82_FR_3839 82 FR 3831 - Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change To Amend the ICE Clear Credit Clearing Rules, as Modified by Amendment No. 1, Relating to Default Management, Clearing House Recovery and Wind-Down

82 FR 3831 - Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change To Amend the ICE Clear Credit Clearing Rules, as Modified by Amendment No. 1, Relating to Default Management, Clearing House Recovery and Wind-Down

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 8 (January 12, 2017)

Page Range3831-3837
FR Document2017-00491

Federal Register, Volume 82 Issue 8 (Thursday, January 12, 2017)
[Federal Register Volume 82, Number 8 (Thursday, January 12, 2017)]
[Notices]
[Pages 3831-3837]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-00491]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79750; File No. SR-ICC-2016-013]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing Amendment No. 1 and Order Granting Accelerated Approval of 
Proposed Rule Change To Amend the ICE Clear Credit Clearing Rules, as 
Modified by Amendment No. 1, Relating to Default Management, Clearing 
House Recovery and Wind-Down

January 6, 2017.

I. Introduction

    On November 4, 2016, ICE Clear Credit LLC (``ICC'' or ``clearing 
house'') 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-2016-013) to amend the ICC Clearing Rules 
(``ICC Rules'' or ``Rules'') relating to clearing house default 
management, recovery, and wind-down, and to adopt certain related 
default auction procedures. The proposed rule change was published for 
comment in the Federal Register on November 22, 2016.\3\ The Commission 
received one comment letter to the proposed rule change.\4\ On December 
19, 2016, ICC filed Amendment No. 1 to the proposed rule change. The 
Commission is publishing this notice to solicit comment on Amendment 
No. 1 from interested persons and, for the reasons stated below, is 
approving the proposed rule change, as modified by Amendment No. 1, on 
an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-79324 (Nov. 16, 
2016), 81 FR 83906 (Nov. 22, 2016) (SR-ICC-2016-013) (``Notice'').
    \4\ See letter from Jacqueline H. Mesa, Senior Vice President of 
Global Policy, FIA (Dec. 2, 2016) (``FIA Comment'').
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II. Description of the Proposed Rule Change and Notice of Filing of 
Amendment No. 1

    ICC has proposed changes to the ICC Rules, as modified by Amendment 
No. 1, relating to clearing house default management, recovery, and 
wind-down to address uncovered losses from a clearing participant 
(``Participant'') default or series of Participant defaults. The 
proposed changes consist of three aspects. First, ICC proposes to 
revise its auction procedures and tools for returning to a matched-book 
after a Participant default or series of Participant defaults and to 
implement a different approach to allocating uncovered losses stemming 
from such Participant default(s) that provides more certainty to 
Participants by limiting their exposure to ICC. Second, ICC proposes to 
collect additional initial margin to ensure that it maintains minimum 
pre-funded financial resources in compliance with applicable regulatory 
requirements. Third, ICC proposes to clarify the governance 
requirements relating to the use of ICC's proposed default management 
tools, including matched-book tools and loss allocation tools, as well 
as clarify the Rules to enhance transparency and specificity.

A. Revised Auction Procedures, Tools for Returning ICC to a Matched-
Book and Tools for Default Loss Allocation

    ICC proposes substantial changes in the way it returns to a 
matched-book following a Participant default or series of defaults. 
Specifically, ICC proposes to maintain its existing default management 
practices,\5\ such as the practice of auctioning a defaulting 
Participant's positions to its non-defaulting Participants, but 
proposes to eliminate its ability to forcibly allocate a defaulting 
Participant's positions to other non-defaulting Participants, in the 
event an auction is unsuccessful. In lieu of these forced allocations, 
ICC has proposed a revised set of auction procedures and an additional 
matched-book tool. The revised auction procedures include initial and 
secondary auctions, each of which include a number of features designed 
to incentivize Participants and their customers to bid competitively. 
In the event that the default management auctions are unsuccessful in 
returning ICC to a matched-book, ICC proposes to terminate any 
positions of non-defaulting Participants (or their customers) that 
exactly offset the unsuccessfully auctioned positions in the defaulting 
Participant's portfolio. ICC refers to this termination of a discrete 
set, as opposed to all, of its outstanding positions as ``partial tear-
up.'' Separately, ICC proposes to revise its authority to seek 
unlimited guaranty fund assessments from its Participants and implement 
a ``cooling-off period,'' during which its ability to call for 
additional Participant contributions to the guaranty fund is capped. In 
addition, ICC proposes, in a highly limited set of circumstances, to 
allocate losses by reducing the amount of variation margin that would 
otherwise be owed to Participants or their customers as a tool to 
assist in ICC's recovery, which ICC refers to as ``reduced gains 
distributions.'' These provisions are described more fully below.\6\
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    \5\ ICC's existing default remedies, as amended by this proposed 
rule change, are referred to as ``Standard Default Management 
Actions.'' By contrast, additional, new default management tools 
adopted as part of this proposed rule change are referred to as 
``Secondary Default Management Actions.'' See Notice, 81 FR at 
83906.
    \6\ See Notice, 81 FR at 83906-10, unless otherwise noted.
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1. Revised Auction Procedures
    Under the proposed changes, ICC will use an auction to dispose of a 
defaulting Participant's portfolio.\7\ Ordinarily, ICC will begin with 
an initial default auction and if necessary or appropriate proceed to a 
secondary auction. But, in consultation with the Risk Committee, if 
practicable, and upon a majority vote of ICC's Board, ICC may bypass 
the initial auction and proceed directly to a secondary auction.
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    \7\ Although the auction procedures will not be published, ICC 
will make such procedures available to all Participants, subject to 
existing confidentiality arrangements between ICC and Participants 
and the confidentiality provisions set forth in the auction 
procedures. ICC will also make such procedures available to 
customers of Participants at the request of such customers (and/or 
permit Participants to do so), subject to confidentiality 
arrangements.
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    In the initial auction, ICC management will divide the defaulting 
Participant's portfolio into one or more lots, and each non-defaulting 
Participant will be subject to a minimum bid requirement for each lot. 
In addition, ICC proposes to permit customers of Participants to 
participate in the initial auction either by bidding indirectly through 
a Participant or by bidding directly in the auction, provided that such 
customers (1) agree to the terms of the auction, (2) accept the same 
confidentiality agreements concerning the auction as a Participant; and 
(3) make a minimum deposit to be applied by ICC in the same manner as 
Participants' guaranty fund contributions. ICC will use all available 
default resources to cover the costs associated with the initial 
default

[[Page 3832]]

auction. These resources include all mutualized guaranty fund 
contributions, whether pre-funded or assessed, including ICC's ``pro 
rata'' contribution. In an effort to encourage competitive bidding, ICC 
will ``juniorize,'' i.e., apply the guaranty fund contributions of 
Participants who fail to bid and those who bid non-competitively to the 
costs of the auction before it applies those of Participants who bid 
competitively, as set forth in the default auction procedures.
    As part of this proposed rule change, ICC proposes to move its 
contribution to the guaranty fund higher in the default waterfall such 
that ICC's contribution will be used prior to the application of 
guaranty fund contributions of non-defaulting Participants.
    In the event an initial auction does not fully dispose of a 
defaulting Participant's portfolio, ICC may conduct one or more 
secondary auctions. At the secondary auction stage, ICC will endeavor 
to auction off the remaining portfolio in a single lot, though ICC 
retains the discretion to break the portfolio into separate lots if 
certain non-defaulting Participants are not able to bid on particular 
positions or ICC otherwise determines that doing so would facilitate 
the auction process. Moreover, customers of Participants are permitted 
to bid in secondary auctions directly without the need for a minimum 
deposit, so long as a Participant has confirmed that it would clear any 
resulting transactions of the customer. (Customers of Participants 
continue to retain the option of bidding indirectly through a 
Participant as well.) As with initial auctions, ICC will apply all 
remaining default resources to fund the secondary auction(s), and it 
will continue to juniorize guaranty fund contributions that remain, if 
any. A secondary auction for any lot is deemed successful if it results 
in a price that is within ICC's remaining default resources. If a 
secondary auction is unsuccessful for any lot, ICC may run another 
secondary auction for that lot on a subsequent business day, unless ICC 
has invoked reduced gains distributions, in which case secondary 
auctions may not extend beyond the five business-day reduced gains 
distributions period.
2. Removal of Forced Allocation and Addition of Partial Tear-Up
    ICC further proposes to eliminate its rules regarding forced 
allocation, in which all positions not successfully auctioned through 
the default auction process are allocated to non-defaulting 
Participants, and instead, implement pro rata partial tear-up to return 
to a matched book. Partial tear-up entails terminating the positions of 
non-defaulting Participants (and their customers) that exactly offset 
those in the defaulting Participant's remaining portfolio (i.e., 
positions in the identical contracts and in the same aggregate notional 
amount). Partial tear-up will be employed on both house and customer 
origin accounts across all non-defaulting Participants that have such 
positions on a pro rata basis. ICC proposes to base the partial tear-up 
price on the last established end-of-day mark-to-market settlement 
price and terminate selected contracts contemporaneously with the 
determination of such price (i.e., at 5 p.m., New York time). Thus, ICC 
proposes to collect and pay the tear-up price by application of mark-
to-market margin posted (or that would have been posted but for reduced 
gains distributions) as part of its end-of-day settlement process. 
After a partial tear-up is executed, ICC would return to a matched-book 
and would be positioned to continue offering clearing services for all 
remaining Participants and their customers.
    ICC may invoke partial tear-up as a matched-book tool only after a 
number of prerequisites have been satisfied. First, ICC may not resort 
to partial tear-up until it has attempted one or more initial or 
secondary auctions. In addition, ICC must consult with its Risk 
Committee, which is comprised of a supermajority of Participants, if 
practicable, before it may proceed to partial tear-up. If consultation 
with the Risk Committee is impracticable prior to taking action, ICC 
must use its reasonable best efforts to consult with the Risk Committee 
as soon as practicable thereafter regarding any further relevant 
actions. Moreover, only ICC's Board, which is comprised of a majority 
of directors independent of ICC and includes directors chosen by 
Participants and may also include Participant representatives, may 
invoke partial-tear up.
3. Cooling-Off Period, Participant Withdrawal, and Reduced Gains 
Distributions
    ICC's current rules permit the clearing house to seek unlimited 
guaranty fund assessments from its Participants, but the proposed rule 
change would eliminate the clearing house's unlimited power of 
assessment. Instead, ICC proposes to implement a ``cooling-off 
period,'' during which its ability to call for additional Participant 
contributions to the guaranty fund is limited. During a cooling-off 
period, non-defaulting Participants will not be required to pay more 
than one time their required guaranty fund contribution per default. 
And during the cooling-off period, non-defaulting Participants' 
liability for mutualized guaranty fund contributions is capped at three 
times the required guaranty fund contribution, based on the last 
guaranty fund calculation before the cooling-off period was triggered, 
regardless of the number of defaults that occur during this period. 
Similarly, ICC's contributions to the guaranty fund are subject to 
limits of one times its contribution per default and three times its 
contribution during the cooling-off period. Participants may terminate 
their membership during a cooling-off period by providing ICC with an 
irrecoverable notice of withdrawal and closing out all positions by a 
specified deadline. Participants who withdraw during a cooling-off 
termination period must continue to meet their obligations to ICC, 
including guaranty fund assessments with respect to defaults and 
potential defaults that occur before such Participants' withdrawal 
becomes effective, subject to the limits described above.
    ICC further proposes to use reduced gains distributions as a tool 
to allocate losses stemming from the defaulting Participant's variation 
margin obligations while ICC attempts a secondary auction or conducts a 
partial tear-up during default management and recovery. Currently, 
holders of positions opposite those of a defaulting Participant are 
entitled to receive variation margin each day such positions appreciate 
in value. Under the proposed rule change, ICC may reduce variation 
margin that would be otherwise owed to both Participants and their 
customers. ICC proposes to use reduced gains distributions for no more 
than five business days. On each day when reduced gains distributions 
are invoked, ICC will calculate a haircut that is applied pro rata to 
house and customer origin accounts and applied pro rata to each 
customer portfolio such that each customer portfolio receives the same 
haircut.
    Under the proposed rule change, the use of reduced gains 
distributions is subject to certain conditions. ICC may not resort to 
reduced gains distributions unless it has exhausted all available 
financial resources and expects that there will be favorable conditions 
for completing a successful secondary auction, subject to the 
limitation that reduced gains distributions may not extend for more 
than five business days. In the event ICC conducts a successful 
secondary auction, reduced gains distributions will end on that day. If 
ICC has been unable to conduct a successful secondary auction by the 
end of the five

