80 FR 28733 - Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change Relating to Collateral and Haircut Policy

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 96 (May 19, 2015)

Page Range		28733-28735
FR Document		2015-12032
Federal Register, Volume 80 Issue 96 (Tuesday, May 19, 2015)
[Federal Register Volume 80, Number 96 (Tuesday, May 19, 2015)]
[Notices]
[Pages 28733-28735]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-12032]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74955; File No. SR-ICEEU-2015-007]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to Collateral and Haircut 
Policy

May 13, 2015.

I.Introduction

    On March 13, 2015, ICE Clear Europe Limited (``ICE Clear Europe'' 
or ``Clearing House'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 
19b-4 thereunder,\2\ to implement a new collateral and haircut policy 
(the ``Haircut Policy'') applicable to Permitted Cover posted by 
Clearing Members to meet the Clearing House's Margin and Guaranty Fund 
requirements. The proposed rule change was published for comment in the 
Federal Register on March 31, 2015.\3\ The Commission did not receive 
comment letters regarding the proposed change. For the reasons 
discussed below, the Commission is granting approval of the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-74579 (Mar. 25, 
2015), 80 FR 17132 (Mar. 31, 2015) (SR-ICEEU-2015-007).
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II. Description of the Proposed Rule Change

    ICE Clear Europe proposes to implement a Haircut Policy, which 
would codify and consolidate certain existing practices of the Clearing 
House with respect to Permitted Cover. The proposed Haircut Policy is 
designed (i) to set out overall principles with respect to the assets 
accepted by the Clearing House as Permitted Cover; (ii) to establish a 
framework for determining absolute and relative limits, as applicable, 
on the value of the collateral that may be posted by a Clearing Member 
as Permitted Cover; (iii) to establish a value-at-risk (``VaR'') based 
methodology for determining haircuts for all Permitted Cover; (iv) to 
mitigate wrong-way risk from Permitted Cover; (v) to address sources 
for pricing Permitted Cover; and (vi) to set out certain related 
monitoring, reviewing and reporting procedures. The Haircut Policy 
would apply to Permitted Cover provided for all product classes (F&O, 
CDS and FX).\4\ Following implementation, the Clearing House will from 
time to time adjust the haircuts applicable to Permitted Cover under 
the methodology set forth in the policy.
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    \4\ ICE Clear Europe notes that although the Haircut Policy 
generally also applies to Permitted Cover posted with respect to 
Guaranty Fund requirements, certain additional requirements apply to 
Guaranty Fund contributions under the Rules and Finance Procedures. 
Those additional requirements are not proposed to be changed in 
connection with the Haircut Policy.
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    The general aims of the proposed Haircut Policy are to ensure that 
the Clearing House can efficiently liquidate all forms of Permitted 
Cover, that appropriate prices are used for valuation of Permitted 
Cover and that appropriate haircuts (including, as applicable, cross-
currency haircuts) are used. The proposed Haircut Policy would codify 
certain general principles considered by the Clearing House in 
accepting assets as Permitted Cover, including availability of pricing 
information, the existence of liquid and active markets for buyers and 
sellers of those assets, the existence of sufficient price history, the 
ability to liquidate Permitted Cover without causing a market 
disruption, compliance with legal and regulatory requirements and 
sufficient operational and technological framework to handle deposit, 
liquidation and return of such assets as Permitted Cover.
    Under the proposed Haircut Policy, cash collateral must be in one 
of several specified currencies underlying contracts cleared by the 
Clearing House. Additional general requirements would apply to 
financial instruments, including prohibitions on acceptance of 
instruments that have non-``vanilla'' features such as embedded 
options, instruments issued by a Clearing Member or its affiliate, 
instruments issued by a CCP or by entities that provide critical 
services to the Clearing House (other than central banks) and certain 
credit-based limits. Such limits would require that the issuer is rated 
at least ``BBB-'' by S&P (or its equivalent), the average yield on the 
asset over the previous three months is not greater than 8%, and the 5-
year CDS spread of the issuer has not exceeded 500 basis points over 
the previous three months. The proposed Haircut Policy provides that 
where market conditions warrant, or where the Clearing House's 
sovereign risk model indicates deteriorating credit below a certain 
threshold (i.e., ``BBB-'' by S&P), the Clearing House may remove 
securities from the list of Permitted Cover and/or vary applicable 
haircuts. ICE Clear Europe will notify Clearing Members and other 
market participants of such actions by Circular. ICE Clear Europe 
maintains the current List of Permitted

