delivery-versus-payment basis (``Non-DVP Obligations''). The rule 
establishes a procedure under which the Matched Delivery Seller pays 
the physical settlement amount owed to ICC, which in turn will not pay 
such amount to the Matched Delivery Buyer until ICC receives notice 
that the obligation has been received by the Matched Delivery Seller 
from the Matched Delivery Buyer. If the obligation is not delivered, 
the physical settlement amount is returned to the Matched Delivery 
Seller.
    Rule 2205 addresses settlement failures by the Matched Delivery 
Seller or Matched Delivery Buyer. Under subsection (a), if the Matched 
Delivery Seller fails to pay the physical settlement amount when due, 
the Matched Delivery Buyer Contract will be cash settled as between the 
Matched Delivery Buyer and ICC. ICC thus will not be obligated to take 
delivery of the relevant deliverable obligations (and dispose of them 
in a situation where the Matched Delivery Seller has failed to 
perform), but will compensate the Matched Delivery Buyer for the value 
of the Matched Delivery Buyer Contract through the cash settlement 
process. Pursuant to subsection (b), ICC may, in addition to its other 
default remedies, terminate the Matched Delivery Seller Contract, in 
which case the Matched Delivery Seller will owe ICC an amount equal to 
the cash settlement amount ICC paid the Matched Delivery Buyer, 
together with other losses and expenses incurred by ICC as a result of 
the failure. Rule 2205(c) provides that, consistent with the terms of 
the ISDA Definitions applicable to a protection buyer generally, any 
failure by ICC to deliver any deliverable obligations to the Matched 
Delivery Seller (including as a result of a failure by the Matched 
Delivery Buyer to make a delivery) will not constitute a default by 
ICC, and the Matched Delivery Seller's sole remedy

[[Page 16473]]

will be as set forth in the Matched Delivery Seller Contract (which may 
include, for example, buy-in remedies of the Matched Delivery Seller). 
ICC will not have any obligation to purchase or acquire deliverable 
obligations (other than in settlement of the Matched Delivery Buyer 
Contract) in order to settle the Matched Delivery Seller Contract. This 
is consistent with the clearinghouse's guarantee of finance 
performance, but not actual delivery. In the event of a delivery 
failure by a Matched Delivery Buyer, such party will be liable to ICC 
for any costs incurred by ICC in settling the corresponding Matched 
Delivery Seller Contract (in addition to ICC's other remedies for a 
default).
    Rule 2206 covers certain other, non-default scenarios in which 
physical settlement fails to occur. Under Rule 2206(a) and (b), if 
physical settlement of the Matched Buyer Delivery Contract does not 
occur because the deliverable obligation is in less than the relevant 
minimum denomination or the Matched Delivery Seller is not a permitted 
transferee of the obligation, the failure will be treated as an 
illegality or impossibility outside of the parties' control, which will 
result in cash settlement \5\ under the ISDA Definitions. In this and 
other scenarios where a cash settlement fallback applies, the same cash 
settlement amount will apply to both the Matched Delivery Buyer 
Contract and Matched Delivery Seller Contract under Rule 2206(c). 
Similarly, in the case of a buy-in, the same buy-in price will apply to 
both contracts. Rule 2206(d) provides for cash settlement of both the 
Matched Delivery Buyer Contract and Matched Delivery Seller Contract in 
certain cases where delivery does not occur between the Matched 
Delivery Buyer and the customer for which it is acting. Rule 2206(e) 
specifies the date of any cash settlement and provides for notice of 
the relevant amount owed.
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    \5\ Cash settlement in this context is different from the 
auction cash settlement that normally applies to CDS contracts under 
the ISDA Definitions, and is based on price quotations obtained by 
the relevant party to the contract for the obligation or obligations 
that cannot be delivered.
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    Rule 2207(a) provides for certain standard representations and 
related provisions for physical settlement in the ISDA Definitions to 
apply as between the Matched Delivery Buyer and Matched Delivery 
Seller, and clarifies ICC's authority to designate a Participant to 
make or receive physical settlement on its behalf as provided in Rules 
2203 and 2204 for purposes of Section 9.2(c)(iv) of the 2003 
Definitions or Section 11.2(c)(iv) of the 2014 Definitions, even though 
the Participant is not its Affiliate. Rule 2207(b) clarifies certain 
procedures for obtaining price quotations for the relevant deliverable 
obligations in the event that a cash settlement fallback applies.
    Rule 2208 allows the Matched Delivery Buyer and Matched Delivery 
Seller to settle their rights and obligations as to physical settlement 
through an alternative arrangement agreed between them (referred to as 
a ``CADP''), in lieu of settlement pursuant to Chapter 22 of the Rules. 
If they so agree, ICC will have no obligation in respect of such 
alternative arrangement.
    Rule 2209(a) and (c) provide that margin (including physical 
settlement margin) will continue to be called and held through 
settlement. Rule 2209(b) provides that ICC will apply physical 
settlement margin to satisfy the Matched Delivery Seller's obligation 
to pay the physical settlement amount, and call such seller for any 
shortfall.
    ICC also proposes to adopt Delivery Procedures that further specify 
certain operational and other details for the physical settlement 
process. Paragraph 1 provides certain definitions used in the Delivery 
Procedures. Paragraph 3.2 sets out certain requirements for providing 
notices in connection with physical settlement. Paragraphs 3.3(a)-(e) 
establish the procedures and timetable for ICC to allocate Matched 
Delivery Pairs and notify Participants accordingly. Paragraph 3.3(g) 
addresses additional procedures concerning delivery of notices by 
Participants in connection with physical settlement, including as to 
relevant notice deadlines, requirements for providing copies of notices 
to the clearinghouse, treatment of late notices and procedures for 
disputes involving notices. Paragraph 4 of the Delivery Procedures 
specifies certain deadlines in connection with the physical settlement 
of Non-DVP Obligations under Rule 2204. Paragraph 5 specifies the 
deadline for notices that parties have elected a CADP.
    ICC also proposes to adopt a set of Physical Settlement and Notices 
Terms (``Notices Terms'') with respect to physical settlement. The 
Notices Terms are intended to set forth in a uniform way certain 
matters between a Participant and its customer in connection with 
physical settlement, including delivery of physical settlement notices 
and delivery and receipt of deliverable obligations as between the 
Participant and its customer. The Notices Terms also address the 
operation of certain cash settlement and other fallbacks as between the 
Participant and its customer. The Notices Terms do not bind ICC and do 
not form part of the ICC Rules or ICC Procedures. The Notices Terms are 
published for the convenience and use of Participants and their 
customers, and are designed to be incorporated by reference in customer 
clearing documentation. However, a Participant and its customer may 
agree to vary the Notices Terms as between them.
    ICC also proposes to make certain changes to its Risk Management 
Framework to accommodate the changes relating to physical settlement 
that are being made to the Rules and procedures as set forth herein. As 
revised, the Risk Management Framework reflects the clearinghouse's 
obligations in respect of physical settlement as provided in the 
amended Rules and procedures. It sets out the steps in the physical 
settlement process to be taken by the clearinghouse if physical 
settlement applies, including the matching of Participants into Matched 
Delivery Pairs, consistent with the Rules and procedures. The revisions 
also address the calculation, collection and use of margin (including 
physical settlement margin) where physical settlement applies.
    Section 17A(b)(3)(F) of the Act \6\ 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 and to comply with the provisions of the Act and the rules 
and regulations thereunder. ICC believes that the proposed rule change 
is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to ICC, in particular, Section 
17(A)(b)(3)(F) \7\ and Rule 17Ad-22,\8\ because the proposed rule 
change will assure the prompt and accurate clearance and settlement of 
securities transactions and derivatives agreements, contracts, and 
transactions. Specifically, ICC believes that the proposed amendments 
will enhance the clearance and settlement of CDS transactions in 
circumstances where physical settlement applies. Although physical 
settlement applies only rarely, and as a fallback to the normal 
procedure for auction cash settlement, ICC and its Participants believe 
that the amendments will benefit the CDS market generally by making the 
physical settlement process more robust and providing greater certainty 
around the