[[Page 3833]]

business day reduced gains distributions period, ICC will proceed to 
partial tear-up, as described above, at the close of business on such 
fifth business day. Moreover, as further clarified in Amendment No. 1, 
reduced gains distributions will not be available to provide additional 
funds for a secondary auction, and projected auction costs will not be 
factored into the amount of reduced gains distributions. Finally, as 
with partial tear-up, ICC must consult with its Risk Committee before 
invoking reduced gains distributions, to the extent practicable, and 
the ultimate decision to do so must be made by the Board.

B. Additional Initial Margin

    ICC further proposes to levy additional initial margin, if 
necessary, during a cooling-off period when Participants' obligations 
to replenish the guaranty fund and to make required guaranty fund 
contributions (i.e., assessments) have reached the cap described above, 
in order to maintain sufficient financial resources that would enable 
the clearing house to withstand a default by the two Participant 
families to which it has the largest exposure in extreme but plausible 
market conditions (i.e. the ``cover two'' standard), as required by 
Exchange Act Rule 17Ad-22(b)(3). The additional initial margin will be 
calculated in an amount such that ICC has collected sufficient 
financial resources to meet the regulatory requirement.

C. Governance

    ICC further proposes enhanced governance requirements for the use 
of certain default management tools as part of the proposed rule 
change. Under the proposed rule change, ICC is required to consult with 
the Risk Committee (which consists of a supermajority of Participant 
representatives) on whether to conduct a secondary auction, employ 
reduced gains distributions, implement partial tear-up, or proceed to 
wind-down the service. If such consultation is impracticable, ICC must 
use its reasonable best efforts to consult with the Risk Committee as 
soon as practicable thereafter regarding any further relevant actions. 
In addition, ICC's management is not permitted to invoke partial tear-
up or reduced gains distributions on its own authority. Those decisions 
may only be undertaken after majority vote of the ICC Board, which 
itself is composed of a majority of directors independent of ICC.
    To complement its governance provisions, ICC has also proposed 
several clarifications to enhance the transparency of its Rules. With 
respect to clearing service termination, ICC proposes to establish more 
specific procedures governing a number of matters, such as the notice 
of and timing of clearing service termination, the calculation of 
termination prices, and the determination of the net amount owed to or 
by each Participant. In addition, ICC has made a number of additional 
changes to the existing rules to clarify that its emergency authority 
does not override the limitations on Participant obligations to make 
guaranty fund contributions during a cooling-off period or permit 
resort to partial tear-up, unless otherwise permitted under the Rules, 
as well as a number of more minor drafting enhancements.

D. Notice of Filing of Amendment No. 1

    In Amendment No. 1, ICC proposes to clarify certain aspects of the 
proposed rule change. In particular, as noted above, ICC explains that 
reduced gains distributions will not be used to provide additional 
funds for a secondary auction, and that expected auction costs will not 
be factored into the determination of the haircut used for reduced 
gains distributions. In addition, ICC clarifies that additional initial 
margin called after the cap on guaranty fund replenishments and 
assessments in a cooling-off period is reached will be calculated not 
only for the house account, but also customer accounts (on a net basis 
across customers). Any margin amounts charged, however, will be charged 
to the house account of the Participant, with no charge against any 
customer accounts. Finally, ICC notes that the ability to call for the 
additional initial margin after the cap on guaranty fund replenishments 
and assessments has been reached may have a procyclical impact on 
Participants and their customers. However, ICC believes that any 
additional initial margin called will likely not exceed the amount of 
initial margin otherwise on deposit, and will be commensurate with the 
range of initial margin variation experienced in the ordinary course.

III. Summary of Comment Letter

    The Commission received one comment letter in response to the 
proposed rule change.\8\ The commenter, a trade association, provided 
general comments on three broad issues: (1) The use of variation margin 
gains haircutting (``VMGH'') and partial tear-ups; (2) compensation for 
losses beyond mutualized resources; and (3) full clearing service 
termination,\9\ but did not take a position regarding any of these 
three issues or provide any legal analysis regarding whether ICC's use 
of VMGH, i.e., reduced gains distributions, or partial-tear up or other 
aspects of ICC's proposal is consistent with the Exchange Act. The 
commenter did suggest that ICC be required to consult not only with its 
Risk Committee, but also with all members when ``invoking tools that 
impact loss distributions after the exhaustion of funded and unfunded 
resources.'' \10\
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    \8\ See FIA Comment, supra note 4.
    \9\ With regard to the use of VMGH and partial tear-up, the 
commenter noted that its members have varying, sometimes 
inconsistent views on the desirability of using VMGH or partial 
tear-up in recovery. Similarly, the commenter noted that there is a 
disagreement within its membership as to whether ICC should be able 
to terminate all trades without recourse to ICC capital. With regard 
to compensation for losses beyond mutualized resources, the 
commenter expects to engage ICC on this topic and does not argue 
that this is a basis upon which the proposed rule change can or 
should be disapproved. See id.
    \10\ See id.
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IV. Discussion and Commission Findings

    Pursuant to section 19(b)(2)(C) \11\ of the Act, the Commission 
must 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. After 
careful consideration, the Commission believes that the proposed rule 
changes are consistent with the Act and the rules and regulations 
thereunder applicable to ICC.
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    \11\ 15 U.S.C. 78s(b)(2)(C).
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    Specifically, Section 17A(b)(3)(F) of the Act requires,\12\ 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, as well as to assure the safeguarding of 
securities and funds and to protect investors and the public interest. 
Exchange Act Rule 17Ad-22(d)(11) requires,\13\ in part, each registered 
clearing agency to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to make key aspects of the 
clearing agency's default procedures publicly available and establish 
default procedures that ensure that the clearing agency can take timely 
action to contain losses and liquidity pressures and to continue 
meeting its obligations in the event of a participant

[[Page 3834]]

default. Furthermore, Exchange Act Rule 17Ad-22(b)(3) requires, in 
part, each registered clearing agency providing central counterparty 
services to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to maintain certain 
financial resource requirements at all times,\14\ including during the 
default management process and in the clearing house recovery scenario. 
Finally, Exchange Act Rule 17Ad-22(d)(8) requires a clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to have governance arrangements that are 
clear and transparent to fulfill the public interest requirements in 
Section 17A of the Act, to support the objectives of owners and 
participants, and to promote the effectiveness of the clearing agency's 
risk management procedures.\15\
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(d)(11).
    \14\ 17 CFR 240.17Ad-22(b)(3).
    \15\ 17 CFR 240.17Ad-22(d)(8).
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    The Commission discusses each aspect of ICC's proposed rule change 
and its findings below.

A. Revised Auction Procedures, Tools for Returning ICC to a Matched-
Book and Tools for Default Loss Allocation

1. Revised Auction Procedures
    The Commission finds the revised auction procedures, as proposed by 
ICC, consistent with Section 17A(b)(3)(F) and Exchange Act Rule 17Ad-
22(d)(11). As described above, under the proposed rule change, in the 
event of a Participant default, ICC will ordinarily conduct an initial 
auction as part of its Standard Default Management Actions.\16\ Under 
the proposed auction procedures, Participants will be required to bid 
in the initial auction for each lot in a minimum amount determined by 
ICC. In addition, the revised auction procedures will permit customers 
of Participants to participate in auctions by either bidding indirectly 
through a Participant or by bidding directly in the auction, provided 
that such customers (1) agree to the terms of the auction, (2) accept 
the same confidentiality agreements concerning the auction as a 
Participant; and (3) make a minimum deposit to be applied by ICC in the 
same manner as Participants' guaranty fund contributions. Furthermore, 
the guaranty fund and assessment contributions of non-defaulting 
Participants will be subject to juniorization and applied using a 
defined default auction priority set out in the default auction 
procedures based on the competitiveness of their bids.
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    \16\ In consultation with the Risk Committee, if practicable, 
and with a majority vote of the Board, ICC may proceed directly to 
Secondary Default Management Actions if appropriate.
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    If the initial auction fails, as described above, ICC may conduct a 
secondary auction to maximize the opportunities of disposing of the 
defaulting Participant's portfolio and returning to a matched-book. 
Similar to the initial auction, ICC would juniorize the guaranty fund 
and assessment contributions that remain, if any, of non-defaulting 
Participants with less competitive bids in order to incentivize 
competitive bidding by such Participants. In addition, at the secondary 
auction stage, ICC will apply all remaining clearing house default 
resources and endeavor to auction off the remaining portfolio in a 
single lot, although it may break the portfolio into separate lots if 
certain Participants are not able to bid on particular contracts or it 
otherwise determines that doing so would facilitate the auction 
process. A secondary auction for a lot will be deemed successful if it 
results in a price for the lot that is within ICC's remaining default 
resources. The secondary auction procedures would make it even easier 
for customers to bid directly by eliminating the need for a minimum 
deposit, so long as a Participant has confirmed that it would clear any 
resulting transactions of the customer. (As with initial auctions, 
customers retain the option of bidding through a Participant.) If a 
secondary auction is unsuccessful for any lot, ICC may repeat this 
process and run another secondary auction for that lot on a subsequent 
business day, unless ICC has invoked reduced gains distributions, in 
which case, the secondary auctions may not extend beyond the five-
business-day reduced gains distributions period.\17\
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    \17\ See ICC Rule 808(e).
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    Taken together, the Commission believes that the revised default 
auction procedures, including the assignment of minimum bid 
requirements to Participants during the initial auction, broadening 
participation in both the initial auction and the secondary auctions by 
permitting customers of Participants to bid directly or indirectly, and 
juniorization of the guaranty fund and assessment contributions of non-
defaulting Participants and the minimum deposit of customers, provide 
Participants and applicable customers of Participants who elect to 
participate in the auction a strong incentive to bid competitively. The 
revised auction procedures should significantly increase the likelihood 
of reaching an efficient auction clearing price that permits ICC 
successfully to dispose of the defaulting Participant's portfolio 
within the resources of the clearing house. Therefore, Commission 
believes that the revised auction procedures are reasonably designed to 
establish default procedures that ensure that the clearing agency can 
take timely action to contain losses and to continue meeting its 
obligations in the event of a participant default, as well as promoting 
safeguarding securities and funds, consistent with the requirements in 
Section 17A(b)(3)(F) of the Act and Exchange Act Rule 17Ad-22(d)(11).
    In addition, the Commission finds the proposal to move ICC's 
contribution to the guaranty fund to the beginning of the waterfall is 
consistent with the Act. Subordination of ICC's guaranty fund 
contribution reinforces its incentives to manage risk appropriately and 
safeguard the securities and funds with which it has been entrusted, 
and therefore, is consistent with the requirements in Section 
17A(b)(3)(F) of the Act.
2. Removal of Forced Allocation and Addition of Partial Tear-Up
    The Commission further finds that the removal of forced allocation 
and addition of partial tear-up, as proposed by ICC, are consistent 
with the Exchange Act. As described above, if any positions are not 
successfully auctioned through the default auction process, ICC 
proposes pro-rata partial tear-up in lieu of the existing forced 
allocation.\18\ As a result of the partial tear-up, ICC would return to 
a matched book.
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    \18\ See ICC Rules 809 and 20-605(f)(iii).
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    The Commission recognizes that the replacement of forced allocation 
with partial tear-up as a matched-book tool would result in termination 
of positions of non-defaulting Participants across both the house and 
customer origin accounts that exactly offset those in the defaulting 
Participant's portfolio that are not successfully auctioned off during 
the initial and/or secondary auctions. However, the Commission also 
recognizes that the forced allocation of positions in a defaulting 
Participant's remaining portfolio that cannot be successfully disposed 
of with the clearing house's financial resources would potentially 
result in non-defaulting Participants taking unmeasurable and unlimited 
losses beyond their risk tolerance or risk management capability. 
Because ICC will only be permitted to use partial tear-up to return to 
a matched book after it has attempted initial and/or secondary 
auctions, as appropriate, and the proposed auction procedures would 
significantly improve the likelihood of successful auctions, the use of 
the