[[Page 28734]]

Cover (along with haircut rates, limits and restrictions) on its Web 
site at https://www.theice.com/publicdocs/clear_europe/list-of-permitted-covers.pdf.
    The proposed Haircut Policy contains a methodology for setting 
absolute limits on the value of non-cash Permitted Cover that can be 
posted by a Clearing Member.\5\ Absolute collateral limits would apply 
across a group of affiliated Clearing Members and apply across all 
product categories cleared by that group. The policy also sets out 
relative (or concentration) limits for Permitted Cover provided by a 
Clearing Member. ICE Clear Europe publishes on its Web site the current 
absolute and relative limits on government bonds provided as Permitted 
Cover. In addition, the policy sets out procedures for monitoring of 
limits on a daily basis and for remediation of breach of a limit by a 
Clearing Member. The risk management department will monitor all 
collateral limits on a daily basis using a collateral breakdown report 
which flags limit breaches. Breaches will be reviewed internally and 
the relevant Clearing Member will be contacted. Breaches can be 
remediated by posting additional collateral, removal of collateral that 
is in breach of a limit, or both of the above.
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    \5\ The Clearing House does not impose absolute or relative 
limits on the use of U.S. Treasury securities as Permitted Cover.
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    The policy also provides for a risk-based reduction in absolute 
limits for government bonds based on the credit default swap (``CDS'') 
spread for the relevant issuer in order to mitigate wrong-way risk 
arising from government bonds accepted as Permitted Cover. Once the 
spread exceeds a specified level for a particular issuer, the absolute 
limit for Permitted Collateral of that issuer would be reduced pursuant 
to a defined formula. If the spread exceeds a second level, the 
absolute limit will be reduced to 5% of the otherwise applicable 
original limit. Spread levels are determined using a five-day average 
to avoid excessive volatility. The specified parameters will be 
reviewed on a quarterly basis.
    Specific wrong-way risk arising in connection with clearing of 
Western European sovereign CDS is addressed through a requirement that 
U.S. dollar denominated collateral be provided for initial margin and 
that a portion of the CDS Guaranty Fund be U.S. dollar-based 
(determined based on the ratio between the dollar-denominated and Euro-
denominated initial margin requirements for CDS). In addition, where 
the member's aggregate short position in sovereign CDS with respect to 
a sovereign exceeds a specified threshold, the Clearing House may 
decline to accept government bonds of that sovereign or any other 
sovereign bonds that exhibit certain correlations with such government 
bonds.
    The Haircut Policy also addresses potential wrong-way risk arising 
from Permitted Cover more generally. The Clearing House will monitor 
collateral on a daily basis. Where the Clearing House considers there 
to be strong general wrong-way risk between a Clearing Member and the 
asset it is posting, the Clearing House will ask the member to change 
the composition of collateral to mitigate that risk.
    The Haircut Policy establishes a VaR-based methodology for 
determining haircuts for Permitted Cover. Under the proposed Haircut 
Policy, the Clearing House will calculate six different estimations of 
VaR for each applicable risk factor. Each estimation is calculated 
using a 99.9% confidence interval (applicable to Permitted Cover posted 
with respect to all product categories). The proposed haircut will be 
based on the largest VaR of the 6 estimations. The policy specifies 
relevant price sources that will be used for the calculation of 
haircuts for each type of Permitted Cover. Haircuts will be determined 
using the bid prices of Permitted Cover assets, in order to account for 
higher liquidation costs in stressed markets. The applicable haircuts 
will be reviewed on a monthly basis, or more frequently where the risk 
management department deems it necessary.
    Under the proposed policy, the risk management department may 
further adjust the haircut determined under the model as it determines 
prudent in light of additional qualitative and quantitative factors, 
including: the Clearing House's credit assessment of the issuer, 
current market conditions and volatility, expected future volatility, 
the liquidity of the underlying market for the asset, including bid/ask 
spread, wrong way risk considerations, VaR estimates determined for a 
period of stressed market conditions, and other factors that might 
affect the liquidity or value of an asset in stressed market 
conditions. ICE Clear Europe anticipates that such adjustments to the 
value calculated under the model would be used only in exceptional 
circumstances and would expect to use such adjustments to increase 
haircuts in stressed market circumstances. ICE Clear Europe has stated 
that it will make judicious use of current market information to 
override the model but anticipates exercising this ability in less than 
5% of haircut rates.
    The proposed Haircut Policy also sets a minimum haircut level of 3% 
in order to avoid pro-cyclical variation in haircuts and will review 
this minimum level annually under the Haircut Policy. In addition, a 
haircut add-on of up to 1% will be applied during the period until the 
next monthly review to issuers presenting increased credit risk. The 
add-on is applied once the issuer's CDS spread exceeds a specified 
level, and increases in steps of 0.25% up to a maximum of 1% where the 
CDS spread exceeds higher thresholds. The add-on is generally designed 
to anticipate potential haircut increases as part of the next monthly 
review cycle.
    The proposed policy also imposes cross-currency haircuts to address 
the exchange rate risk faced by the Clearing House where the Permitted 
Cover is denominated in a different currency from the currency of the 
applicable margin requirement. Under the proposed Haircut Policy, 
cross-currency haircuts are determined using the same methodology 
described above for other haircuts, but are subject to a minimum 
haircut of 4.5%. Cross-currency haircuts will be applied in addition to 
any applicable haircut for the relevant form of Permitted Cover.
    The Clearing House will monitor Permitted Cover on a daily and 
intraday basis. The Clearing House may, under its existing Rules and 
the Haircut Policy, take action to mitigate any change in risk, 
including by increasing haircuts, calling for additional collateral, 
reducing concentration limits and removing an asset from eligibility as 
Permitted Cover. The Clearing House will monitor the value of Permitted 
Cover deposited with it on a real time basis. Any change in a member's 
intra-day cover value that is greater than 3% will be flagged 
immediately by the Risk Management intraday monitoring system that is 
monitored by the Risk Management team throughout the business day. Any 
breach will be investigated and appropriate action taken where 
necessary. The Clearing House also will backtest haircuts based on 
price moves observed in the markets on a daily basis, and review 
haircut levels if a price move breaches an existing haircut. The 
Clearing House will prepare daily reports with respect to Permitted 
Cover for purposes of internal monitoring and provide monthly reports 
to the relevant Risk Committees and Board Risk Committee.
    The Clearing House will review the Haircut Policy on an annual 
basis (which will include review by the Board Risk Committee) or where 
there is a material change to the risk exposure of the Clearing House. 
The Haircut Policy