[[Page 16474]]

physical settlement process. ICC proposes to extend its clearing 
guarantee to the financial performance of physical settlement, which 
eliminates the existing gap in coverage where contracts go to physical 
settlement and avoids exposing Participants to the direct credit of 
other Participants in the case of physical settlement. At the same 
time, ICC has designed the revised procedures so that it is not itself 
required to make or take delivery of underlying deliverable 
obligations. In the ordinary course, payments and deliveries (and 
related notices) will be made directly between the matched buying and 
selling Participants. In the case of a settlement failure, the 
clearinghouse's obligations will be settled in cash, avoiding the need 
for the clearinghouse to obtain or dispose of deliverable obligations. 
In ICC's view, this allows it to appropriately limit and manage its 
risks with respect to physical settlement of cleared CDS contracts. As 
a result, ICC believes that the amendments will promote the accurate 
clearing and settlement of CDS contracts, and are therefore consistent 
with the requirements of Section 17A(b)(3)(F) of the Act.\9\
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ Id.
    \8\ 17 CFR 240.17Ad-22.
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    In addition, the amendments are consistent with the requirements of 
Rule 17Ad-22.\10\ In particular, Rule 17Ad-22(d)(15) \11\ requires that 
ICC ``state to its participants the clearing agency's obligations with 
respect to physical deliveries and identify and manage the risks from 
these obligations.'' As discussed above, revised chapter 22 of the 
Rules clearly states ICC's obligations with respect to physical 
settlement of CDS Contracts. The revised Rules establish the 
clearinghouse's responsibility for financial performance of physically 
settled contracts, while establishing the procedures for settlement in 
the ordinary course to take place directly between the buying 
Participant and the selling Participant. The Rules also establish the 
procedures to be followed in the case of a settlement failure and the 
responsibilities of the relevant Participants and ICC with respect 
thereto, and provide a mechanism for ICC to effect settlement in cash 
without having to acquire or dispose of the underlying deliverable 
obligations. In ICC's view, these arrangements permit it to 
appropriately manage the risks to the clearinghouse from the physical 
settlement obligations it would undertake under the proposed 
amendments, and are therefore consistent with the requirements of Rule 
17Ad-22(d)(15).\12\
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    \10\ 17 CFR 240.17Ad-22.
    \11\ 17 CFR 240.17Ad-22(d)(15).
    \12\ Id.
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    In terms of financial resources, ICC will continue to collect 
initial and mark-to-market margin for CDS Contracts through the 
completion of physical settlement, and does not propose to change its 
margin methodology with respect thereto in connection with these 
amendments. In addition, ICC will collect physical settlement margin to 
cover the specific obligations of Participants to the clearinghouse 
with respect to physical settlement. In ICC's view, its financial 
resources will as a result be sufficient to support its clearing 
operations, including under the amended physical settlement procedures, 
in a manner consistent with the requirements of Rule 17Ad-22(d)(2).\13\
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    \13\ 17 CFR 240.17Ad-22(d)(2).
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    In terms of default management, the amendments provide additional 
procedures for addressing settlement failures in the physical 
settlement process, in a manner that provides financial protection to 
non-defaulting Participants while avoiding the need for the 
clearinghouse to make or take physical delivery. ICC believes that 
these additional provisions, together with its existing default 
management rules and procedures, will permit it to take timely action 
to contain losses and liquidity pressures and continue meeting its 
obligations in the case of a default, including in connection with 
physical settlement, within the meaning of Rule 17Ad-22(d)(11).\14\
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    \14\ 17 CFR 240.17Ad-22(d)(11).
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    ICC also believes that its operational systems and capabilities are 
sufficient to support the changes to physical settlement. As discussed 
above, ICC proposes to adopt Delivery Procedures that would specify 
certain key operational aspects of the physical settlement process. 
These procedures, as well as related systems and arrangements, address 
relevant sources of operational risk in the physical settlement process 
and are designed to minimize such risks, within the meaning of Rule 
17Ad-22(d)(4).\15\
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    \15\ 17 CFR 240.17Ad-22(d)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    ICC does not believe the proposed amendments would have any impact, 
or impose any burden, on competition not necessary or appropriate in 
furtherance of the purpose of the Act. The amendments will apply 
uniformly across all Participants. Although physical settlement is 
expected to be a remote circumstance, the amendments are intended to 
extend the benefit of the clearing guarantee to that process in the 
event it occurs, and therefore would generally be expected to benefit 
all market participants. Although ICC may collect additional physical 
settlement margin in connection with physical settlement, such margin 
is, in ICC's view, necessary to protect the operation of the 
clearinghouse and will affect all Participants with positions that go 
to physical settlement. In other respects, ICC does not anticipate that 
these enhancements will materially affect the cost of clearing for 
Participants or other market participants. In addition, ICC is not 
otherwise proposing to change its standards for access to the 
clearinghouse or the terms and conditions of cleared contracts (which 
already provide for physical settlement in these limited circumstances, 
but without the benefit of the clearinghouse guarantee). As a result, 
ICC does not believe the amendments will adversely affect the ability 
of Participants or other market participants to continue to clear CDS 
contracts. ICC also does not believe the enhancements will limit the 
availability of clearing in CDS products for Participants or their 
customers or otherwise limit market participants' choices for selecting 
clearing services in CDS. Therefore, ICC does not believe the proposed 
rule change imposes any burden on competition that is not appropriate 
in furtherance of the purpose of the Act.