[[Page 3835]]

partial tear-up would only arise in an extreme stress scenario. In such 
a stress scenario, the forced allocation of a defaulting Participant's 
remaining positions that could not be auctioned off also could pose 
risk to non-defaulting Participants and threaten systemic financial 
stability by, among other things, precipitating further defaults among 
such Participants. On the other hand, use of partial tear-up could 
potentially return the clearing house to a matched book quickly, 
thereby containing the clearing house's losses. Pursuant to the 
proposed rule change, ICC would base the partial tear-up price on the 
last established end-of-day mark-to-market settlement price and 
terminate selected contracts contemporaneously with the determination 
of such price (i.e., at 5 p.m., New York time).\19\ This would enable 
ICC to collect and pay the tear-up price by application of mark-to-
market margin posted (or that would have been posted but for reduced 
gains distributions) as part of its end-of-day settlement process. Once 
the partial tear-up is completed through the end-of-day mark-to-market 
settlement process, ICC would have the ability to promptly return the 
initial margin associated with the terminated positions to the 
Participants and customers whose positions have been terminated 
pursuant to ICC's existing rules. Finally, pursuant to the proposed 
rule change, ICC must consult with the Risk Committee, if practicable, 
and obtain the Board's approval before invoking partial tear-up, which 
ensures that Participants have the opportunity to provide input in the 
decision-making process with respect to whether the clearing house 
should initiate partial tear-up.
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    \19\ See ICC Rules 809(b)(iv) and (d).
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    The Commission believes that these provisions regarding the use of 
partial tear-up and the removal of forced allocation are designed to 
provide greater certainty to Participants in the estimation of their 
potential risks and losses in their use of the clearing agency, while 
enabling ICC to promptly return to a matched book. The Commission 
believes that returning to a matched book pursuant to these provisions 
in the context of ICC's default management and recovery, facilitates 
the timely containment of default losses and liquidity pressures and is 
consistent with the safeguarding of assets and funds and, to the extent 
of limiting contagion to the broader financial system, is consistent 
with the protection of investors and the public interest as well--
consistent with Section 17A(b)(3)(F) and Exchange Act Rule 17Ad-
22(d)(11).
3. Cooling-Off Period, Participant Withdrawal, and Reduced Gains 
Distributions
    With respect to financial resources available during default 
management and clearing house recovery, ICC also proposes to impose a 
cooling-off period, to permit Participants to withdraw from ICC during 
the cooling-off period, and to use reduced gains distributions when all 
the other default resources have been exhausted. The Commission 
believes that these changes, subject to the conditions and the 
governance arrangements proposed by ICC in conjunction therewith, are 
consistent with the requirements of prompt and accurate clearance and 
settlement, safeguarding securities and funds and promoting public 
interest and investor protection in the Act, and the rules and 
regulations thereunder.
    As described above, during the proposed cooling-off period, 
Participants' obligations for assessments would be capped at ``1x'' the 
required guaranty fund contribution per default, and each Participant's 
total amount of replenishments and assessment contributions would be 
capped at three times the required guaranty fund contribution, 
regardless of the number of defaults during the period. In addition, 
Participants who seek to withdraw from ICC during a cooling-off period 
must generally provide ICC with an irrecoverable notice of withdrawal 
and close out all positions by a specified deadline. The Commission 
recognizes that these provisions would effectively limit the amount of 
financial resources available to ICC for covering default losses, even 
though a withdrawing Participant will continue to meet its obligations, 
including guaranty fund assessments, with respect to defaults and 
potential defaults before such withdrawal becomes effective, subject to 
the cap described above. However, these provisions also provide 
certainty regarding Participants' ultimate exposure to the clearing 
house in connection with their use of clearing services and provide 
clarity with respect to the distinction between additional guaranty 
fund contributions (i.e., assessment) and replenishment obligations, as 
well as when participant withdrawal is effective. In an extreme stress 
scenario, where multiple calls for assessments or sequential guaranty 
fund depletion have occurred, capping Participants' obligations and 
permitting Participant withdrawal could well have stabilizing effects 
on the financial market.
    Because the proposed rule change would not subject Participants to 
unlimited assessment calls, ICC further proposes reduced gains 
distributions as a tool to manage the limitation the proposed rule 
change places on its financial resources while the clearing house 
attempts a secondary auction or conducts a partial tear-up during 
default management and recovery.\20\ Since reduced gains distributions 
will allow ICC to reduce payment of variation margin, or mark-to-
market, gains that would otherwise be owed to Participants or their 
customers, reduced gains distributions will be used only on an 
extremely limited basis, with appropriate input from the Risk Committee 
in order to minimize the negative impact on Participants or customers. 
Pursuant to the proposed rule change, the implementation of reduced 
gains distributions will be subject to certain conditions, including 
the condition that ICC has exhausted all other available default 
resources and has determined that reduced gains distributions are 
appropriate in connection with a secondary auction or partial tear-up. 
As described above, ICC must, to the extent practicable, consult with 
the Risk Committee, which is predominantly comprised of Participants, 
before using reduced gains distributions, and any decision to use 
reduced gains distributions must be made by the ICC Board, which as 
noted above, is independent of ICC and must include members chosen by 
Participants and may also include Participant representatives.\21\
---------------------------------------------------------------------------

    \20\ See ICC Rules 20-605(f)(i) and 808.
    \21\ See ICC Rules 20-605(l)(iv) and (v).
---------------------------------------------------------------------------

    It should also be noted that under the proposed rule change, as 
clarified by Amendment No. 1, the use of reduced gains distributions is 
not intended to pay for the auction costs; rather, it is designed to 
provide additional time and liquidity needed (no more than five 
business days) to enable completion of a successful secondary auction 
or partial tear-up that would not otherwise be possible because all 
other default resources have been exhausted. Thus, reduced gains 
distributions will not be used as a source of funds for a secondary 
auction, and projected auction costs will not be factored into the 
amount of any reduced gains distributions.
    The proposed rule change also limits the use of reduced gains 
distributions to no more than five business days, and even during this 
limited period, ICC may not continue to invoke reduced gains 
distributions to keep the clearing house going if there is no 
reasonable

[[Page 3836]]

prospect of a successful auction. Pursuant to the proposed rule change, 
at the end of each day in the five-business-day period, ICC must 
determine whether it expects that there will be favorable conditions 
for completing a successful secondary auction.\22\ If so, ICC may 
continue the reduced gains distributions for that day. The proposed 
rule change also provides that, if ICC conducts a successful secondary 
auction on any day, any reduced gains distributions period that is in 
effect will end. If ICC has been unable to conduct a successful 
secondary auction by the end of the five business day reduced gains 
distributions period, ICC will proceed to conduct a partial tear-up 
described above, as of the close of business on such fifth business 
day.\23\ As such, the Commission believes the cooling-off period, 
Participant withdrawal, and reduced gains distributions, taken together 
with the other components of ICC's default management procedures and 
recovery rules, are reasonably designed to provide ICC with financial 
resources it needs to cover default losses and to ensure that ICC can 
take timely Standard Default Management Actions and/or Secondary 
Default Management Actions, including auctions, to contain losses and 
liquidity pressures and to continue meeting its obligations in the 
event of Participant defaults, in accordance with Exchange Act Rule 
17Ad-22(d)(11),\24\ while at the same time providing Participants and 
their customers with greater certainty and predictability with respect 
to the amount of losses they must bear as a result of a Participant 
default, which could potentially limit loss contagion in the broader 
financial system, consistent with the public interest requirement under 
Section 17A(b)(3)(F).\25\
---------------------------------------------------------------------------

    \22\ See ICC Rule 808(d).
    \23\ See Rule 808(e).
    \24\ 17 CFR 240.17Ad-22(d)(11).
    \25\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Additional Initial Margin

    The Commission further finds the aspect of the proposed rule change 
that would require Participants to provide additional initial margin 
during the cooling-off period is consistent with applicable rules. 
Exchange Act Rule 17Ad-22(b)(3) provides, in part, that a registered 
clearing agency that performs central counterparty services for 
security-based swaps must establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to maintain 
sufficient financial resources to meet the cover two standard.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------

    As described above, the proposed rule change will require 
Participants to provide additional initial margin in the event the cap 
on Participant guaranty fund assessments and replenishment during a 
cooling-off period described above is reached. The amount of such 
initial margin would be determined by ICC based on the applicable 
regulatory financial resources requirements during the remainder of the 
cooling-off period. The Commission finds that the additional initial 
margin requirement is reasonably designed to ensure that ICC would 
maintain sufficient financial resources meeting the cover two standard 
and therefore, consistent with the requirement of Exchange Act Rule 
17Ad-22(b)(3).\27\
---------------------------------------------------------------------------

    \27\ 17 CFR 240.17Ad-22 (b)(3).
---------------------------------------------------------------------------