[[Page 28735]]

also will be independently reviewed annually under the Clearing House's 
model governance framework.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \6\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if the 
Commission finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such self-regulatory organization. Section 17A(b)(3)(F) 
of the Act \7\ requires, among other things, that the rules of a 
clearing agency are designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions and, in 
general, to protect investors and the public interest.
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    \6\ 15 U.S.C. 78s(b)(2)(C).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds that the proposed rule change is consistent 
with Section 17A of the Act \8\ and the rules thereunder applicable to 
ICE Clear Europe. The proposed Haircut Policy will codify the general 
principles and limitations for assets accepted by ICE Clear Europe as 
Permitted Cover. The proposed policy also provides a framework for 
ensuring that appropriate prices are used to value Permitted Cover and 
establishes a VaR-based methodology, utilizing six different 
estimations for each applicable risk factor and calculating each 
estimation using a 99.9% confidence interval, for determining haircuts 
to ensure that the value of Permitted Cover held by ICE Clear Europe is 
sufficient to cover the Clearing House's Margin and Guaranty Fund 
requirements. The policy also provides a methodology for setting 
absolute and relative concentration limits on particular bonds a 
Clearing Member may provide as Permitted Cover to guard against 
liquidity and concentration risks and establishes several measures 
designed to mitigate wrong-way-risk. In addition, the proposed policy 
provides procedures for the regular review and monitoring of Permitted 
Cover and associated haircuts and permits the Clearing House to respond 
promptly to changes in market conditions by modifying haircuts or other 
limits on Permitted Cover. Accordingly, the Commission believes that 
the Haircut Policy is designed to appropriately value Permitted Cover 
and enable ICE Clear Europe to efficiently and effectively liquidate 
all forms of accepted Permitted Cover to satisfy its payment 
obligations in the event of a Clearing Member default. The Commission 
therefore finds that the proposed rule change is designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions and, to the extent applicable, derivative agreements, 
contracts, and transactions and, in general, to protect investors and 
the public interest in accordance with Section 17A(b)(3)(F) of the 
Act.\9\
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    \8\ 15 U.S.C. 78q-1.
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \10\ and the 
rules and regulations thereunder.
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    \10\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-ICEEU-2015-007) be, 
and hereby is, approved.\12\
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-12032 Filed 5-18-15; 8:45 am]
 BILLING CODE 8011-01-P
Federal Register / Vol. 80, No. 96 / Tuesday, May 19, 2015 / Notices 28733

