82 FR 34997 - Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to ICC's End-of-Day Price Discovery Policies and Procedures

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 143 (July 27, 2017)

Page Range		34997-34998
FR Document		2017-15774
Federal Register, Volume 82 Issue 143 (Thursday, July 27, 2017)
[Federal Register Volume 82, Number 143 (Thursday, July 27, 2017)]
[Notices]
[Pages 34997-34998]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-15774]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81186; File No. SR-ICC-2017-006]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to ICC's End-of-Day Price 
Discovery Policies and Procedures

July 21, 2017.

I. Introduction

    On May 25, 2017, ICE Clear Credit LLC (``ICC'' or ``ICE Clear 
Credit'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change (SR-ICC-2017-006) to amend ICC's End-of-Day Price 
Discovery Policies and Procedures (``Pricing Policy'') to implement an 
automated bid-offer width scaling methodology as part of its end-of-day 
pricing process. The proposed rule change was published for comment in 
the Federal Register on June 15, 2017.\3\ The Commission did not 
receive comments regarding the proposed changes. For the reasons 
discussed below, the Commission is approving 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. 34-80895 (June 9, 2017), 
82 FR 27539 (June 15, 2017) (SR-ICC-2017-006) (``Notice'').
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II. Description of the Proposed Rule Change

    Bid-offer width (``BOW'') is one input in ICC's end-of-day price 
discovery process used to determine end-of-day price levels for ICC's 
cleared products. ICC derives the BOW used in its end-of-day price 
discovery process for each clearing-eligible instrument from BOW 
information supplied by its Clearing Participants. Currently, ICC 
determines the end-of-day BOW for index products by comparing BOW data 
received from Clearing Participants to three pre-defined BOWs. The 
three pre-defined BOWs are progressively larger, such that the smallest 
BOW (``Regime 1'') is associated with normal market conditions; the 
next largest BOW (``Regime 2'') is associated with market conditions 
experiencing some measure of volatility; and the largest BOW (``Regime 
3'') is associated with more extreme market conditions. ICC selects as 
the end-of-day BOW (``EOD BOW) for an index product the pre-defined BOW 
that is most representative of the BOWs obtained from Clearing 
Participants based on ICC's methodology. For single-name instruments, 
ICC determines the EOD BOW by using intraday BOW data received from 
Clearing Participants and then applies various scaling factors to 
arrive at an EOD BOW based on ICC's methodology. The EOD BOWs are used 
for mark-to-market and risk management purposes.
    As currently constituted, ICC's procedures allow its Risk 
Department to override the EOD BOW based on the Risk Department's 
review and monitoring of market conditions. ICC represents that during 
periods of high market volatility, a significant number of BOW 
adjustments may need to be made, and that, if needed, such adjustments 
are determined and input manually.\4\ ICC believes that this manual 
intervention, which takes place in a short time period, is a potential 
source of operational risk.\5\
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    \4\ Notice, 82 FR at 27540.
    \5\ Id.
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    In order to reduce this operational risk, ICC proposes to replace 
the manual BOW adjustment process in the Pricing Policy with an 
algorithm that will automatically execute the widening of selected BOWs 
based on the dispersion of intraday mid-level quotes, an indicator of 
the day's volatility.
    To effectuate this automatic BOW-widening process, ICC proposed to 
introduce a new metric, a ``Variability Level,'' designed to measure 
the movement of intraday bid-offer mid-levels relative to the existing 
pre-defined BOWs described above. Under the proposed changes, where the 
intraday BOW mid-level falls above or below the prior day's end-of-day 
level by more than one pre-defined BOW, the Variability Level will be 
determined by a formula that takes the maximum deviation of the time 
series of intraday BOW mid-levels from the prior day's end-of-day level 
and divides it by the pre-defined BOW. Where the intraday BOW mid-level 
falls within one pre-defined BOW of the prior day's end-of-day level, 
the Variability Level would be set to 1.0, if the range of intraday 
mid-levels is less than the pre-defined BOW. If the range is greater 
than the pre-defined BOW, the Variability Level would be set to 1.2. 
Variability Levels