C. Governance

    The Commission also finds the aspects of proposed rule change 
concerning amendments to ICC's governance provisions with respect to 
default management, use of recovery tools and clearing service 
termination are consistent with the Act. As described above, key 
decisions by the clearing house in connection with recovery or wind-
down, including the use of partial tear-up and reduced gains 
distributions, or clearing service termination, are subject to specific 
governance requirements. These governance requirements include 
consultation with the Risk Committee, when practicable, and the 
requirement that certain enumerated decisions on the deployment of end-
of-waterfall recovery tools, such as reduced gains distributions, 
partial tear-up, or clearing service termination, must be made by the 
Board and cannot be delegated to ICC management. In addition to the 
governance requirements regarding key decision-making, the proposed 
rule change also specifies the conditions to the invocation and 
continuation of reduced gains distributions. Moreover, the proposed 
rule change further clarifies that ICC's emergency authority does not 
permit overriding the limitations on Participant obligations during the 
cooling-off period, or permit ICC's management to invoke partial tear-
up of positions without going through the required governance processes 
as described above. With respect to clearing service termination, as 
described above, ICC also proposes to establish more specific 
procedures, such as the timing of termination and calculation of 
termination prices.
    Accordingly, the Commission believes that these governance changes 
and related clarifications provide greater specificity, transparency, 
fair representation of Participants, and a sound process for 
Participants' input with respect to ICC's default management, recovery, 
and wind-down, as applicable, and are reasonably designed to establish 
governance arrangements that are clear and transparent to fulfill the 
public interest and support the objectives of owners and participants, 
and promote the effectiveness of the clearing agency's risk management 
procedures, consistent with the requirements in Section 17A of the Act 
and Exchange Act Rule 17Ad-22(d)(8).\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    The Commission notes that a commenter urged that ICC implement 
greater governance requirements with regard to the invocation of 
certain loss allocation methods. In particular, the commenter suggested 
that ICC be required to consult not only with its Risk Committee, but 
also with all Participants when ``invoking tools that impact loss 
distributions after the exhaustion of funded and unfunded resources.'' 
\29\ The commenter did not provide any analysis regarding whether the 
governance changes proposed by ICC are consistent with the applicable 
requirements under the Exchange Act and applicable rules and 
regulations thereunder. As stated above, ICC must consult, if 
practicable, with its Risk Committee on key decisions regarding ICC's 
default management, recovery, and wind-down, such as the initiation and 
continuation of reduced gains distributions, and partial tear-up. 
Moreover, the decision to invoke these end-of-waterfall measures must 
be made by the ICC Board, which itself consists of a majority of 
directors that are independent of ICC. As noted above, ICC's Risk 
Committee consists of a supermajority of Participant members, and it in 
turn has the right to name four members to the ICC Board, two of which 
may be Participant representatives.\30\
---------------------------------------------------------------------------

    \29\ See FIA Comment, supra note 4.
    \30\ See ICC Rules 503 and 508.
---------------------------------------------------------------------------

    The Commission also notes that this proposed rule change has been 
developed over the course of several years, and throughout that time 
ICC has regularly consulted at length with Participants (individually 
and as a group) on both the overall design and drafting of this 
proposed rule change. In particular, the introduction of partial tear-
up and reduced gains distributions as recovery tools have been 
discussed in detail with Participants, and have been

[[Page 3837]]

crafted to take into account suggestions and issues raised by 
Participants, including to limit the circumstances in which those tools 
may be used, to limit the adverse impact of such tools on netting, 
regulatory capital, and other matters, and to consult with Risk 
Committee in major decisions.\31\ In addition, as described above, the 
proposed rule change clarifies that ICC's senior management would not 
be permitted to invoke emergency authority to initiate these recovery 
tools without consulting the Risk Committee, if practicable, and 
obtaining the Board's approval.
---------------------------------------------------------------------------

    \31\ See Notice, 81 FR 83914-15. The Commission also notes that 
in addition to consulting Participants on the proposed rule change 
and the governance surrounding the use of recovery tools, ICC also 
consulted with the customers of Participants. In particular, ICC 
discussed the proposed rule change individually with members of its 
buy-side advisory committee, which consists of customers of 
Participants. ICC also considered the views of industry groups 
representing customers of Participants, both through discussions 
with members of such groups and through the public statements and 
positions of such groups. ICC has taken these views into account and 
incorporated them into the proposed rule change, including limiting 
the use of reduced gains distributions to scenarios where all other 
financial resources of the clearing house have been exhausted, and 
moving the priority of ICC's contributions in the waterfall such 
that they are used prior to the guaranty fund contributions of non-
defaulting Participants. See id. at 83915.
---------------------------------------------------------------------------

    Based on the extensive ex ante consultation with Participants at 
the proposal development stage and the enhanced governance provisions 
surrounding ICC's invoking tools that impact loss distributions after 
the exhaustion of funded and unfunded resources, the Commission does 
not believe that the proposed rule change is inconsistent with the Act 
because it does not require ICC to consult with all Participants when 
it invokes loss distribution tools. As discussed above, the Commission 
finds that the governance provisions and related clarification changes 
as part of the proposed rule change are reasonably designed to 
establish governance arrangements that are clear and transparent to 
fulfill the public interest and support the objectives of owners and 
participants, and promote the effectiveness of the clearing agency's 
risk management procedures, consistent with the requirements in Section 
17A of the Act and Exchange Act Rule 17Ad-22(d)(8).

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, 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-2016-013 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-2016-013. 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-2016-013 
and should be submitted on or before February 2, 2017.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause, pursuant to section 19(b)(2) of 
the Act,\32\ to approve the proposed rule changes, as modified by 
Amendment No. 1, prior to the 30th day after the publication of 
Amendment No. 1 in the Federal Register. As discussed above, Amendment 
No.1 clarifies various aspects of ICC's proposal to utilize reduced 
gains distributions, as well as its proposal to collect additional 
initial margin after the cap on replenishments and assessments to the 
guaranty fund is reached. Amendment No. 1 does not raise any novel 
regulatory issues, nor does it materially alter the substance of ICC's 
proposed rule changes.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    Accordingly, on its own motion, the Commission finds good cause for 
approving the proposed rule changes, as modified by Amendment No. 1, on 
an accelerated basis, pursuant to section 19(b)(2) of the Act.

VII. 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 \33\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the proposed rule changes (File No. SR-ICC-2016-013), as 
modified by Amendment No. 1, be, and hereby is, approved on an 
accelerated basis.\35\
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78s(b)(2).
    \35\ In approving the proposed rule changes, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78s(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
---------------------------------------------------------------------------

    \36\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-00491 Filed 1-11-17; 8:45 am]
 BILLING CODE 8011-01-P



                                                                                Federal Register / Vol. 82, No. 8 / Thursday, January 12, 2017 / Notices                                                        3831

                                                  information that you wish to make                       II. Description of the Proposed Rule                   terminate any positions of non-
                                                  available publicly. All submissions                     Change and Notice of Filing of                         defaulting Participants (or their
                                                  should refer to File Number SR–NYSE–                    Amendment No. 1                                        customers) that exactly offset the
                                                  2016–93, and should be submitted on or                     ICC has proposed changes to the ICC                 unsuccessfully auctioned positions in
                                                  before February 2, 2017.                                Rules, as modified by Amendment No.                    the defaulting Participant’s portfolio.
                                                    For the Commission, by the Division of                1, relating to clearing house default                  ICC refers to this termination of a
                                                  Trading and Markets, pursuant to delegated              management, recovery, and wind-down                    discrete set, as opposed to all, of its
                                                  authority.19                                            to address uncovered losses from a                     outstanding positions as ‘‘partial tear-
                                                  Eduardo A. Aleman,                                      clearing participant (‘‘Participant’’)                 up.’’ Separately, ICC proposes to revise
                                                  Assistant Secretary.                                    default or series of Participant defaults.             its authority to seek unlimited guaranty
                                                                                                          The proposed changes consist of three                  fund assessments from its Participants
                                                  [FR Doc. 2017–00490 Filed 1–11–17; 8:45 am]
                                                                                                          aspects. First, ICC proposes to revise its             and implement a ‘‘cooling-off period,’’
                                                  BILLING CODE 8011–01–P
                                                                                                          auction procedures and tools for                       during which its ability to call for
                                                                                                          returning to a matched-book after a                    additional Participant contributions to
                                                                                                          Participant default or series of                       the guaranty fund is capped. In
                                                  SECURITIES AND EXCHANGE
                                                                                                          Participant defaults and to implement a                addition, ICC proposes, in a highly
                                                  COMMISSION
                                                                                                          different approach to allocating                       limited set of circumstances, to allocate
                                                  [Release No. 34–79750; File No. SR–ICC–                 uncovered losses stemming from such                    losses by reducing the amount of
                                                  2016–013]                                               Participant default(s) that provides more              variation margin that would otherwise
                                                                                                          certainty to Participants by limiting                  be owed to Participants or their
                                                  Self-Regulatory Organizations; ICE                      their exposure to ICC. Second, ICC                     customers as a tool to assist in ICC’s
                                                  Clear Credit LLC; Notice of Filing                      proposes to collect additional initial                 recovery, which ICC refers to as
                                                  Amendment No. 1 and Order Granting                      margin to ensure that it maintains                     ‘‘reduced gains distributions.’’ These
                                                  Accelerated Approval of Proposed                        minimum pre-funded financial                           provisions are described more fully
                                                  Rule Change To Amend the ICE Clear                      resources in compliance with applicable                below.6
                                                  Credit Clearing Rules, as Modified by                   regulatory requirements. Third, ICC                    1. Revised Auction Procedures
                                                  Amendment No. 1, Relating to Default                    proposes to clarify the governance
                                                  Management, Clearing House                                                                                        Under the proposed changes, ICC will
                                                                                                          requirements relating to the use of ICC’s
                                                  Recovery and Wind-Down                                                                                         use an auction to dispose of a defaulting
                                                                                                          proposed default management tools,
                                                                                                                                                                 Participant’s portfolio.7 Ordinarily, ICC
                                                  January 6, 2017.                                        including matched-book tools and loss
                                                                                                                                                                 will begin with an initial default auction
                                                                                                          allocation tools, as well as clarify the
                                                  I. Introduction                                                                                                and if necessary or appropriate proceed
                                                                                                          Rules to enhance transparency and
                                                                                                                                                                 to a secondary auction. But, in
                                                     On November 4, 2016, ICE Clear                       specificity.
                                                                                                                                                                 consultation with the Risk Committee, if
                                                  Credit LLC (‘‘ICC’’ or ‘‘clearing house’’)              A. Revised Auction Procedures, Tools                   practicable, and upon a majority vote of
                                                  filed with the Securities and Exchange                  for Returning ICC to a Matched-Book                    ICC’s Board, ICC may bypass the initial
                                                  Commission (‘‘Commission’’), pursuant                   and Tools for Default Loss Allocation                  auction and proceed directly to a
                                                  to Section 19(b)(1) of the Securities                                                                          secondary auction.
                                                                                                             ICC proposes substantial changes in
                                                  Exchange Act of 1934 (‘‘Act’’) 1 and Rule                                                                         In the initial auction, ICC
                                                                                                          the way it returns to a matched-book
                                                  19b–4 thereunder,2 a proposed rule                                                                             management will divide the defaulting
                                                                                                          following a Participant default or series
                                                  change (SR–ICC–2016–013) to amend                                                                              Participant’s portfolio into one or more
                                                                                                          of defaults. Specifically, ICC proposes to
                                                  the ICC Clearing Rules (‘‘ICC Rules’’ or                maintain its existing default                          lots, and each non-defaulting
                                                  ‘‘Rules’’) relating to clearing house                   management practices,5 such as the                     Participant will be subject to a
                                                  default management, recovery, and                       practice of auctioning a defaulting                    minimum bid requirement for each lot.
                                                  wind-down, and to adopt certain related                 Participant’s positions to its non-                    In addition, ICC proposes to permit
                                                  default auction procedures. The                         defaulting Participants, but proposes to               customers of Participants to participate
                                                  proposed rule change was published for                  eliminate its ability to forcibly allocate             in the initial auction either by bidding
                                                  comment in the Federal Register on                      a defaulting Participant’s positions to                indirectly through a Participant or by
                                                  November 22, 2016.3 The Commission                      other non-defaulting Participants, in the              bidding directly in the auction,
                                                  received one comment letter to the                      event an auction is unsuccessful. In lieu              provided that such customers (1) agree
                                                  proposed rule change.4 On December                      of these forced allocations, ICC has                   to the terms of the auction, (2) accept
                                                  19, 2016, ICC filed Amendment No. 1 to                  proposed a revised set of auction                      the same confidentiality agreements
                                                  the proposed rule change. The                           procedures and an additional matched-                  concerning the auction as a Participant;
                                                  Commission is publishing this notice to                 book tool. The revised auction                         and (3) make a minimum deposit to be
                                                  solicit comment on Amendment No. 1                      procedures include initial and                         applied by ICC in the same manner as
                                                  from interested persons and, for the                    secondary auctions, each of which                      Participants’ guaranty fund
                                                  reasons stated below, is approving the                  include a number of features designed                  contributions. ICC will use all available
                                                  proposed rule change, as modified by                    to incentivize Participants and their                  default resources to cover the costs
                                                  Amendment No. 1, on an accelerated                      customers to bid competitively. In the                 associated with the initial default
                                                  basis.                                                  event that the default management                        6 See Notice, 81 FR at 83906–10, unless otherwise
                                                                                                          auctions are unsuccessful in returning                 noted.
mstockstill on DSK3G9T082PROD with NOTICES