Comments may be submitted by any of SECURITIES AND EXCHANGE implementation, the Clearing House
the following methods: COMMISSION will from time to time adjust the
haircuts applicable to Permitted Cover
Electronic Comments [Release No. 34–74955; File No. SR–ICEEU–
2015–007]
under the methodology set forth in the
• Use the Commission’s Internet policy.
comment form (http://www.sec.gov/ Self-Regulatory Organizations; ICE The general aims of the proposed
rules/sro.shtml); or Clear Europe Limited; Order Approving Haircut Policy are to ensure that the
Proposed Rule Change Relating to Clearing House can efficiently liquidate
• Send an email to rule-comments@ all forms of Permitted Cover, that
sec.gov. Please include File Number SR– Collateral and Haircut Policy
appropriate prices are used for valuation
NYSEARCA–2015–38 on the subject May 13, 2015. of Permitted Cover and that appropriate
line. haircuts (including, as applicable, cross-
I.Introduction
Paper Comments currency haircuts) are used. The
On March 13, 2015, ICE Clear Europe proposed Haircut Policy would codify
• Send paper comments in triplicate Limited (‘‘ICE Clear Europe’’ or certain general principles considered by
to Secretary, Securities and Exchange ‘‘Clearing House’’) filed with the the Clearing House in accepting assets
Commission, 100 F Street NE., Securities and Exchange Commission as Permitted Cover, including
Washington, DC 20549–1090. (‘‘Commission’’) a proposed rule change availability of pricing information, the
pursuant to Section 19(b)(1) of the existence of liquid and active markets
All submissions should refer to File Securities Exchange Act of 1934 for buyers and sellers of those assets, the
Number SR–NYSEARCA–2015–38. This (‘‘Act’’),1 and Rule 19b–4 thereunder,2 existence of sufficient price history, the
file number should be included on the to implement a new collateral and ability to liquidate Permitted Cover
subject line if email is used. haircut policy (the ‘‘Haircut Policy’’) without causing a market disruption,
To help the Commission process and applicable to Permitted Cover posted by compliance with legal and regulatory
review your comments more efficiently, Clearing Members to meet the Clearing requirements and sufficient operational
please use only one method. The House’s Margin and Guaranty Fund and technological framework to handle
Commission will post all comments on requirements. The proposed rule change deposit, liquidation and return of such
the Commission’s Internet Web site was published for comment in the assets as Permitted Cover.
(http://www.sec.gov/rules/sro.shtml). Federal Register on March 31, 2015.3 Under the proposed Haircut Policy,
Copies of the submission, all subsequent The Commission did not receive cash collateral must be in one of several
amendments, all written statements comment letters regarding the proposed specified currencies underlying
with respect to the proposed rule change. For the reasons discussed contracts cleared by the Clearing House.
change that are filed with the below, the Commission is granting Additional general requirements would
Commission, and all written approval of the proposed rule change. apply to financial instruments,
communications relating to the II. Description of the Proposed Rule including prohibitions on acceptance of
proposed rule change between the Change instruments that have non-‘‘vanilla’’
Commission and any person, other than features such as embedded options,
those that may be withheld from the ICE Clear Europe proposes to instruments issued by a Clearing
public in accordance with the implement a Haircut Policy, which Member or its affiliate, instruments
provisions of 5 U.S.C. 552, will be would codify and consolidate certain issued by a CCP or by entities that
available for Web site viewing and existing practices of the Clearing House provide critical services to the Clearing
printing in the Commission’s Public with respect to Permitted Cover. The House (other than central banks) and
Reference Room, 100 F Street NE., proposed Haircut Policy is designed (i) certain credit-based limits. Such limits
Washington, DC 20549, on official to set out overall principles with respect would require that the issuer is rated at
business days between the hours of to the assets accepted by the Clearing least ‘‘BBB¥’’ by S&P (or its
10:00 a.m. and 3:00 p.m. Copies of the House as Permitted Cover; (ii) to equivalent), the average yield on the
filing will also be available for establish a framework for determining asset over the previous three months is
inspection and copying at the NYSE’s absolute and relative limits, as not greater than 8%, and the 5-year CDS
principal office and on its Internet Web applicable, on the value of the collateral spread of the issuer has not exceeded
site at www.nyse.com. All comments that may be posted by a Clearing 500 basis points over the previous three
received will be posted without change; Member as Permitted Cover; (iii) to months. The proposed Haircut Policy
the Commission does not edit personal establish a value-at-risk (‘‘VaR’’) based provides that where market conditions
identifying information from methodology for determining haircuts warrant, or where the Clearing House’s
submissions. You should submit only for all Permitted Cover; (iv) to mitigate sovereign risk model indicates
information that you wish to make wrong-way risk from Permitted Cover; deteriorating credit below a certain
available publicly. All submissions (v) to address sources for pricing threshold (i.e., ‘‘BBB¥’’ by S&P), the
should refer to File Number SR– Permitted Cover; and (vi) to set out Clearing House may remove securities
NYSEARCA–2015–38, and should be certain related monitoring, reviewing from the list of Permitted Cover and/or
submitted on or before June 9, 2015. and reporting procedures. The Haircut vary applicable haircuts. ICE Clear
Policy would apply to Permitted Cover Europe will notify Clearing Members
For the Commission, by the Division of provided for all product classes (F&O, and other market participants of such
Trading and Markets, pursuant to delegated CDS and FX).4 Following actions by Circular. ICE Clear Europe
authority.37
tkelley on DSK3SPTVN1PROD with NOTICES