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

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

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.

[[Page 16475]]

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-ICC-2015-004 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-ICC-2015-004. 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 Credit 
and on ICE Clear Credit's Web site at https://www.theice.com/clear-credit/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-ICC-2015-004 
and should be submitted on or before April 17, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-06992 Filed 3-26-15; 8:45 am]
 BILLING CODE 8011-01-P



                                                                                  Federal Register / Vol. 80, No. 59 / Friday, March 27, 2015 / Notices                                                     16471

                                                  subject line if email is used. To help the              primarily by ICC. The Commission is                   applies,3 the clearinghouse will match
                                                  Commission process and review your                      publishing this notice to solicit                     clearing participants (‘‘Participants’’)
                                                  comments more efficiently, please use                   comments on the proposed rule change                  that are protection buyers with
                                                  only one method. The Commission will                    from interested persons.                              Participants that are protection sellers in
                                                  post all comments on the Commission’s                                                                         the relevant contract, and the two
                                                                                                          I. Self-Regulatory Organization’s
                                                  Internet Web site (http://www.sec.gov/                                                                        Participants will be responsible for
                                                                                                          Statement of the Terms of Substance of
                                                  rules/sro.shtml). Copies of the                                                                               effecting physical settlement between
                                                                                                          the Proposed Rule Change
                                                  submission, all subsequent                                                                                    them. ICC does not itself perform or
                                                  amendments, all written statements                         The purpose of the proposed rule                   guarantee performance of physical
                                                  with respect to the proposed rule                       change is to amend ICC rules to modify                settlement between the matched
                                                  change that are filed with the                          the terms and conditions for physical                 Participants. Once matching occurs, the
                                                  Commission, and all written                             settlement of cleared CDS Contracts,                  contract is purely a bilateral contract
                                                  communications relating to the                          and to adopt certain new delivery                     between the matched Participants, and
                                                  proposed rule change between the                        procedures relating to physical                       the clearinghouse has no further rights
                                                  Commission and any person, other than                   settlement.                                           or obligations with respect to the
                                                  those that may be withheld from the                     II. Self-Regulatory Organization’s                    contract. ICC does, however, collect and
                                                  public in accordance with the                           Statement of the Purpose of, and                      hold physical settlement margin as
                                                  provisions of 5 U.S.C. 552, will be                     Statutory Basis for, the Proposed Rule                collateral agent on behalf of the
                                                  available for Web site viewing and                      Change                                                protection buyer to secure the
                                                  printing in the Commission’s Public                                                                           protection seller’s obligations to the
                                                  Reference Room, 100 F Street NE.,                          In its filing with the Commission, ICC
                                                                                                          included statements concerning the                    protection buyer under physical
                                                  Washington, DC 20549 on official                                                                              settlement.
                                                  business days between the hours of                      purpose of and basis for the proposed
                                                  10:00 a.m. and 3:00 p.m. Copies of the                  rule change and discussed any                            At the request of its Participants, and
                                                  filing also will be available for                       comments it received on the proposed                  following extensive consultation with
                                                  inspection and copying at the principal                 rule change. The text of these statements             them, ICC proposes to amend the ICC
                                                  office of the MSRB. All comments                        may be examined at the places specified               Rules relating to physical settlement
                                                  received will be posted without change;                 in Item IV below. ICC has prepared                    such that the clearinghouse will be
                                                  the Commission does not edit personal                   summaries, set forth in sections A, B,                responsible for financial performance of
                                                  identifying information from                            and C below, of the most significant                  physical settlement. ICC understands
                                                  submissions. You should submit only                     aspects of these statements.                          that Participants and other market
                                                  information that you wish to make                       A. Self-Regulatory Organization’s                     participants view the current approach,
                                                  available publicly. All submissions                     Statement of the Purpose of, and                      in which cash settlement of credit
                                                  should refer to File Number SR–MSRB–                    Statutory Basis for, the Proposed Rule                events is guaranteed by the
                                                  2015–02 and should be submitted on or                   Change                                                clearinghouse but physical settlement is
                                                  before April 17, 2015.                                                                                        not, as creating a potentially anomalous
                                                                                                            ICC submits proposed amendments to                  result in the unlikely case that physical
                                                    For the Commission, pursuant to delegated             the ICC Clearing Rules (‘‘ICC Rules’’)
                                                  authority.20                                                                                                  settlement may apply. The application
                                                                                                          relating to physical settlement of CDS                of physical settlement would be a
                                                  Brent J. Fields,                                        Contracts. Upon the occurrence of a                   circumstance that is generally not
                                                  Secretary.                                              credit event under a cleared CDS                      within any Participant’s control, and
                                                  [FR Doc. 2015–06993 Filed 3–26–15; 8:45 am]             Contract, the contract is typically settled           under the current rules may expose
                                                  BILLING CODE 8011–01–P                                  in cash in accordance with the terms of               Participants to a significantly different
                                                                                                          the ICC Rules, which incorporate the                  credit risk profile than under cash
                                                                                                          applicable ISDA Credit Derivatives                    settlement (where the Participant is
                                                  SECURITIES AND EXCHANGE                                 Definitions (the ‘‘ISDA Definitions’’)                exposed to the credit of the
                                                  COMMISSION                                              and the market-standard credit default                clearinghouse). In light of these
                                                  [Release No. 34–74563; File No. SR–ICC–                 swap auction methodology for                          discussions, ICC has determined that it
                                                  2015–004]                                               determining the cash settlement price.                is appropriate to extend the clearing
                                                                                                          However, in certain circumstances, such               guarantee to the financial performance
                                                  Self-Regulatory Organizations; ICE                      as where the Credit Derivatives                       of physical settlement. ICC notes that
                                                  Clear Credit LLC; Notice of Filing of                   Determinations Committee decides not                  under the amended approach, it would
                                                  Proposed Rule Change Relating to                        to hold a cash settlement auction for a               still require payments and deliveries in
                                                  Physical Settlement of CDS Contracts                    particular credit event, or such an                   the ordinary course under physical
                                                  March 23, 2015.
                                                                                                          auction is cancelled under the terms of               settlement to be made directly between
                                                     Pursuant to Section 19(b)(1) of the                  the auction methodology (including                    the matched buying Participant and
                                                  Securities Exchange Act of 1934                         because of a failure to determine the                 selling Participant, with the
                                                  (‘‘Act’’) 1 and Rule 19b–4 thereunder,2                 auction settlement price), the CDS                    clearinghouse only being obligated to
                                                  notice is hereby given that on March 11,                Contracts provide for a fallback                      make direct payments in the case of
                                                  2015, ICE Clear Credit LLC (‘‘ICC’’ or the              settlement method of physical                         certain defined settlement failure
                                                  ‘‘clearinghouse’’) filed with the                       settlement. Under physical settlement of              scenarios. ICC believes that this
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                                                  Securities and Exchange Commission                      a CDS contract generally, the protection              proposed rule change will further the
                                                  (‘‘Commission’’) the proposed rule                      buyer will be entitled to deliver one or              general policy goals of central clearing
                                                  change as described in Items I, II and III              more qualifying deliverable obligations               for CDS transactions, and is consistent
                                                  below, which Items have been prepared                   to the protection seller, in which case               with the clearinghouse’s financial
                                                                                                          the protection seller will be required to
                                                    20 17 CFR 200.30–3(a)(12).                            pay the protection buyer a defined                      3 ICC notes that to date, physical settlement has
                                                    1 15 U.S.C. 78s(b)(1).                                physical settlement amount. Under the                 not been necessary for any of the CDS Contracts
                                                    2 17 CFR 240.19b–4.                                   current ICC Rules, if physical settlement             cleared by ICC.