                                                    19 17 CFR 200.30–3(a)(12).                            ICC to a matched-book, ICC proposes to                   7 Although the auction procedures will not be
                                                    1 15 U.S.C. 78s(b)(1).
                                                                                                                                                                 published, ICC will make such procedures available
                                                    2 17 CFR 240.19b–4.
                                                                                                             5 ICC’s existing default remedies, as amended by    to all Participants, subject to existing confidentiality
                                                    3 Securities Exchange Act Release No. 34–79324
                                                                                                          this proposed rule change, are referred to as          arrangements between ICC and Participants and the
                                                  (Nov. 16, 2016), 81 FR 83906 (Nov. 22, 2016) (SR–       ‘‘Standard Default Management Actions.’’ By            confidentiality provisions set forth in the auction
                                                  ICC–2016–013) (‘‘Notice’’).                             contrast, additional, new default management tools     procedures. ICC will also make such procedures
                                                    4 See letter from Jacqueline H. Mesa, Senior Vice     adopted as part of this proposed rule change are       available to customers of Participants at the request
                                                  President of Global Policy, FIA (Dec. 2, 2016) (‘‘FIA   referred to as ‘‘Secondary Default Management          of such customers (and/or permit Participants to do
                                                  Comment’’).                                             Actions.’’ See Notice, 81 FR at 83906.                 so), subject to confidentiality arrangements.



                                             VerDate Sep<11>2014   18:28 Jan 11, 2017   Jkt 241001   PO 00000   Frm 00116   Fmt 4703   Sfmt 4703   E:\FR\FM\12JAN1.SGM   12JAN1


                                                  3832                          Federal Register / Vol. 82, No. 8 / Thursday, January 12, 2017 / Notices

                                                  auction. These resources include all                    matched book. Partial tear-up entails                  guaranty fund contribution per default.
                                                  mutualized guaranty fund contributions,                 terminating the positions of non-                      And during the cooling-off period, non-
                                                  whether pre-funded or assessed,                         defaulting Participants (and their                     defaulting Participants’ liability for
                                                  including ICC’s ‘‘pro rata’’ contribution.              customers) that exactly offset those in                mutualized guaranty fund contributions
                                                  In an effort to encourage competitive                   the defaulting Participant’s remaining                 is capped at three times the required
                                                  bidding, ICC will ‘‘juniorize,’’ i.e., apply            portfolio (i.e., positions in the identical            guaranty fund contribution, based on
                                                  the guaranty fund contributions of                      contracts and in the same aggregate                    the last guaranty fund calculation before
                                                  Participants who fail to bid and those                  notional amount). Partial tear-up will be              the cooling-off period was triggered,
                                                  who bid non-competitively to the costs                  employed on both house and customer                    regardless of the number of defaults that
                                                  of the auction before it applies those of               origin accounts across all non-defaulting              occur during this period. Similarly,
                                                  Participants who bid competitively, as                  Participants that have such positions on               ICC’s contributions to the guaranty fund
                                                  set forth in the default auction                        a pro rata basis. ICC proposes to base the             are subject to limits of one times its
                                                  procedures.                                             partial tear-up price on the last                      contribution per default and three times
                                                     As part of this proposed rule change,                established end-of-day mark-to-market                  its contribution during the cooling-off
                                                  ICC proposes to move its contribution to                settlement price and terminate selected                period. Participants may terminate their
                                                  the guaranty fund higher in the default                 contracts contemporaneously with the                   membership during a cooling-off period
                                                  waterfall such that ICC’s contribution                  determination of such price (i.e., at 5                by providing ICC with an irrecoverable
                                                  will be used prior to the application of                p.m., New York time). Thus, ICC                        notice of withdrawal and closing out all
                                                  guaranty fund contributions of non-                     proposes to collect and pay the tear-up                positions by a specified deadline.
                                                  defaulting Participants.                                price by application of mark-to-market                 Participants who withdraw during a
                                                     In the event an initial auction does                 margin posted (or that would have been                 cooling-off termination period must
                                                  not fully dispose of a defaulting                       posted but for reduced gains                           continue to meet their obligations to
                                                  Participant’s portfolio, ICC may conduct                distributions) as part of its end-of-day               ICC, including guaranty fund
                                                  one or more secondary auctions. At the                  settlement process. After a partial tear-              assessments with respect to defaults and
                                                  secondary auction stage, ICC will                       up is executed, ICC would return to a                  potential defaults that occur before such
                                                  endeavor to auction off the remaining                   matched-book and would be positioned                   Participants’ withdrawal becomes
                                                  portfolio in a single lot, though ICC                   to continue offering clearing services for             effective, subject to the limits described
                                                  retains the discretion to break the                     all remaining Participants and their                   above.
                                                  portfolio into separate lots if certain                 customers.                                                ICC further proposes to use reduced
                                                  non-defaulting Participants are not able                   ICC may invoke partial tear-up as a                 gains distributions as a tool to allocate
                                                  to bid on particular positions or ICC                   matched-book tool only after a number                  losses stemming from the defaulting
                                                  otherwise determines that doing so                      of prerequisites have been satisfied.                  Participant’s variation margin
                                                  would facilitate the auction process.                   First, ICC may not resort to partial tear-             obligations while ICC attempts a
                                                  Moreover, customers of Participants are                 up until it has attempted one or more                  secondary auction or conducts a partial
                                                  permitted to bid in secondary auctions                  initial or secondary auctions. In                      tear-up during default management and
                                                  directly without the need for a                         addition, ICC must consult with its Risk               recovery. Currently, holders of positions
                                                  minimum deposit, so long as a                           Committee, which is comprised of a                     opposite those of a defaulting
                                                  Participant has confirmed that it would                 supermajority of Participants, if                      Participant are entitled to receive
                                                  clear any resulting transactions of the                 practicable, before it may proceed to                  variation margin each day such
                                                  customer. (Customers of Participants                    partial tear-up. If consultation with the              positions appreciate in value. Under the
                                                  continue to retain the option of bidding                Risk Committee is impracticable prior to               proposed rule change, ICC may reduce
                                                  indirectly through a Participant as well.)              taking action, ICC must use its                        variation margin that would be
                                                  As with initial auctions, ICC will apply                reasonable best efforts to consult with                otherwise owed to both Participants and
                                                  all remaining default resources to fund                 the Risk Committee as soon as                          their customers. ICC proposes to use
                                                  the secondary auction(s), and it will                   practicable thereafter regarding any                   reduced gains distributions for no more
                                                  continue to juniorize guaranty fund                     further relevant actions. Moreover, only               than five business days. On each day
                                                  contributions that remain, if any. A                    ICC’s Board, which is comprised of a                   when reduced gains distributions are
                                                  secondary auction for any lot is deemed                 majority of directors independent of ICC               invoked, ICC will calculate a haircut
                                                  successful if it results in a price that is             and includes directors chosen by                       that is applied pro rata to house and
                                                  within ICC’s remaining default                          Participants and may also include                      customer origin accounts and applied
                                                  resources. If a secondary auction is                    Participant representatives, may invoke                pro rata to each customer portfolio such
                                                  unsuccessful for any lot, ICC may run                   partial-tear up.                                       that each customer portfolio receives the
                                                  another secondary auction for that lot                                                                         same haircut.
                                                                                                          3. Cooling-Off Period, Participant                        Under the proposed rule change, the
                                                  on a subsequent business day, unless
                                                                                                          Withdrawal, and Reduced Gains                          use of reduced gains distributions is
                                                  ICC has invoked reduced gains
                                                                                                          Distributions                                          subject to certain conditions. ICC may
                                                  distributions, in which case secondary
                                                  auctions may not extend beyond the five                    ICC’s current rules permit the clearing             not resort to reduced gains distributions
                                                  business-day reduced gains                              house to seek unlimited guaranty fund                  unless it has exhausted all available
                                                  distributions period.                                   assessments from its Participants, but                 financial resources and expects that
                                                                                                          the proposed rule change would                         there will be favorable conditions for
                                                  2. Removal of Forced Allocation and                     eliminate the clearing house’s unlimited               completing a successful secondary
                                                  Addition of Partial Tear-Up                             power of assessment. Instead, ICC                      auction, subject to the limitation that
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                                                     ICC further proposes to eliminate its                proposes to implement a ‘‘cooling-off                  reduced gains distributions may not
                                                  rules regarding forced allocation, in                   period,’’ during which its ability to call             extend for more than five business days.
                                                  which all positions not successfully                    for additional Participant contributions               In the event ICC conducts a successful
                                                  auctioned through the default auction                   to the guaranty fund is limited. During                secondary auction, reduced gains
                                                  process are allocated to non-defaulting                 a cooling-off period, non-defaulting                   distributions will end on that day. If ICC
                                                  Participants, and instead, implement                    Participants will not be required to pay               has been unable to conduct a successful
                                                  pro rata partial tear-up to return to a                 more than one time their required                      secondary auction by the end of the five


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                                                                                Federal Register / Vol. 82, No. 8 / Thursday, January 12, 2017 / Notices                                                      3833