maintains the current List of Permitted
Robert W. Errett, 1 15 U.S.C. 78s(b)(1).
Deputy Secretary. 2 17 CFR 240.19b–4. posted with respect to Guaranty Fund requirements,
3 Securities Exchange Act Release No. 34–74579
[FR Doc. 2015–12028 Filed 5–18–15; 8:45 am] certain additional requirements apply to Guaranty
(Mar. 25, 2015), 80 FR 17132 (Mar. 31, 2015) (SR– Fund contributions under the Rules and Finance
BILLING CODE 8011–01–P
ICEEU–2015–007). Procedures. Those additional requirements are not
4 ICE Clear Europe notes that although the Haircut proposed to be changed in connection with the
37 17 CFR 200.30–3(a)(12). Policy generally also applies to Permitted Cover Haircut Policy.

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28734 Federal Register / Vol. 80, No. 96 / Tuesday, May 19, 2015 / Notices

Cover (along with haircut rates, limits position in sovereign CDS with respect The proposed Haircut Policy also sets
and restrictions) on its Web site at to a sovereign exceeds a specified a minimum haircut level of 3% in order
https://www.theice.com/publicdocs/ threshold, the Clearing House may to avoid pro-cyclical variation in
clear_europe/list-of-permitted- decline to accept government bonds of haircuts and will review this minimum
covers.pdf. that sovereign or any other sovereign level annually under the Haircut Policy.
The proposed Haircut Policy contains bonds that exhibit certain correlations In addition, a haircut add-on of up to
a methodology for setting absolute with such government bonds. 1% will be applied during the period
limits on the value of non-cash The Haircut Policy also addresses until the next monthly review to issuers
Permitted Cover that can be posted by potential wrong-way risk arising from presenting increased credit risk. The
a Clearing Member.5 Absolute collateral Permitted Cover more generally. The add-on is applied once the issuer’s CDS
limits would apply across a group of Clearing House will monitor collateral spread exceeds a specified level, and
affiliated Clearing Members and apply on a daily basis. Where the Clearing increases in steps of 0.25% up to a
across all product categories cleared by House considers there to be strong maximum of 1% where the CDS spread
that group. The policy also sets out general wrong-way risk between a exceeds higher thresholds. The add-on
relative (or concentration) limits for Clearing Member and the asset it is is generally designed to anticipate
Permitted Cover provided by a Clearing posting, the Clearing House will ask the potential haircut increases as part of the
Member. ICE Clear Europe publishes on member to change the composition of next monthly review cycle.
its Web site the current absolute and collateral to mitigate that risk. The proposed policy also imposes
relative limits on government bonds The Haircut Policy establishes a VaR- cross-currency haircuts to address the
provided as Permitted Cover. In based methodology for determining exchange rate risk faced by the Clearing
addition, the policy sets out procedures haircuts for Permitted Cover. Under the House where the Permitted Cover is
for monitoring of limits on a daily basis proposed Haircut Policy, the Clearing denominated in a different currency
and for remediation of breach of a limit House will calculate six different from the currency of the applicable
by a Clearing Member. The risk estimations of VaR for each applicable margin requirement. Under the
management department will monitor risk factor. Each estimation is calculated proposed Haircut Policy, cross-currency
all collateral limits on a daily basis using a 99.9% confidence interval haircuts are determined using the same
using a collateral breakdown report (applicable to Permitted Cover posted methodology described above for other
which flags limit breaches. Breaches with respect to all product categories). haircuts, but are subject to a minimum
will be reviewed internally and the The proposed haircut will be based on haircut of 4.5%. Cross-currency haircuts
relevant Clearing Member will be the largest VaR of the 6 estimations. The will be applied in addition to any
contacted. Breaches can be remediated policy specifies relevant price sources applicable haircut for the relevant form
by posting additional collateral, removal that will be used for the calculation of of Permitted Cover.