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                                                  16472                           Federal Register / Vol. 80, No. 59 / Friday, March 27, 2015 / Notices

                                                  resources, risk management procedures                   been made. Rule 2201(b), which                        Delivery Seller, and vice versa. Rules
                                                  and operational capabilities.4                          addresses delivery of certain notices                 2203(d) and (e) provide for copies of
                                                     ICC proposes to make certain                         between a Matched Delivery Pair, has                  relevant notices to be provided to ICC,
                                                  amendments to Chapters 1, 4, 5, 21 and                  been revised to include references to                 as well as notice of the completion of
                                                  22 of the ICC Rules. ICC also proposes                  Asset Package Delivery Notices. Rule                  settlement between the Matched
                                                  to adopt a related set of Delivery                      2201(c) has been deleted at the request               Delivery Buyer and Matched Delivery
                                                  Procedures and Physical Settlement and                  of Participants as being inconsistent                 Seller. Rule 2203(f) clarifies the
                                                  Notices Terms. ICC also proposes to                     with the terms of uncleared CDS and                   obligations of the respective parties to a
                                                  make certain related and conforming                     unnecessary in light of the provisions of             Matched Delivery Contract, and
                                                  changes to its Risk Management                          the ISDA Definitions and Rule 2202.                   addresses a scenario where an Asset
                                                  Framework. All capitalized terms not                       Rule 2202, which addresses                         Package being delivered is deemed to
                                                  defined herein are defined in the ICC                   resolution of disputes related to                     have a value of zero under the 2014
                                                  Rules.                                                  permissible deliverable obligations, has              ISDA Definitions. Rule 2203(g) allocates
                                                     In Chapter 1 of the ICC Rules, the                   been revised to incorporate the concept               costs and expenses that may be incurred
                                                  definition of ‘‘Client-Related Initial                  of Asset Package Delivery under the                   by ICC in connection with physical
                                                  Margin’’ has been amended so that it                    2014 ISDA Definitions, as well as                     settlement.
                                                  now includes Physical Settlement                        related concepts of Prior Deliverable                    Rule 2204, as revised, addresses
                                                  Margin collected with respect to Client-                Obligations, Package Observable Bonds                 physical settlement of certain
                                                  Related Positions. As discussed below,                  and Asset Package Delivery Notices.                   deliverable obligations that do not settle
                                                  such Physical Settlement Margin will                    Rules 2202(b) and (c) have also been                  in the ordinary course on a delivery-
                                                  now secure the obligations of a                         revised to address the consequences of                versus-payment basis (‘‘Non-DVP
                                                  Participant to ICC in connection with                   a selling Participant’s refusal to accept             Obligations’’). The rule establishes a
                                                  physical settlement. Similarly, in Rule                 delivery of a particular obligation,                  procedure under which the Matched
                                                  403, the definition of ‘‘Physical                       including for the offsetting transaction              Delivery Seller pays the physical
                                                  Settlement Margin’’ has been amended                    between ICC and the buying Participant.               settlement amount owed to ICC, which
                                                  to refer to such obligations to ICC (as                    Rule 2203 has been replaced with                   in turn will not pay such amount to the
                                                  opposed to the obligations to the                       new provisions addressing the                         Matched Delivery Buyer until ICC
                                                  matched Participant under the current                   clearinghouse’s role in physical                      receives notice that the obligation has
                                                  ICC Rules). In Rule 502(b), a conforming                settlement. When a Matched Delivery                   been received by the Matched Delivery
                                                  reference to Physical Settlement Margin                 Pair is established, the CDS Contract                 Seller from the Matched Delivery Buyer.
                                                  has been updated. A conforming change                   between the Matched Delivery Buyer                    If the obligation is not delivered, the
                                                  is also made in Rule 2101–02(a)(iv).                    and ICC is referred to as the Matched                 physical settlement amount is returned
                                                     In Chapter 22 (which covers physical                 Delivery Buyer Contract, and the                      to the Matched Delivery Seller.
                                                  settlement), a new Rule 2200 is added                   corresponding CDS Contract between                       Rule 2205 addresses settlement