[[Page 34998]]

are calculated for the on-the-run instrument in each index family.\6\
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    \6\ Id.
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    Once Variability Levels are calculated, ICC proposed to convert 
Variability Levels into Variability Bands, which correspond to a range 
of Variability Levels. Once Variability Levels and Variability Bands 
have been determined, ICC proposed to create market groups and assign 
each index instrument to one of these market groups. For example, the 
CDX.NA.IG and CDX.NA.HY would be assigned to the North American group. 
After assigning each index instrument to a market group, ICC would use 
the largest Variability Band of any instrument within a market group as 
the Variability Band for that market group as a whole. ICC refers to 
this Variability Band as the ``Market-Proxy Variability Band.'' \7\ The 
proposed automated BOW algorithm would then adjust the EOD BOW (Regime 
1, 2, or 3) for the market group as a whole by one regime (moving from 
Regime 1 to Regime 2, or from Regime 2 to Regime 3) or two regimes 
(from Regime 1 to Regime 3), with higher Market-Proxy Variability Bands 
resulting in a two-regime adjustment, and smaller Market-Proxy 
Variability Bands resulting in a one-regime adjustment, or no 
adjustment.\8\
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    \7\ Id.
    \8\ Id.
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    For single-name instruments, ICC proposes to introduce a new 
scaling factor that would be applied, along with other scaling factors 
used in the current process, to the EOD BOW, as calculated based on BOW 
data received from participants. The Variability Scaling Factor for 
single-name instruments would depend on the Market-Proxy Variability 
Band for the market to which each single-name instrument is assigned. A 
higher Market-Proxy Variability Band will result in a larger scaling 
factor being applied.\9\
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    \9\ Id.
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    In addition to proposing to automate the process for increasing 
selected BOWs, ICC also proposed to remove a footnote from its Pricing 
Policy that set forth details of an intraday filtering algorithm that 
was planned but never implemented. Also, ICC proposed to correct 
inaccurate references in the Pricing Policy.\10\
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    \10\ Id. at 27540-41.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
propose rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\11\ Section 17A(b)(3)(F) of the Act requires, among other 
things, that the rules of a registered 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.\12\ Rule 17Ad-22(d)(4) requires, in 
relevant part, that a registered clearing agency shall establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to identify sources of operational risk and 
minimize them through the development of appropriate systems, controls, 
and procedures; and implement systems that are reliable, resilient and 
secure, and have adequate, scalable capacity.\13\
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(d)(4).
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    The Commission finds that the proposed rule change, which modifies 
ICC's Pricing Policy to implement an automated process for widening the 
EOD BOW for index and single-name instruments is consistent with 
Section 17A of the Act and Rule 17Ad-22 thereunder. By automating the 
process for widening the EOD BOWs when necessary, the Commission 
believes that ICC will likely reduce the risk of error or delay in the 
end-of-day pricing process in connection with a potentially significant 
number of adjustments to BOWs that would need to be made manually and 
in a short period of time absent the proposed changes. Since the end-
of-day BOW is an input in ICC's end-of-day price discovery process, the 
Commission believes that the proposed rule changes will likely enhance 
the speed and accuracy of that process, thereby promoting the prompt 
clearance and settlement of derivative agreements, contracts and 
transactions, consistent with Section 17A(b)(3)(F) of the Act.
    For similar reasons, the Commission finds that the proposed rule 
changes are also consistent with Rule 17Ad-22(d)(4) in that they are 
designed to reduce operational risk. Specifically, the proposed rule 
changes are intended to reduce ICC's operational risk in the end-of-day 
pricing process by establishing an automated process that will more 
quickly implement the widening of BOWs, if appropriate, based on a set 
of well-defined criteria. As a result, the risk of error that 
accompanies manual observation of market conditions and manual input of 
a potentially significant amount of adjustments in a small period of 
time during volatile market conditions is significantly reduced. 
Therefore, the Commission finds that the proposed rule changes are 
consistent with the requirements of Rule 17Ad-22(d)(4) that the 
registered clearing agencies establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to identify 
sources of operational risk and minimize them through the development 
of appropriate systems, controls, and procedures; and implement systems 
that are reliable, resilient and secure, and have adequate, scalable 
capacity.

IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-ICC-2017-006) be, and hereby is, 
approved.\14\
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    \14\ 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.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-15774 Filed 7-26-17; 8:45 am]
BILLING CODE 8011-01-P
Federal Register / Vol. 82, No. 143 / Thursday, July 27, 2017 / Notices 34997

request, prior to September 1, 2017, that For the Nuclear Regulatory Commission. conditions experiencing some measure
one or more particular States, local Annette L. Vietti-Cook, of volatility; and the largest BOW
government bodies, or Indian Tribes Secretary of the Commission. (‘‘Regime 3’’) is associated with more
send one representative each to the [FR Doc. 2017–15752 Filed 7–26–17; 8:45 am] extreme market conditions. ICC selects
evidentiary hearing to answer BILLING CODE 7590–01–P as the end-of-day BOW (‘‘EOD BOW) for
Commission questions and/or make a an index product the pre-defined BOW
statement for the purpose of assisting that is most representative of the BOWs
the Commission’s exploration of one or SECURITIES AND EXCHANGE obtained from Clearing Participants
more of the issues raised by the State, COMMISSION based on ICC’s methodology. For single-
local government body, or Indian Tribe name instruments, ICC determines the
in the pre-hearing filings described [Release No. 34–81186; File No. SR–ICC– EOD BOW by using intraday BOW data
above. The decision of whether to 2017–006] received from Clearing Participants and
request the presence of a representative Self-Regulatory Organizations; ICE then applies various scaling factors to
of a State, local government body, or Clear Credit LLC; Order Approving arrive at an EOD BOW based on ICC’s
Indian Tribe at the evidentiary hearing Proposed Rule Change Relating to methodology. The EOD BOWs are used
to make a statement and/or answer ICC’s End-of-Day Price Discovery for mark-to-market and risk
Commission questions is solely at the Policies and Procedures management purposes.
Commission’s discretion. The As currently constituted, ICC’s
Commission’s request will specify the July 21, 2017. procedures allow its Risk Department to
issue or issues that the representative I. Introduction override the EOD BOW based on the
should be prepared to address. Risk Department’s review and
On May 25, 2017, ICE Clear Credit
States, local governments, or Indian monitoring of market conditions. ICC
LLC (‘‘ICC’’ or ‘‘ICE Clear Credit’’) filed
Tribes should be aware that this represents that during periods of high
with the Securities and Exchange
evidentiary hearing is separate and market volatility, a significant number
Commission (‘‘Commission’’), pursuant
distinct from the NRC’s contested to Section 19(b)(1) of the Securities of BOW adjustments may need to be
hearing process. Issues within the scope Exchange Act of 1934 (‘‘Act’’) 1 and Rule made, and that, if needed, such
of contentions that have been admitted 19b–4 thereunder,2 a proposed rule adjustments are determined and input
or contested issues pending before the change (SR–ICC–2017–006) to amend manually.4 ICC believes that this
Atomic Safety and Licensing Board or ICC’s End-of-Day Price Discovery manual intervention, which takes place
the Commission in a contested Policies and Procedures (‘‘Pricing in a short time period, is a potential
proceeding for a COL application are Policy’’) to implement an automated source of operational risk.5
outside the scope of the uncontested bid-offer width scaling methodology as In order to reduce this operational
proceeding for that COL application. In part of its end-of-day pricing process. risk, ICC proposes to replace the manual
addition, although States, local The proposed rule change was BOW adjustment process in the Pricing
governments, or Indian Tribes published for comment in the Federal Policy with an algorithm that will
participating as described above may Register on June 15, 2017.3 The automatically execute the widening of
take any position they wish, or no Commission did not receive comments selected BOWs based on the dispersion
position at all, with respect to issues regarding the proposed changes. For the of intraday mid-level quotes, an
regarding the COL application or the reasons discussed below, the indicator of the day’s volatility.
NRC staff’s associated environmental Commission is approving the proposed To effectuate this automatic BOW-
review that do fall within the scope of rule change. widening process, ICC proposed to
the uncontested proceeding (i.e., issues
II. Description of the Proposed Rule introduce a new metric, a ‘‘Variability
that are not within the scope of
Change Level,’’ designed to measure the
admitted contentions or pending
movement of intraday bid-offer mid-
contested issues), they should be aware Bid-offer width (‘‘BOW’’) is one input levels relative to the existing pre-
that many of the procedures and rights in ICC’s end-of-day price discovery defined BOWs described above. Under
applicable to the NRC’s contested process used to determine end-of-day the proposed changes, where the
hearing process due to the inherently price levels for ICC’s cleared products. intraday BOW mid-level falls above or
adversarial nature of such proceedings ICC derives the BOW used in its end-of- below the prior day’s end-of-day level
are not available with respect to this day price discovery process for each by more than one pre-defined BOW, the
uncontested hearing. Participation in clearing-eligible instrument from BOW Variability Level will be determined by
the NRC’s contested hearing process is information supplied by its Clearing a formula that takes the maximum
governed by 10 CFR 2.309 (for persons Participants. Currently, ICC determines deviation of the time series of intraday
or entities, including States, local the end-of-day BOW for index products BOW mid-levels from the prior day’s
governments, or Indian Tribes, seeking by comparing BOW data received from end-of-day level and divides it by the
to file contentions of their own) and 10 Clearing Participants to three pre- pre-defined BOW. Where the intraday
CFR 2.315(c) (for interested States, local defined BOWs. The three pre-defined BOW mid-level falls within one pre-
governments, and Indian Tribes seeking BOWs are progressively larger, such that defined BOW of the prior day’s end-of-
to participate with respect to the smallest BOW (‘‘Regime 1’’) is day level, the Variability Level would be
contentions filed by others). associated with normal market set to 1.0, if the range of intraday mid-
mstockstill on DSK30JT082PROD with NOTICES