of collateral that is in breach of a limit, haircuts for each type of Permitted The Clearing House will monitor
or both of the above. Cover. Haircuts will be determined Permitted Cover on a daily and intraday
The policy also provides for a risk- using the bid prices of Permitted Cover basis. The Clearing House may, under
based reduction in absolute limits for assets, in order to account for higher its existing Rules and the Haircut
government bonds based on the credit liquidation costs in stressed markets. Policy, take action to mitigate any
default swap (‘‘CDS’’) spread for the The applicable haircuts will be change in risk, including by increasing
relevant issuer in order to mitigate reviewed on a monthly basis, or more haircuts, calling for additional
wrong-way risk arising from government frequently where the risk management collateral, reducing concentration limits
bonds accepted as Permitted Cover. department deems it necessary. and removing an asset from eligibility as
Once the spread exceeds a specified Under the proposed policy, the risk Permitted Cover. The Clearing House
level for a particular issuer, the absolute management department may further will monitor the value of Permitted
limit for Permitted Collateral of that adjust the haircut determined under the Cover deposited with it on a real time
issuer would be reduced pursuant to a model as it determines prudent in light basis. Any change in a member’s intra-
defined formula. If the spread exceeds a of additional qualitative and day cover value that is greater than 3%
second level, the absolute limit will be quantitative factors, including: the will be flagged immediately by the Risk
reduced to 5% of the otherwise Clearing House’s credit assessment of Management intraday monitoring
applicable original limit. Spread levels the issuer, current market conditions system that is monitored by the Risk
are determined using a five-day average and volatility, expected future volatility, Management team throughout the
to avoid excessive volatility. The the liquidity of the underlying market business day. Any breach will be
for the asset, including bid/ask spread, investigated and appropriate action
specified parameters will be reviewed
wrong way risk considerations, VaR taken where necessary. The Clearing
on a quarterly basis.
Specific wrong-way risk arising in estimates determined for a period of House also will backtest haircuts based
connection with clearing of Western stressed market conditions, and other on price moves observed in the markets
European sovereign CDS is addressed factors that might affect the liquidity or on a daily basis, and review haircut
through a requirement that U.S. dollar value of an asset in stressed market levels if a price move breaches an
denominated collateral be provided for conditions. ICE Clear Europe anticipates existing haircut. The Clearing House
initial margin and that a portion of the that such adjustments to the value will prepare daily reports with respect
calculated under the model would be to Permitted Cover for purposes of
CDS Guaranty Fund be U.S. dollar-
used only in exceptional circumstances internal monitoring and provide
based (determined based on the ratio
and would expect to use such monthly reports to the relevant Risk
between the dollar-denominated and
tkelley on DSK3SPTVN1PROD with NOTICES

adjustments to increase haircuts in Committees and Board Risk Committee.
Euro-denominated initial margin
stressed market circumstances. ICE The Clearing House will review the
requirements for CDS). In addition,
Clear Europe has stated that it will make Haircut Policy on an annual basis
where the member’s aggregate short
judicious use of current market (which will include review by the Board
5 The Clearing House does not impose absolute or information to override the model but Risk Committee) or where there is a
relative limits on the use of U.S. Treasury securities anticipates exercising this ability in less material change to the risk exposure of
as Permitted Cover. than 5% of haircut rates. the Clearing House. The Haircut Policy

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Document Created: 2015-12-15 15:29:32
Document Modified: 2015-12-15 15:29:32
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		80 FR 28733