                                                  with definitions relating to the revised                ICC and the Matched Delivery Seller is                failures by the Matched Delivery Seller
                                                  physical settlement provisions,                         referred to as the Matched Delivery                   or Matched Delivery Buyer. Under
                                                  including ‘‘Matched Delivery Buyer’’                    Seller Contract. Under the revised                    subsection (a), if the Matched Delivery
                                                  and ‘‘Matched Delivery Seller,’’ and the                physical settlement approach, ICC                     Seller fails to pay the physical
                                                  related terms ‘‘Matched Delivery                        remains party to each such contract, but              settlement amount when due, the
                                                  Contract,’’ ‘‘Matched Delivery Buyer                    requires certain notices, payments and                Matched Delivery Buyer Contract will
                                                  Contract,’’ ‘‘Matched Delivery Seller                   deliveries to take place directly between             be cash settled as between the Matched
                                                  Contract’’ and ‘‘MP Delivery Amount.’’                  the Matched Delivery Buyer and                        Delivery Buyer and ICC. ICC thus will
                                                  As discussed below, these terms are                     Matched Delivery Seller. Accordingly,                 not be obligated to take delivery of the
                                                  used in connection with the matching of                 under Rule 2203(a), for each Matched                  relevant deliverable obligations (and
                                                  buying Participants and selling                         Delivery Buyer Contract, ICC designates               dispose of them in a situation where the
                                                  Participants in the revised settlement                  the Matched Delivery Seller to receive                Matched Delivery Seller has failed to
                                                  procedures. A new definition of ‘‘Asset                 on ICC’s behalf notices and deliveries                perform), but will compensate the
                                                  Package Delivery Notice’’ has also been                 from the Matched Delivery Buyer and to                Matched Delivery Buyer for the value of
                                                  added to address notices in connection                  make payments on ICC’s behalf to the                  the Matched Delivery Buyer Contract
                                                  with Asset Package delivery under the                   Matched Delivery Buyer. Similarly,                    through the cash settlement process.
                                                  2014 ISDA Credit Derivatives                            under Rule 2203(b), for each Matched                  Pursuant to subsection (b), ICC may, in
                                                  Definitions (the ‘‘2014 ISDA                            Delivery Seller Contract, ICC designates              addition to its other default remedies,
                                                  Definitions’’).                                         the Matched Delivery Buyer to deliver                 terminate the Matched Delivery Seller
                                                     Rule 2201(a), which provides for                     on ICC’s behalf notices and deliveries to             Contract, in which case the Matched
                                                  matching of buying Participants and                     the Matched Delivery Seller, and to                   Delivery Seller will owe ICC an amount
                                                  selling Participants into a Matched                     receive on ICC’s behalf payments from                 equal to the cash settlement amount ICC
                                                  Delivery Pair in the case of physical                   the Matched Delivery Seller. The result               paid the Matched Delivery Buyer,
                                                  settlement, has been revised to address                 is that notices, payments and deliveries              together with other losses and expenses
                                                  scenarios where a Participant’s CDS                     will be made directly between the                     incurred by ICC as a result of the failure.
                                                  contracts must be split and matched                     Matched Delivery Buyer and Matched                    Rule 2205(c) provides that, consistent
                                                  with multiple other Participants for                    Delivery Seller, in satisfaction of the               with the terms of the ISDA Definitions
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                                                  purposes of physical settlement.                        parties and ICC’s respective obligations              applicable to a protection buyer
                                                  Conforming changes to use applicable                    under both the Matched Delivery Buyer                 generally, any failure by ICC to deliver
                                                  defined terms (such as Relevant                         Contract and Matched Delivery Seller                  any deliverable obligations to the
                                                  Restructuring Credit Event) have also                   Contract. Rule 2203(c) further clarifies              Matched Delivery Seller (including as a
                                                                                                          that the exercise of rights by Matched                result of a failure by the Matched
                                                    4 ICC notes that a substantially similar approach     Delivery Buyer against ICC will be                    Delivery Buyer to make a delivery) will
                                                  to physical settlement is used in the ICE Clear         deemed the exercise by ICC of the                     not constitute a default by ICC, and the
                                                  Europe Limited CDS clearing service.                    corresponding rights against Matched                  Matched Delivery Seller’s sole remedy