                                                  business day reduced gains                              transparency of its Rules. With respect                clearing service termination,9 but did
                                                  distributions period, ICC will proceed to               to clearing service termination, ICC                   not take a position regarding any of
                                                  partial tear-up, as described above, at                 proposes to establish more specific                    these three issues or provide any legal
                                                  the close of business on such fifth                     procedures governing a number of                       analysis regarding whether ICC’s use of
                                                  business day. Moreover, as further                      matters, such as the notice of and timing              VMGH, i.e., reduced gains distributions,
                                                  clarified in Amendment No. 1, reduced                   of clearing service termination, the                   or partial-tear up or other aspects of
                                                  gains distributions will not be available               calculation of termination prices, and                 ICC’s proposal is consistent with the
                                                  to provide additional funds for a                       the determination of the net amount                    Exchange Act. The commenter did
                                                  secondary auction, and projected                        owed to or by each Participant. In                     suggest that ICC be required to consult
                                                  auction costs will not be factored into                 addition, ICC has made a number of                     not only with its Risk Committee, but
                                                  the amount of reduced gains                             additional changes to the existing rules               also with all members when ‘‘invoking
                                                  distributions. Finally, as with partial                 to clarify that its emergency authority                tools that impact loss distributions after
                                                  tear-up, ICC must consult with its Risk                 does not override the limitations on                   the exhaustion of funded and unfunded
                                                  Committee before invoking reduced                       Participant obligations to make guaranty               resources.’’ 10
                                                  gains distributions, to the extent                      fund contributions during a cooling-off                IV. Discussion and Commission
                                                  practicable, and the ultimate decision to               period or permit resort to partial tear-               Findings
                                                  do so must be made by the Board.                        up, unless otherwise permitted under
                                                                                                          the Rules, as well as a number of more                   Pursuant to section 19(b)(2)(C) 11 of
                                                  B. Additional Initial Margin                                                                                   the Act, the Commission must approve
                                                                                                          minor drafting enhancements.
                                                     ICC further proposes to levy                                                                                a proposed rule change of a self-
                                                  additional initial margin, if necessary,                D. Notice of Filing of Amendment                       regulatory organization if the
                                                  during a cooling-off period when                        No. 1                                                  Commission finds that such proposed
                                                  Participants’ obligations to replenish the                In Amendment No. 1, ICC proposes to                  rule change is consistent with the
                                                  guaranty fund and to make required                      clarify certain aspects of the proposed                requirements of the Act and the rules
                                                  guaranty fund contributions (i.e.,                                                                             and regulations thereunder applicable to
                                                                                                          rule change. In particular, as noted
                                                  assessments) have reached the cap                                                                              such self-regulatory organization. After
                                                                                                          above, ICC explains that reduced gains
                                                  described above, in order to maintain                                                                          careful consideration, the Commission
                                                                                                          distributions will not be used to provide
                                                  sufficient financial resources that would                                                                      believes that the proposed rule changes
                                                                                                          additional funds for a secondary
                                                  enable the clearing house to withstand                                                                         are consistent with the Act and the rules
                                                                                                          auction, and that expected auction costs
                                                  a default by the two Participant families                                                                      and regulations thereunder applicable to
                                                                                                          will not be factored into the
                                                  to which it has the largest exposure in                                                                        ICC.
                                                                                                          determination of the haircut used for                    Specifically, Section 17A(b)(3)(F) of
                                                  extreme but plausible market conditions
                                                                                                          reduced gains distributions. In addition,              the Act requires,12 among other things,
                                                  (i.e. the ‘‘cover two’’ standard), as
                                                                                                          ICC clarifies that additional initial                  that the rules of a clearing agency be
                                                  required by Exchange Act Rule 17Ad–
                                                  22(b)(3). The additional initial margin                 margin called after the cap on guaranty                designed to promote the prompt and
                                                  will be calculated in an amount such                    fund replenishments and assessments in                 accurate clearance and settlement of
                                                  that ICC has collected sufficient                       a cooling-off period is reached will be                securities transactions and, to the extent
                                                  financial resources to meet the                         calculated not only for the house                      applicable, derivative agreements,
                                                  regulatory requirement.                                 account, but also customer accounts (on                contracts, and transactions, as well as to
                                                                                                          a net basis across customers). Any                     assure the safeguarding of securities and
                                                  C. Governance                                           margin amounts charged, however, will                  funds and to protect investors and the
                                                    ICC further proposes enhanced                         be charged to the house account of the                 public interest. Exchange Act Rule
                                                  governance requirements for the use of                  Participant, with no charge against any                17Ad–22(d)(11) requires,13 in part, each
                                                  certain default management tools as part                customer accounts. Finally, ICC notes                  registered clearing agency to establish,
                                                  of the proposed rule change. Under the                  that the ability to call for the additional            implement, maintain, and enforce
                                                  proposed rule change, ICC is required to                initial margin after the cap on guaranty               written policies and procedures
                                                  consult with the Risk Committee (which                  fund replenishments and assessments                    reasonably designed to make key
                                                  consists of a supermajority of                          has been reached may have a                            aspects of the clearing agency’s default
                                                  Participant representatives) on whether                 procyclical impact on Participants and                 procedures publicly available and
                                                  to conduct a secondary auction, employ                  their customers. However, ICC believes                 establish default procedures that ensure
                                                  reduced gains distributions, implement                  that any additional initial margin called              that the clearing agency can take timely
                                                  partial tear-up, or proceed to wind-                    will likely not exceed the amount of                   action to contain losses and liquidity
                                                  down the service. If such consultation is               initial margin otherwise on deposit, and               pressures and to continue meeting its
                                                  impracticable, ICC must use its                         will be commensurate with the range of                 obligations in the event of a participant
                                                  reasonable best efforts to consult with                 initial margin variation experienced in
                                                  the Risk Committee as soon as                           the ordinary course.                                      9 With regard to the use of VMGH and partial tear-

                                                  practicable thereafter regarding any                                                                           up, the commenter noted that its members have
                                                                                                          III. Summary of Comment Letter                         varying, sometimes inconsistent views on the
                                                  further relevant actions. In addition,                                                                         desirability of using VMGH or partial tear-up in
                                                  ICC’s management is not permitted to                       The Commission received one                         recovery. Similarly, the commenter noted that there
                                                  invoke partial tear-up or reduced gains                 comment letter in response to the                      is a disagreement within its membership as to
                                                                                                          proposed rule change.8 The commenter,                  whether ICC should be able to terminate all trades
                                                  distributions on its own authority.                                                                            without recourse to ICC capital. With regard to
                                                  Those decisions may only be                             a trade association, provided general
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                                                                                                                                                                 compensation for losses beyond mutualized
                                                  undertaken after majority vote of the                   comments on three broad issues: (1) The                resources, the commenter expects to engage ICC on
                                                  ICC Board, which itself is composed of                  use of variation margin gains haircutting              this topic and does not argue that this is a basis
                                                                                                          (‘‘VMGH’’) and partial tear-ups; (2)                   upon which the proposed rule change can or should
                                                  a majority of directors independent of                                                                         be disapproved. See id.
                                                  ICC.                                                    compensation for losses beyond                            10 See id.
                                                    To complement its governance                          mutualized resources; and (3) full                        11 15 U.S.C. 78s(b)(2)(C).

                                                  provisions, ICC has also proposed                                                                                 12 15 U.S.C. 78q–1(b)(3)(F).

                                                  several clarifications to enhance the                     8 See   FIA Comment, supra note 4.                      13 17 CFR 240.17Ad–22(d)(11).




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                                                  3834                          Federal Register / Vol. 82, No. 8 / Thursday, January 12, 2017 / Notices

                                                  default. Furthermore, Exchange Act                      in the default auction procedures based                 resources of the clearing house.
                                                  Rule 17Ad–22(b)(3) requires, in part,                   on the competitiveness of their bids.                   Therefore, Commission believes that the
                                                  each registered clearing agency                            If the initial auction fails, as described           revised auction procedures are
                                                  providing central counterparty services                 above, ICC may conduct a secondary                      reasonably designed to establish default
                                                  to establish, implement, maintain, and                  auction to maximize the opportunities                   procedures that ensure that the clearing
                                                  enforce written policies and procedures                 of disposing of the defaulting                          agency can take timely action to contain
                                                  reasonably designed to maintain certain                 Participant’s portfolio and returning to a              losses and to continue meeting its
                                                  financial resource requirements at all                  matched-book. Similar to the initial                    obligations in the event of a participant
                                                  times,14 including during the default                   auction, ICC would juniorize the                        default, as well as promoting
                                                  management process and in the clearing                  guaranty fund and assessment                            safeguarding securities and funds,
                                                  house recovery scenario. Finally,                       contributions that remain, if any, of                   consistent with the requirements in
                                                  Exchange Act Rule 17Ad–22(d)(8)                         non-defaulting Participants with less                   Section 17A(b)(3)(F) of the Act and
                                                  requires a clearing agency to establish,                competitive bids in order to incentivize                Exchange Act Rule 17Ad–22(d)(11).
                                                  implement, maintain, and enforce                        competitive bidding by such                               In addition, the Commission finds the
                                                  written policies and procedures                         Participants. In addition, at the                       proposal to move ICC’s contribution to
                                                  reasonably designed to have governance                  secondary auction stage, ICC will apply                 the guaranty fund to the beginning of
                                                  arrangements that are clear and                         all remaining clearing house default                    the waterfall is consistent with the Act.
                                                  transparent to fulfill the public interest              resources and endeavor to auction off                   Subordination of ICC’s guaranty fund
                                                  requirements in Section 17A of the Act,                 the remaining portfolio in a single lot,                contribution reinforces its incentives to
                                                  to support the objectives of owners and                 although it may break the portfolio into                manage risk appropriately and safeguard
                                                  participants, and to promote the                        separate lots if certain Participants are               the securities and funds with which it
                                                  effectiveness of the clearing agency’s                  not able to bid on particular contracts or              has been entrusted, and therefore, is
                                                  risk management procedures.15                           it otherwise determines that doing so                   consistent with the requirements in
                                                     The Commission discusses each                        would facilitate the auction process. A                 Section 17A(b)(3)(F) of the Act.
                                                  aspect of ICC’s proposed rule change                    secondary auction for a lot will be
                                                                                                                                                                  2. Removal of Forced Allocation and
                                                  and its findings below.                                 deemed successful if it results in a price
                                                                                                                                                                  Addition of Partial Tear-Up
                                                                                                          for the lot that is within ICC’s remaining
                                                  A. Revised Auction Procedures, Tools                    default resources. The secondary                           The Commission further finds that the
                                                  for Returning ICC to a Matched-Book                     auction procedures would make it even                   removal of forced allocation and
                                                  and Tools for Default Loss Allocation                   easier for customers to bid directly by                 addition of partial tear-up, as proposed
                                                  1. Revised Auction Procedures                           eliminating the need for a minimum                      by ICC, are consistent with the
                                                                                                          deposit, so long as a Participant has                   Exchange Act. As described above, if
                                                     The Commission finds the revised                                                                             any positions are not successfully
                                                  auction procedures, as proposed by ICC,                 confirmed that it would clear any
                                                                                                          resulting transactions of the customer.                 auctioned through the default auction
                                                  consistent with Section 17A(b)(3)(F) and                                                                        process, ICC proposes pro-rata partial
                                                                                                          (As with initial auctions, customers
                                                  Exchange Act Rule 17Ad–22(d)(11). As                                                                            tear-up in lieu of the existing forced
                                                                                                          retain the option of bidding through a
                                                  described above, under the proposed                                                                             allocation.18 As a result of the partial
                                                                                                          Participant.) If a secondary auction is
                                                  rule change, in the event of a Participant                                                                      tear-up, ICC would return to a matched
                                                                                                          unsuccessful for any lot, ICC may repeat
                                                  default, ICC will ordinarily conduct an                                                                         book.
                                                                                                          this process and run another secondary
                                                  initial auction as part of its Standard                                                                            The Commission recognizes that the
                                                                                                          auction for that lot on a subsequent
                                                  Default Management Actions.16 Under                                                                             replacement of forced allocation with
                                                                                                          business day, unless ICC has invoked
                                                  the proposed auction procedures,                                                                                partial tear-up as a matched-book tool
                                                                                                          reduced gains distributions, in which
                                                  Participants will be required to bid in                                                                         would result in termination of positions
                                                                                                          case, the secondary auctions may not
                                                  the initial auction for each lot in a                   extend beyond the five-business-day                     of non-defaulting Participants across
                                                  minimum amount determined by ICC.                       reduced gains distributions period.17                   both the house and customer origin
                                                  In addition, the revised auction                           Taken together, the Commission                       accounts that exactly offset those in the
                                                  procedures will permit customers of                     believes that the revised default auction               defaulting Participant’s portfolio that
                                                  Participants to participate in auctions by              procedures, including the assignment of                 are not successfully auctioned off
                                                  either bidding indirectly through a                     minimum bid requirements to                             during the initial and/or secondary
                                                  Participant or by bidding directly in the               Participants during the initial auction,                auctions. However, the Commission also
                                                  auction, provided that such customers                   broadening participation in both the                    recognizes that the forced allocation of
                                                  (1) agree to the terms of the auction, (2)              initial auction and the secondary                       positions in a defaulting Participant’s
                                                  accept the same confidentiality                         auctions by permitting customers of                     remaining portfolio that cannot be
                                                  agreements concerning the auction as a                  Participants to bid directly or indirectly,             successfully disposed of with the
                                                  Participant; and (3) make a minimum                     and juniorization of the guaranty fund                  clearing house’s financial resources
                                                  deposit to be applied by ICC in the same                and assessment contributions of non-                    would potentially result in non-
                                                  manner as Participants’ guaranty fund                   defaulting Participants and the                         defaulting Participants taking
                                                  contributions. Furthermore, the                         minimum deposit of customers, provide                   unmeasurable and unlimited losses
                                                  guaranty fund and assessment                            Participants and applicable customers of                beyond their risk tolerance or risk
                                                  contributions of non-defaulting                         Participants who elect to participate in                management capability. Because ICC
                                                  Participants will be subject to                         the auction a strong incentive to bid                   will only be permitted to use partial
                                                  juniorization and applied using a                       competitively. The revised auction                      tear-up to return to a matched book after
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                                                  defined default auction priority set out                procedures should significantly increase                it has attempted initial and/or
                                                                                                          the likelihood of reaching an efficient                 secondary auctions, as appropriate, and
                                                    14 17 CFR 240.17Ad–22(b)(3).                          auction clearing price that permits ICC                 the proposed auction procedures would
                                                    15 17 CFR 240.17Ad–22(d)(8).
                                                    16 In consultation with the Risk Committee, if
                                                                                                          successfully to dispose of the defaulting               significantly improve the likelihood of
                                                  practicable, and with a majority vote of the Board,     Participant’s portfolio within the                      successful auctions, the use of the
                                                  ICC may proceed directly to Secondary Default
                                                  Management Actions if appropriate.                        17 See   ICC Rule 808(e).                               18 See   ICC Rules 809 and 20–605(f)(iii).