Participation in this uncontested conditions; the next largest BOW levels is less than the pre-defined BOW.
hearing does not affect the right of a (‘‘Regime 2’’) is associated with market If the range is greater than the pre-
State, local government, or Indian Tribe defined BOW, the Variability Level
to participate in the separate contested 1 15
U.S.C. 78s(b)(1).
would be set to 1.2. Variability Levels
hearing process. 2 17
CFR 240.19b–4.
3 Securities Exchange Act Release No. 34–80895
Dated at Rockville, Maryland, this 20th day (June 9, 2017), 82 FR 27539 (June 15, 2017) (SR– 4 Notice, 82 FR at 27540.
of July, 2017. ICC–2017–006) (‘‘Notice’’). 5 Id.

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34998 Federal Register / Vol. 82, No. 143 / Thursday, July 27, 2017 / Notices

are calculated for the on-the-run proposed rule change is consistent with of time during volatile market
instrument in each index family.6 the requirements of the Act and the conditions is significantly reduced.
Once Variability Levels are rules and regulations thereunder Therefore, the Commission finds that
calculated, ICC proposed to convert applicable to such organization.11 the proposed rule changes are consistent
Variability Levels into Variability Section 17A(b)(3)(F) of the Act requires, with the requirements of Rule 17Ad–
Bands, which correspond to a range of among other things, that the rules of a 22(d)(4) that the registered clearing
Variability Levels. Once Variability registered clearing agency be designed agencies establish, implement,
Levels and Variability Bands have been to promote the prompt and accurate maintain, and enforce written policies
determined, ICC proposed to create clearance and settlement of securities and procedures reasonably designed to
market groups and assign each index transactions and, to the extent identify sources of operational risk and
instrument to one of these market applicable, derivative agreements, minimize them through the
groups. For example, the CDX.NA.IG contracts, and transactions.12 Rule development of appropriate systems,
and CDX.NA.HY would be assigned to 17Ad–22(d)(4) requires, in relevant part, controls, and procedures; and
the North American group. After that a registered clearing agency shall implement systems that are reliable,
assigning each index instrument to a establish, implement, maintain, and resilient and secure, and have adequate,
market group, ICC would use the largest enforce written policies and procedures scalable capacity.
Variability Band of any instrument reasonably designed to identify sources
within a market group as the Variability of operational risk and minimize them IV. Conclusion
Band for that market group as a whole. through the development of appropriate It is therefore ordered pursuant to
ICC refers to this Variability Band as the systems, controls, and procedures; and Section 19(b)(2) of the Act that the
‘‘Market-Proxy Variability Band.’’ 7 The implement systems that are reliable, proposed rule change (SR–ICC–2017–
proposed automated BOW algorithm resilient and secure, and have adequate, 006) be, and hereby is, approved.14
would then adjust the EOD BOW scalable capacity.13
For the Commission by the Division of
(Regime 1, 2, or 3) for the market group The Commission finds that the
Trading and Markets, pursuant to delegated
as a whole by one regime (moving from proposed rule change, which modifies authority.15
Regime 1 to Regime 2, or from Regime ICC’s Pricing Policy to implement an
Eduardo A. Aleman,
2 to Regime 3) or two regimes (from automated process for widening the
EOD BOW for index and single-name Assistant Secretary.
Regime 1 to Regime 3), with higher [FR Doc. 2017–15774 Filed 7–26–17; 8:45 am]
Market-Proxy Variability Bands instruments is consistent with Section
resulting in a two-regime adjustment, 17A of the Act and Rule 17Ad–22 BILLING CODE 8011–01–P