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                                                                                   Federal Register / Vol. 80, No. 59 / Friday, March 27, 2015 / Notices                                            16473

                                                  will be as set forth in the Matched                       Definitions, even though the Participant             customer. The Notices Terms do not
                                                  Delivery Seller Contract (which may                       is not its Affiliate. Rule 2207(b) clarifies         bind ICC and do not form part of the ICC
                                                  include, for example, buy-in remedies of                  certain procedures for obtaining price               Rules or ICC Procedures. The Notices
                                                  the Matched Delivery Seller). ICC will                    quotations for the relevant deliverable              Terms are published for the
                                                  not have any obligation to purchase or                    obligations in the event that a cash                 convenience and use of Participants and
                                                  acquire deliverable obligations (other                    settlement fallback applies.                         their customers, and are designed to be
                                                  than in settlement of the Matched                            Rule 2208 allows the Matched                      incorporated by reference in customer
                                                  Delivery Buyer Contract) in order to                      Delivery Buyer and Matched Delivery                  clearing documentation. However, a
                                                  settle the Matched Delivery Seller                        Seller to settle their rights and                    Participant and its customer may agree
                                                  Contract. This is consistent with the                     obligations as to physical settlement                to vary the Notices Terms as between
                                                  clearinghouse’s guarantee of finance                      through an alternative arrangement                   them.
                                                  performance, but not actual delivery. In                  agreed between them (referred to as a                   ICC also proposes to make certain
                                                  the event of a delivery failure by a                      ‘‘CADP’’), in lieu of settlement pursuant            changes to its Risk Management
                                                  Matched Delivery Buyer, such party will                   to Chapter 22 of the Rules. If they so               Framework to accommodate the changes
                                                  be liable to ICC for any costs incurred                   agree, ICC will have no obligation in                relating to physical settlement that are
                                                  by ICC in settling the corresponding                      respect of such alternative arrangement.             being made to the Rules and procedures
                                                  Matched Delivery Seller Contract (in                         Rule 2209(a) and (c) provide that                 as set forth herein. As revised, the Risk
                                                  addition to ICC’s other remedies for a                    margin (including physical settlement                Management Framework reflects the
                                                  default).                                                 margin) will continue to be called and               clearinghouse’s obligations in respect of
                                                     Rule 2206 covers certain other, non-                   held through settlement. Rule 2209(b)                physical settlement as provided in the
                                                  default scenarios in which physical                       provides that ICC will apply physical                amended Rules and procedures. It sets
                                                  settlement fails to occur. Under Rule                     settlement margin to satisfy the Matched             out the steps in the physical settlement
                                                  2206(a) and (b), if physical settlement of                Delivery Seller’s obligation to pay the              process to be taken by the clearinghouse
                                                  the Matched Buyer Delivery Contract                       physical settlement amount, and call                 if physical settlement applies, including
                                                  does not occur because the deliverable                    such seller for any shortfall.                       the matching of Participants into
                                                  obligation is in less than the relevant                      ICC also proposes to adopt Delivery               Matched Delivery Pairs, consistent with
                                                  minimum denomination or the Matched                       Procedures that further specify certain              the Rules and procedures. The revisions
                                                  Delivery Seller is not a permitted                        operational and other details for the                also address the calculation, collection
                                                  transferee of the obligation, the failure                 physical settlement process. Paragraph 1             and use of margin (including physical
                                                  will be treated as an illegality or                       provides certain definitions used in the             settlement margin) where physical
                                                  impossibility outside of the parties’                     Delivery Procedures. Paragraph 3.2 sets              settlement applies.
                                                  control, which will result in cash                        out certain requirements for providing                  Section 17A(b)(3)(F) of the Act 6
                                                  settlement 5 under the ISDA Definitions.                  notices in connection with physical                  requires, among other things, that the
                                                  In this and other scenarios where a cash                  settlement. Paragraphs 3.3(a)–(e)                    rules of a clearing agency be designed to
                                                  settlement fallback applies, the same                     establish the procedures and timetable               promote the prompt and accurate
                                                  cash settlement amount will apply to                      for ICC to allocate Matched Delivery                 clearance and settlement of securities
                                                  both the Matched Delivery Buyer                           Pairs and notify Participants                        transactions, and to the extent
                                                  Contract and Matched Delivery Seller                      accordingly. Paragraph 3.3(g) addresses              applicable, derivative agreements,
                                                  Contract under Rule 2206(c). Similarly,                   additional procedures concerning                     contracts and transactions and to
                                                  in the case of a buy-in, the same buy-                    delivery of notices by Participants in               comply with the provisions of the Act
                                                  in price will apply to both contracts.                    connection with physical settlement,                 and the rules and regulations
                                                  Rule 2206(d) provides for cash                            including as to relevant notice                      thereunder. ICC believes that the
                                                  settlement of both the Matched Delivery                   deadlines, requirements for providing                proposed rule change is consistent with
                                                  Buyer Contract and Matched Delivery                       copies of notices to the clearinghouse,              the requirements of the Act and the
                                                  Seller Contract in certain cases where                    treatment of late notices and procedures             rules and regulations thereunder
                                                  delivery does not occur between the                       for disputes involving notices.                      applicable to ICC, in particular, Section
                                                  Matched Delivery Buyer and the                            Paragraph 4 of the Delivery Procedures               17(A)(b)(3)(F) 7 and Rule 17Ad–22,8
                                                  customer for which it is acting. Rule                     specifies certain deadlines in                       because the proposed rule change will
                                                  2206(e) specifies the date of any cash                    connection with the physical settlement              assure the prompt and accurate
                                                  settlement and provides for notice of the                 of Non-DVP Obligations under Rule                    clearance and settlement of securities
                                                  relevant amount owed.                                     2204. Paragraph 5 specifies the deadline             transactions and derivatives agreements,
                                                     Rule 2207(a) provides for certain                      for notices that parties have elected a              contracts, and transactions. Specifically,
                                                  standard representations and related                      CADP.                                                ICC believes that the proposed
                                                  provisions for physical settlement in the                    ICC also proposes to adopt a set of               amendments will enhance the clearance
                                                  ISDA Definitions to apply as between                      Physical Settlement and Notices Terms                and settlement of CDS transactions in
                                                  the Matched Delivery Buyer and                            (‘‘Notices Terms’’) with respect to                  circumstances where physical
                                                  Matched Delivery Seller, and clarifies                    physical settlement. The Notices Terms               settlement applies. Although physical
                                                  ICC’s authority to designate a                            are intended to set forth in a uniform               settlement applies only rarely, and as a
                                                  Participant to make or receive physical                   way certain matters between a                        fallback to the normal procedure for
                                                  settlement on its behalf as provided in                   Participant and its customer in                      auction cash settlement, ICC and its
                                                  Rules 2203 and 2204 for purposes of                       connection with physical settlement,                 Participants believe that the
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                                                  Section 9.2(c)(iv) of the 2003 Definitions                including delivery of physical                       amendments will benefit the CDS
                                                  or Section 11.2(c)(iv) of the 2014                        settlement notices and delivery and                  market generally by making the physical
                                                                                                            receipt of deliverable obligations as                settlement process more robust and
                                                    5 Cash settlement in this context is different from     between the Participant and its                      providing greater certainty around the
                                                  the auction cash settlement that normally applies to      customer. The Notices Terms also
                                                  CDS contracts under the ISDA Definitions, and is
                                                  based on price quotations obtained by the relevant
                                                                                                            address the operation of certain cash                  6 15    U.S.C. 78q–1(b)(3)(F).
                                                  party to the contract for the obligation or obligations   settlement and other fallbacks as                      7 Id.

                                                  that cannot be delivered.                                 between the Participant and its                        8 17    CFR 240.17Ad–22.



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                                                  16474                           Federal Register / Vol. 80, No. 59 / Friday, March 27, 2015 / Notices