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                                                                                  Federal Register / Vol. 82, No. 8 / Thursday, January 12, 2017 / Notices                                                       3835

                                                  partial tear-up would only arise in an                    Section 17A(b)(3)(F) and Exchange Act                     Because the proposed rule change
                                                  extreme stress scenario. In such a stress                 Rule 17Ad–22(d)(11).                                   would not subject Participants to
                                                  scenario, the forced allocation of a                                                                             unlimited assessment calls, ICC further
                                                                                                            3. Cooling-Off Period, Participant
                                                  defaulting Participant’s remaining                                                                               proposes reduced gains distributions as
                                                                                                            Withdrawal, and Reduced Gains
                                                  positions that could not be auctioned off                                                                        a tool to manage the limitation the
                                                                                                            Distributions
                                                  also could pose risk to non-defaulting                                                                           proposed rule change places on its
                                                  Participants and threaten systemic                           With respect to financial resources                 financial resources while the clearing
                                                  financial stability by, among other                       available during default management                    house attempts a secondary auction or
                                                  things, precipitating further defaults                    and clearing house recovery, ICC also                  conducts a partial tear-up during default
                                                  among such Participants. On the other                     proposes to impose a cooling-off period,               management and recovery.20 Since
                                                  hand, use of partial tear-up could                        to permit Participants to withdraw from                reduced gains distributions will allow
                                                  potentially return the clearing house to                  ICC during the cooling-off period, and to              ICC to reduce payment of variation
                                                  a matched book quickly, thereby                           use reduced gains distributions when all               margin, or mark-to-market, gains that
                                                  containing the clearing house’s losses.                   the other default resources have been                  would otherwise be owed to
                                                  Pursuant to the proposed rule change,                     exhausted. The Commission believes                     Participants or their customers, reduced
                                                  ICC would base the partial tear-up price                  that these changes, subject to the                     gains distributions will be used only on
                                                  on the last established end-of-day mark-                  conditions and the governance                          an extremely limited basis, with
                                                  to-market settlement price and                            arrangements proposed by ICC in                        appropriate input from the Risk
                                                  terminate selected contracts                              conjunction therewith, are consistent                  Committee in order to minimize the
                                                  contemporaneously with the                                with the requirements of prompt and                    negative impact on Participants or
                                                  determination of such price (i.e., at 5                   accurate clearance and settlement,                     customers. Pursuant to the proposed
                                                  p.m., New York time).19 This would                        safeguarding securities and funds and                  rule change, the implementation of
                                                  enable ICC to collect and pay the tear-                   promoting public interest and investor                 reduced gains distributions will be
                                                  up price by application of mark-to-                       protection in the Act, and the rules and               subject to certain conditions, including
                                                  market margin posted (or that would                       regulations thereunder.                                the condition that ICC has exhausted all
                                                  have been posted but for reduced gains                       As described above, during the                      other available default resources and
                                                  distributions) as part of its end-of-day                  proposed cooling-off period,                           has determined that reduced gains
                                                  settlement process. Once the partial                      Participants’ obligations for assessments              distributions are appropriate in
                                                  tear-up is completed through the end-of-                  would be capped at ‘‘1x’’ the required                 connection with a secondary auction or
                                                  day mark-to-market settlement process,                    guaranty fund contribution per default,                partial tear-up. As described above, ICC
                                                  ICC would have the ability to promptly                    and each Participant’s total amount of                 must, to the extent practicable, consult
                                                  return the initial margin associated with                 replenishments and assessment                          with the Risk Committee, which is
                                                  the terminated positions to the                           contributions would be capped at three                 predominantly comprised of
                                                  Participants and customers whose                          times the required guaranty fund                       Participants, before using reduced gains
                                                  positions have been terminated                            contribution, regardless of the number                 distributions, and any decision to use
                                                  pursuant to ICC’s existing rules. Finally,                of defaults during the period. In                      reduced gains distributions must be
                                                  pursuant to the proposed rule change,                     addition, Participants who seek to                     made by the ICC Board, which as noted
                                                  ICC must consult with the Risk                            withdraw from ICC during a cooling-off                 above, is independent of ICC and must
                                                  Committee, if practicable, and obtain                     period must generally provide ICC with                 include members chosen by Participants
                                                  the Board’s approval before invoking                      an irrecoverable notice of withdrawal                  and may also include Participant
                                                  partial tear-up, which ensures that                       and close out all positions by a specified             representatives.21
                                                  Participants have the opportunity to                      deadline. The Commission recognizes                       It should also be noted that under the
                                                  provide input in the decision-making                      that these provisions would effectively                proposed rule change, as clarified by
                                                  process with respect to whether the                       limit the amount of financial resources                Amendment No. 1, the use of reduced
                                                  clearing house should initiate partial                    available to ICC for covering default                  gains distributions is not intended to
                                                  tear-up.                                                  losses, even though a withdrawing                      pay for the auction costs; rather, it is
                                                     The Commission believes that these                     Participant will continue to meet its                  designed to provide additional time and
                                                  provisions regarding the use of partial                   obligations, including guaranty fund                   liquidity needed (no more than five
                                                  tear-up and the removal of forced                         assessments, with respect to defaults                  business days) to enable completion of
                                                  allocation are designed to provide                        and potential defaults before such                     a successful secondary auction or partial
                                                  greater certainty to Participants in the                  withdrawal becomes effective, subject to               tear-up that would not otherwise be
                                                  estimation of their potential risks and                   the cap described above. However, these                possible because all other default
                                                  losses in their use of the clearing                       provisions also provide certainty                      resources have been exhausted. Thus,
                                                  agency, while enabling ICC to promptly                    regarding Participants’ ultimate                       reduced gains distributions will not be
                                                  return to a matched book. The                             exposure to the clearing house in                      used as a source of funds for a
                                                  Commission believes that returning to a                   connection with their use of clearing                  secondary auction, and projected
                                                  matched book pursuant to these                            services and provide clarity with respect              auction costs will not be factored into
                                                  provisions in the context of ICC’s                        to the distinction between additional                  the amount of any reduced gains
                                                  default management and recovery,                          guaranty fund contributions (i.e.,                     distributions.
                                                  facilitates the timely containment of                     assessment) and replenishment                             The proposed rule change also limits
                                                  default losses and liquidity pressures                    obligations, as well as when participant               the use of reduced gains distributions to
                                                                                                            withdrawal is effective. In an extreme
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                                                  and is consistent with the safeguarding                                                                          no more than five business days, and
                                                  of assets and funds and, to the extent of                 stress scenario, where multiple calls for              even during this limited period, ICC
                                                  limiting contagion to the broader                         assessments or sequential guaranty fund                may not continue to invoke reduced
                                                  financial system, is consistent with the                  depletion have occurred, capping                       gains distributions to keep the clearing
                                                  protection of investors and the public                    Participants’ obligations and permitting               house going if there is no reasonable
                                                  interest as well—consistent with                          Participant withdrawal could well have
                                                                                                            stabilizing effects on the financial                     20 See   ICC Rules 20–605(f)(i) and 808.
                                                    19 See   ICC Rules 809(b)(iv) and (d).                  market.                                                  21 See   ICC Rules 20–605(l)(iv) and (v).