and smaller Market-Proxy Variability thereunder. By automating the process
Bands resulting in a one-regime for widening the EOD BOWs when
necessary, the Commission believes that SECURITIES AND EXCHANGE
adjustment, or no adjustment.8 COMMISSION
For single-name instruments, ICC ICC will likely reduce the risk of error
proposes to introduce a new scaling or delay in the end-of-day pricing
factor that would be applied, along with process in connection with a potentially [Release No. 34–81183; File No. SR–MIAX–
significant number of adjustments to 2017–33]
other scaling factors used in the current
process, to the EOD BOW, as calculated BOWs that would need to be made
manually and in a short period of time Self-Regulatory Organizations; Miami
based on BOW data received from International Securities Exchange LLC;
participants. The Variability Scaling absent the proposed changes. Since the
end-of-day BOW is an input in ICC’s Notice of Filing and Immediate
Factor for single-name instruments Effectiveness of a Proposed Rule
would depend on the Market-Proxy end-of-day price discovery process, the
Commission believes that the proposed Change To Amend MIAX Options Rule
Variability Band for the market to which 404, Series of Option Contracts Open
each single-name instrument is rule changes will likely enhance the
speed and accuracy of that process, for Trading
assigned. A higher Market-Proxy
Variability Band will result in a larger thereby promoting the prompt clearance July 21, 2017.
scaling factor being applied.9 and settlement of derivative agreements,
Pursuant to the provisions of Section
In addition to proposing to automate contracts and transactions, consistent
19(b)(1) of the Securities Exchange Act
the process for increasing selected with Section 17A(b)(3)(F) of the Act.
For similar reasons, the Commission of 1934 (‘‘Act’’) 1 and Rule 19b–4
BOWs, ICC also proposed to remove a thereunder,2 notice is hereby given that
footnote from its Pricing Policy that set finds that the proposed rule changes are
also consistent with Rule 17Ad–22(d)(4) on July 18, 2017, Miami International
forth details of an intraday filtering Securities Exchange, LLC (‘‘MIAX
algorithm that was planned but never in that they are designed to reduce
operational risk. Specifically, the Options’’ or ‘‘Exchange’’) filed with the
implemented. Also, ICC proposed to Securities and Exchange Commission
correct inaccurate references in the proposed rule changes are intended to
reduce ICC’s operational risk in the end- (‘‘Commission’’) a proposed rule change
Pricing Policy.10 as described in Items I and II below,
of-day pricing process by establishing
III. Discussion and Commission an automated process that will more which Items have been prepared by the
Findings quickly implement the widening of Exchange. The Commission is
BOWs, if appropriate, based on a set of publishing this notice to solicit
Section 19(b)(2)(C) of the Act directs comments on the proposed rule change
the Commission to approve a propose well-defined criteria. As a result, the
from interested persons.
mstockstill on DSK30JT082PROD with NOTICES

rule change of a self-regulatory risk of error that accompanies manual
organization if it finds that such observation of market conditions and
14 In approving the proposed rule change, the
manual input of a potentially significant Commission considered the proposal’s impact on
6 Id. amount of adjustments in a small period efficiency, competition, and capital formation. 15
7 Id. U.S.C. 78c(f).
8 Id. 11 15 U.S.C. 78s(b)(2)(C). 15 17 CFR 200.30–3(a)(12).
9 Id. 12 15 U.S.C. 78q–1(b)(3)(F). 1 15 U.S.C. 78s(b)(1).
10 Id. at 27540–41. 13 17 CFR 240.17Ad–22(d)(4). 2 17 CFR 240.19b–4.

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Document Created: 2017-07-27 02:07:15
Document Modified: 2017-07-27 02:07:15
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		82 FR 34997