                                                  physical settlement process. ICC                        consistent with the requirements of Rule              remote circumstance, the amendments
                                                  proposes to extend its clearing                         17Ad–22(d)(15).12                                     are intended to extend the benefit of the
                                                  guarantee to the financial performance                     In terms of financial resources, ICC               clearing guarantee to that process in the
                                                  of physical settlement, which eliminates                will continue to collect initial and mark-            event it occurs, and therefore would
                                                  the existing gap in coverage where                      to-market margin for CDS Contracts                    generally be expected to benefit all
                                                  contracts go to physical settlement and                 through the completion of physical                    market participants. Although ICC may
                                                  avoids exposing Participants to the                     settlement, and does not propose to                   collect additional physical settlement
                                                  direct credit of other Participants in the              change its margin methodology with                    margin in connection with physical
                                                  case of physical settlement. At the same                respect thereto in connection with these              settlement, such margin is, in ICC’s
                                                  time, ICC has designed the revised                      amendments. In addition, ICC will                     view, necessary to protect the operation
                                                  procedures so that it is not itself                     collect physical settlement margin to                 of the clearinghouse and will affect all
                                                  required to make or take delivery of                    cover the specific obligations of                     Participants with positions that go to
                                                  underlying deliverable obligations. In                  Participants to the clearinghouse with                physical settlement. In other respects,
                                                  the ordinary course, payments and                       respect to physical settlement. In ICC’s              ICC does not anticipate that these
                                                  deliveries (and related notices) will be                view, its financial resources will as a               enhancements will materially affect the
                                                  made directly between the matched                       result be sufficient to support its                   cost of clearing for Participants or other
                                                  buying and selling Participants. In the                 clearing operations, including under the              market participants. In addition, ICC is
                                                  case of a settlement failure, the                       amended physical settlement                           not otherwise proposing to change its
                                                  clearinghouse’s obligations will be                     procedures, in a manner consistent with               standards for access to the
                                                  settled in cash, avoiding the need for the              the requirements of Rule 17Ad–                        clearinghouse or the terms and
                                                  clearinghouse to obtain or dispose of                   22(d)(2).13                                           conditions of cleared contracts (which
                                                  deliverable obligations. In ICC’s view,                    In terms of default management, the                already provide for physical settlement
                                                  this allows it to appropriately limit and               amendments provide additional                         in these limited circumstances, but
                                                  manage its risks with respect to physical               procedures for addressing settlement                  without the benefit of the clearinghouse
                                                  settlement of cleared CDS contracts. As                 failures in the physical settlement                   guarantee). As a result, ICC does not
                                                  a result, ICC believes that the                         process, in a manner that provides                    believe the amendments will adversely
                                                  amendments will promote the accurate                    financial protection to non-defaulting                affect the ability of Participants or other
                                                  clearing and settlement of CDS                          Participants while avoiding the need for              market participants to continue to clear
                                                  contracts, and are therefore consistent                 the clearinghouse to make or take                     CDS contracts. ICC also does not believe
                                                  with the requirements of Section                        physical delivery. ICC believes that                  the enhancements will limit the
                                                  17A(b)(3)(F) of the Act.9                               these additional provisions, together                 availability of clearing in CDS products
                                                     In addition, the amendments are                      with its existing default management                  for Participants or their customers or
                                                  consistent with the requirements of Rule                rules and procedures, will permit it to               otherwise limit market participants’
                                                  17Ad–22.10 In particular, Rule 17Ad–                    take timely action to contain losses and              choices for selecting clearing services in
                                                  22(d)(15) 11 requires that ICC ‘‘state to its           liquidity pressures and continue                      CDS. Therefore, ICC does not believe the
                                                  participants the clearing agency’s                      meeting its obligations in the case of a              proposed rule change imposes any
                                                  obligations with respect to physical                    default, including in connection with                 burden on competition that is not
                                                  deliveries and identify and manage the                  physical settlement, within the meaning               appropriate in furtherance of the
                                                  risks from these obligations.’’ As                      of Rule 17Ad–22(d)(11).14                             purpose of the Act.
                                                  discussed above, revised chapter 22 of                     ICC also believes that its operational
                                                  the Rules clearly states ICC’s obligations              systems and capabilities are sufficient to            C. Self-Regulatory Organization’s
                                                  with respect to physical settlement of                  support the changes to physical                       Statement on Comments on the
                                                  CDS Contracts. The revised Rules                        settlement. As discussed above, ICC                   Proposed Rule Change Received From
                                                  establish the clearinghouse’s                           proposes to adopt Delivery Procedures                 Members, Participants or Others
                                                  responsibility for financial performance                that would specify certain key
                                                  of physically settled contracts, while                                                                          Written comments relating to the
                                                                                                          operational aspects of the physical
                                                  establishing the procedures for                                                                               proposed rule change have not been
                                                                                                          settlement process. These procedures, as
                                                  settlement in the ordinary course to take                                                                     solicited or received. ICC will notify the
                                                                                                          well as related systems and
                                                  place directly between the buying                                                                             Commission of any written comments
                                                                                                          arrangements, address relevant sources
                                                  Participant and the selling Participant.                                                                      received by ICC.
                                                                                                          of operational risk in the physical
                                                  The Rules also establish the procedures                 settlement process and are designed to                III. Date of Effectiveness of the
                                                  to be followed in the case of a                         minimize such risks, within the                       Proposed Rule Change and Timing for
                                                  settlement failure and the                              meaning of Rule 17Ad–22(d)(4).15                      Commission Action
                                                  responsibilities of the relevant
                                                  Participants and ICC with respect                       B. Self-Regulatory Organization’s                       Within 45 days of the date of
                                                  thereto, and provide a mechanism for                    Statement on Burden on Competition                    publication of this notice in the Federal
                                                  ICC to effect settlement in cash without                  ICC does not believe the proposed                   Register or within such longer period
                                                  having to acquire or dispose of the                     amendments would have any impact, or                  up to 90 days (i) as the Commission may
                                                  underlying deliverable obligations. In                  impose any burden, on competition not                 designate if it finds such longer period
                                                  ICC’s view, these arrangements permit it                necessary or appropriate in furtherance               to be appropriate and publishes its
                                                  to appropriately manage the risks to the                of the purpose of the Act. The                        reasons for so finding or (ii) as to which
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                                                  clearinghouse from the physical                         amendments will apply uniformly                       the self-regulatory organization
                                                  settlement obligations it would                         across all Participants. Although                     consents, the Commission will:
                                                  undertake under the proposed                            physical settlement is expected to be a                 (A) By order approve or disapprove
                                                  amendments, and are therefore                                                                                 the proposed rule change, or
                                                                                                            12 Id.
                                                    9 15 U.S.C. 78q–1(b)(3)(F).                             13 17 CFR 240.17Ad–22(d)(2).                          (B) institute proceedings to determine
                                                    10 17 CFR 240.17Ad–22.                                  14 17 CFR 240.17Ad–22(d)(11).                       whether the proposed rule change
                                                    11 17 CFR 240.17Ad–22(d)(15).                           15 17 CFR 240.17Ad–22(d)(4).                        should be disapproved.


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                                                                                    Federal Register / Vol. 80, No. 59 / Friday, March 27, 2015 / Notices                                                    16475

                                                  IV. Solicitation of Comments                                For the Commission, by the Division of              the Commission’s Public Reference
                                                                                                            Trading and Markets, pursuant to delegated            Room.
                                                    Interested persons are invited to                       authority.16
                                                  submit written data, views, and                           Brent J. Fields,                                      II. Self-Regulatory Organization’s
                                                  arguments concerning the foregoing,                       Secretary.
                                                                                                                                                                  Statement of the Purpose of, and
                                                  including whether the proposed rule                                                                             Statutory Basis for, the Proposed Rule
                                                                                                            [FR Doc. 2015–06992 Filed 3–26–15; 8:45 am]
                                                  change is consistent with the Act.                                                                              Change
                                                                                                            BILLING CODE 8011–01–P
                                                  Comments may be submitted by any of                                                                               In its filing with the Commission, the
                                                  the following methods:                                                                                          Exchange included statements
                                                  Electronic Comments                                       SECURITIES AND EXCHANGE                               concerning the purpose of and basis for
                                                                                                            COMMISSION                                            the proposed rule change and discussed
                                                    • Use the Commission’s Internet                                                                               any comments it received on the
                                                  comment form (http://www.sec.gov/                         [Release No. 34–74565; File No. SR–BATS–              proposed rule change. The text of these
                                                  rules/sro.shtml); or                                      2015–22]                                              statements may be examined at the
                                                    • Send an email to rule-comments@                                                                             places specified in Item IV below. The
                                                                                                            Self-Regulatory Organizations; BATS
                                                  sec.gov. Please include File Number SR–                                                                         Exchange has prepared summaries, set
                                                                                                            Exchange, Inc.; Notice of Filing and
                                                  ICC–2015–004 on the subject line.                                                                               forth in sections A, B, and C below, of
                                                                                                            Immediate Effectiveness of a Proposed
                                                                                                                                                                  the most significant parts of such
                                                  Paper Comments                                            Rule Change To Adopt New Rule 21.17,
                                                                                                                                                                  statements.
                                                                                                            Exchange Sharing of User Designated
                                                    • Send paper comments in triplicate                     Risk Settings                                         A. Self-Regulatory Organization’s
                                                  to Secretary, Securities and Exchange                                                                           Statement of the Purpose of, and
                                                  Commission, 100 F Street NE.,                             March 23, 2015.                                       Statutory Basis for, the Proposed Rule
                                                  Washington, DC 20549–1090.                                   Pursuant to section 19(b)(1) of the                Change
                                                                                                            Securities Exchange Act of 1934 (the
                                                  All submissions should refer to File                      ‘‘Act’’),1 and Rule 19b–4 thereunder,2                1. Purpose
                                                  Number SR–ICC–2015–004. This file                         notice is hereby given that on March 13,                 The Exchange is proposing to adopt
                                                  number should be included on the                          2015, BATS Exchange, Inc. (the                        new Rule 21.17, Exchange Sharing of
                                                  subject line if email is used. To help the                ‘‘Exchange’’ or ‘‘BATS’’) filed with the              User Designated Risk Settings, in order
                                                  Commission process and review your                        Securities and Exchange Commission                    to authorize the Exchange to share any
                                                  comments more efficiently, please use                     (‘‘Commission’’) the proposed rule                    of a User’s risk settings with the
                                                  only one method. The Commission will                      change as described in Items I and II                 Clearing Member that clears
                                                  post all comments on the Commission’s                     below, which Items have been prepared                 transactions on behalf of the User.
                                                  Internet Web site (http://www.sec.gov/                    by the Exchange. The Exchange has                        Under BATS Rule 17.2(b), Options
                                                  rules/sro.shtml). Copies of the                           designated this proposal as a ‘‘non-                  Members 7 must be Clearing Members or
                                                  submission, all subsequent                                controversial’’ proposed rule change                  establish a clearing arrangement with a
                                                  amendments, all written statements                        pursuant to section 19(b)(3)(A) of the                Clearing Member. Rule 21.13(a)
                                                  with respect to the proposed rule                         Act 3 and Rule 19b–4(f)(6)(iii)                       provides that every Clearing Member is
                                                  change that are filed with the                            thereunder,4 which renders it effective               responsible for the clearance of BATS
                                                  Commission, and all written                               upon filing with the Commission. The                  Options Transactions 8 of such Clearing
                                                  communications relating to the                            Commission is publishing this notice to               Member and of each User that gives up
                                                  proposed rule change between the                          solicit comments on the proposed rule                 such Clearing Member’s name pursuant
                                                  Commission and any person, other than                     change from interested persons.                       to a letter of authorization, letter of
                                                  those that may be withheld from the                                                                             guarantee, or other authorization given
                                                  public in accordance with the                             I. Self-Regulatory Organization’s
                                                                                                            Statement of the Terms of Substance of                by such Clearing Member to such User,
                                                  provisions of 5 U.S.C. 552, will be                                                                             which authorization must be submitted
                                                  available for Web site viewing and                        the Proposed Rule Change
                                                                                                                                                                  to the Exchange. Further, no Options
                                                  printing in the Commission’s Public                          The Exchange filed a proposal to                   Member may make any transactions on
                                                  Reference Room, 100 F Street NE.,                         authorize the BATS Options Market                     the Exchange unless a letter of guarantee
                                                  Washington, DC 20549, on official                         (‘‘BATS Options’’) to share a User’s 5                providing that the issuing Clearing
                                                  business days between the hours of                        risk settings with the Clearing Member 6              Member accepts financial
                                                  10:00 a.m. and 3:00 p.m. Copies of such                   that clears transactions on behalf of the             responsibilities for all BATS Options
                                                  filings will also be available for                        User.                                                 Transactions made by the Options
                                                  inspection and copying at the principal                      The text of the proposed rule change               Member (a ‘‘Letter of Guarantee’’) has
                                                  office of ICE Clear Credit and on ICE                     is available at the Exchange’s Web site               been issued for such Options Member
                                                  Clear Credit’s Web site at https://                       at www.batstrading.com, at the                        by a Clearing Member and filed with the
                                                  www.theice.com/clear-credit/regulation.                   principal office of the Exchange, and at              Exchange.
                                                     All comments received will be posted                                                                            Thus, while not all Options Members
                                                  without change; the Commission does                         1 15 U.S.C. 78s(b)(1).                              are Clearing Members, all Options
                                                  not edit personal identifying                               2 17 CFR 240.19b–4.
                                                                                                              3 15 U.S.C. 78s(b)(3)(A).
                                                  information from submissions. You                                                                                  7 An Options Member is defined as ‘‘a firm, or
                                                                                                              4 17 CFR 240.19b–4(f)(6)(iii).
                                                  should submit only information that                                                                             organization that is registered with the Exchange
mstockstill on DSK4VPTVN1PROD with NOTICES




                                                                                                              5 A User is defined as ‘‘any Options member or      pursuant to Chapter XVII of these Rules for
                                                  you wish to make available publicly. All                  Sponsored Participant who is authorized to obtain     purposes of participating in options trading on
                                                  submissions should refer to File                          access to the System pursuant to Rule 11.3            BATS Options as an ‘Options Order Entry Firm’ or
                                                  Number SR–ICC–2015–004 and should                         (Access).’’ See Exchange Rule 16.1(a)(63).            ‘Options Market Maker.’ ’’ See Exchange Rule
                                                  be submitted on or before April 17,                         6 A Clearing Member is defined as ‘‘an Options      16.1(a)(38).
                                                  2015.                                                     Member that is self-clearing or an Options Member        8 A BATS Options Transactions is defined as ‘‘a

                                                                                                            that clears BATS Options Transactions for other       transaction involving an options contract that is
                                                                                                            Members of BATS Options.’’ See Exchange Rule          effected on or through BATS Options or its facilities
                                                    16 17   CFR 200.30–3(a)(12).                            16.1(a)(15).                                          or systems.’’ See Exchange Rule 16.1(a)(11).



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Document Created: 2015-12-18 11:36:55
Document Modified: 2015-12-18 11:36:55
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation80 FR 16471 

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