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                                                  3836                          Federal Register / Vol. 82, No. 8 / Thursday, January 12, 2017 / Notices

                                                  prospect of a successful auction.                       sufficient financial resources to meet the                Accordingly, the Commission believes
                                                  Pursuant to the proposed rule change, at                cover two standard.26                                  that these governance changes and
                                                  the end of each day in the five-business-                  As described above, the proposed rule               related clarifications provide greater
                                                  day period, ICC must determine                          change will require Participants to                    specificity, transparency, fair
                                                  whether it expects that there will be                   provide additional initial margin in the               representation of Participants, and a
                                                  favorable conditions for completing a                   event the cap on Participant guaranty                  sound process for Participants’ input
                                                  successful secondary auction.22 If so,                  fund assessments and replenishment                     with respect to ICC’s default
                                                  ICC may continue the reduced gains                      during a cooling-off period described                  management, recovery, and wind-down,
                                                  distributions for that day. The proposed                above is reached. The amount of such                   as applicable, and are reasonably
                                                  rule change also provides that, if ICC                  initial margin would be determined by                  designed to establish governance
                                                  conducts a successful secondary auction                 ICC based on the applicable regulatory                 arrangements that are clear and
                                                  on any day, any reduced gains                           financial resources requirements during                transparent to fulfill the public interest
                                                  distributions period that is in effect will             the remainder of the cooling-off period.               and support the objectives of owners
                                                                                                          The Commission finds that the                          and participants, and promote the
                                                  end. If ICC has been unable to conduct
                                                                                                          additional initial margin requirement is               effectiveness of the clearing agency’s
                                                  a successful secondary auction by the
                                                                                                          reasonably designed to ensure that ICC                 risk management procedures, consistent
                                                  end of the five business day reduced
                                                                                                          would maintain sufficient financial                    with the requirements in Section 17A of
                                                  gains distributions period, ICC will                    resources meeting the cover two                        the Act and Exchange Act Rule 17Ad–
                                                  proceed to conduct a partial tear-up                    standard and therefore, consistent with                22(d)(8).28
                                                  described above, as of the close of                     the requirement of Exchange Act Rule                      The Commission notes that a
                                                  business on such fifth business day.23                  17Ad–22(b)(3).27                                       commenter urged that ICC implement
                                                  As such, the Commission believes the                                                                           greater governance requirements with
                                                  cooling-off period, Participant                         C. Governance
                                                                                                                                                                 regard to the invocation of certain loss
                                                  withdrawal, and reduced gains                             The Commission also finds the                        allocation methods. In particular, the
                                                  distributions, taken together with the                  aspects of proposed rule change                        commenter suggested that ICC be
                                                  other components of ICC’s default                       concerning amendments to ICC’s                         required to consult not only with its
                                                  management procedures and recovery                      governance provisions with respect to                  Risk Committee, but also with all
                                                  rules, are reasonably designed to                       default management, use of recovery                    Participants when ‘‘invoking tools that
                                                  provide ICC with financial resources it                 tools and clearing service termination                 impact loss distributions after the
                                                  needs to cover default losses and to                    are consistent with the Act. As                        exhaustion of funded and unfunded
                                                  ensure that ICC can take timely                         described above, key decisions by the                  resources.’’ 29 The commenter did not
                                                  Standard Default Management Actions                     clearing house in connection with                      provide any analysis regarding whether
                                                  and/or Secondary Default Management                     recovery or wind-down, including the                   the governance changes proposed by
                                                  Actions, including auctions, to contain                 use of partial tear-up and reduced gains               ICC are consistent with the applicable
                                                  losses and liquidity pressures and to                   distributions, or clearing service                     requirements under the Exchange Act
                                                  continue meeting its obligations in the                 termination, are subject to specific                   and applicable rules and regulations
                                                  event of Participant defaults, in                       governance requirements. These                         thereunder. As stated above, ICC must
                                                  accordance with Exchange Act Rule                       governance requirements include                        consult, if practicable, with its Risk
                                                  17Ad–22(d)(11),24 while at the same                     consultation with the Risk Committee,                  Committee on key decisions regarding
                                                  time providing Participants and their                   when practicable, and the requirement                  ICC’s default management, recovery,
                                                  customers with greater certainty and                    that certain enumerated decisions on                   and wind-down, such as the initiation
                                                  predictability with respect to the                      the deployment of end-of-waterfall                     and continuation of reduced gains
                                                                                                          recovery tools, such as reduced gains                  distributions, and partial tear-up.
                                                  amount of losses they must bear as a
                                                                                                          distributions, partial tear-up, or clearing            Moreover, the decision to invoke these
                                                  result of a Participant default, which
                                                                                                          service termination, must be made by                   end-of-waterfall measures must be made
                                                  could potentially limit loss contagion in
                                                                                                          the Board and cannot be delegated to                   by the ICC Board, which itself consists
                                                  the broader financial system, consistent
                                                                                                          ICC management. In addition to the                     of a majority of directors that are
                                                  with the public interest requirement
                                                                                                          governance requirements regarding key                  independent of ICC. As noted above,
                                                  under Section 17A(b)(3)(F).25                           decision-making, the proposed rule                     ICC’s Risk Committee consists of a
                                                  B. Additional Initial Margin                            change also specifies the conditions to                supermajority of Participant members,
                                                                                                          the invocation and continuation of                     and it in turn has the right to name four
                                                    The Commission further finds the                      reduced gains distributions. Moreover,                 members to the ICC Board, two of which
                                                  aspect of the proposed rule change that                 the proposed rule change further                       may be Participant representatives.30
                                                  would require Participants to provide                   clarifies that ICC’s emergency authority                  The Commission also notes that this
                                                  additional initial margin during the                    does not permit overriding the                         proposed rule change has been
                                                  cooling-off period is consistent with                   limitations on Participant obligations                 developed over the course of several
                                                  applicable rules. Exchange Act Rule                     during the cooling-off period, or permit               years, and throughout that time ICC has
                                                  17Ad–22(b)(3) provides, in part, that a                 ICC’s management to invoke partial tear-               regularly consulted at length with
                                                  registered clearing agency that performs                up of positions without going through                  Participants (individually and as a
                                                  central counterparty services for                       the required governance processes as                   group) on both the overall design and
                                                  security-based swaps must establish,                    described above. With respect to                       drafting of this proposed rule change. In
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                                                  implement, maintain, and enforce                        clearing service termination, as                       particular, the introduction of partial
                                                  written policies and procedures                         described above, ICC also proposes to                  tear-up and reduced gains distributions
                                                  reasonably designed to maintain                         establish more specific procedures, such               as recovery tools have been discussed in
                                                                                                          as the timing of termination and                       detail with Participants, and have been
                                                    22 See ICC Rule 808(d).                               calculation of termination prices.
                                                    23 See Rule 808(e).                                                                                            28 17 CFR 240.17Ad–22(d)(8).
                                                    24 17 CFR 240.17Ad–22(d)(11).                           26 17 CFR 240.17Ad–22(b)(3).                           29 See FIA Comment, supra note 4.
                                                    25 15 U.S.C. 78q–1(b)(3)(F).                            27 17 CFR 240.17Ad–22 (b)(3).                          30 See ICC Rules 503 and 508.




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                                                                                Federal Register / Vol. 82, No. 8 / Thursday, January 12, 2017 / Notices                                                      3837

                                                  crafted to take into account suggestions                1, is consistent with the Act. Comments                 to the 30th day after the publication of
                                                  and issues raised by Participants,                      may be submitted by any of the                          Amendment No. 1 in the Federal
                                                  including to limit the circumstances in                 following methods:                                      Register. As discussed above,
                                                  which those tools may be used, to limit                                                                         Amendment No.1 clarifies various
                                                                                                          Electronic Comments
                                                  the adverse impact of such tools on                                                                             aspects of ICC’s proposal to utilize
                                                  netting, regulatory capital, and other                    • Use the Commission’s Internet                       reduced gains distributions, as well as
                                                  matters, and to consult with Risk                       comment form (http://www.sec.gov/                       its proposal to collect additional initial
                                                  Committee in major decisions.31 In                      rules/sro.shtml); or                                    margin after the cap on replenishments
                                                  addition, as described above, the                         • Send an email to rule-comments@                     and assessments to the guaranty fund is
                                                  proposed rule change clarifies that ICC’s               sec.gov. Please include File Number SR–                 reached. Amendment No. 1 does not
                                                  senior management would not be                          ICC–2016–013 on the subject line.                       raise any novel regulatory issues, nor
                                                  permitted to invoke emergency                           Paper Comments                                          does it materially alter the substance of
                                                  authority to initiate these recovery tools                                                                      ICC’s proposed rule changes.
                                                  without consulting the Risk Committee,                     Send paper comments in triplicate to                    Accordingly, on its own motion, the
                                                  if practicable, and obtaining the Board’s               Secretary, Securities and Exchange                      Commission finds good cause for
                                                  approval.                                               Commission, 100 F Street NE.,                           approving the proposed rule changes, as
                                                     Based on the extensive ex ante                       Washington, DC 20549–1090.                              modified by Amendment No. 1, on an
                                                  consultation with Participants at the                   All submissions should refer to File                    accelerated basis, pursuant to section
                                                  proposal development stage and the                      Number SR–ICC–2016–013. This file                       19(b)(2) of the Act.
                                                  enhanced governance provisions                          number should be included on the
                                                                                                          subject line if email is used. To help the              VII. Conclusion
                                                  surrounding ICC’s invoking tools that
                                                  impact loss distributions after the                     Commission process and review your                        On the basis of the foregoing, the
                                                  exhaustion of funded and unfunded                       comments more efficiently, please use                   Commission finds that the proposal is
                                                  resources, the Commission does not                      only one method. The Commission will                    consistent with the requirements of the
                                                  believe that the proposed rule change is                post all comments on the Commission’s                   Act and in particular with the
                                                  inconsistent with the Act because it                    Internet Web site (http://www.sec.gov/                  requirements of Section 17A of the
                                                  does not require ICC to consult with all                rules/sro.shtml). Copies of the                         Act 33 and the rules and regulations
                                                  Participants when it invokes loss                       submission, all subsequent                              thereunder.
                                                  distribution tools. As discussed above,                 amendments, all written statements                        It is therefore ordered, pursuant to
                                                  the Commission finds that the                           with respect to the proposed rule                       Section 19(b)(2) of the Act,34 that the
                                                  governance provisions and related                       change that are filed with the                          proposed rule changes (File No. SR–
                                                  clarification changes as part of the                    Commission, and all written                             ICC–2016–013), as modified by
                                                  proposed rule change are reasonably                     communications relating to the                          Amendment No. 1, be, and hereby is,
                                                  designed to establish governance                        proposed rule change between the                        approved on an accelerated basis.35
                                                  arrangements that are clear and                         Commission and any person, other than                     For the Commission, by the Division of
                                                  transparent to fulfill the public interest              those that may be withheld from the                     Trading and Markets, pursuant to delegated
                                                  and support the objectives of owners                    public in accordance with the                           authority.36
                                                  and participants, and promote the                       provisions of 5 U.S.C. 552, will be                     Eduardo A. Aleman,
                                                  effectiveness of the clearing agency’s                  available for Web site viewing and                      Assistant Secretary.
                                                  risk management procedures, consistent                  printing in the Commission’s Public                     [FR Doc. 2017–00491 Filed 1–11–17; 8:45 am]
                                                  with the requirements in Section 17A of                 Reference Room, 100 F Street NE.,                       BILLING CODE 8011–01–P
                                                  the Act and Exchange Act Rule 17Ad–                     Washington, DC 20549, on official
                                                  22(d)(8).                                               business days between the hours of
                                                                                                          10:00 a.m. and 3:00 p.m. Copies of such                 SECURITIES AND EXCHANGE
                                                  V. Solicitation of Comments                             filings will also be available for                      COMMISSION
                                                    Interested persons are invited to                     inspection and copying at the principal
                                                  submit written data, views, and                         office of ICE Clear Credit and on ICE                   Proposed Collection; Comment
                                                  arguments concerning the foregoing,                     Clear Credit’s Web site at https://                     Request
                                                  including whether the proposed rule                     www.theice.com/clear-credit/regulation.
                                                                                                                                                                  Upon Written Request, Copies Available
                                                  change, as modified by Amendment No.                       All comments received will be posted
                                                                                                                                                                   From: Securities and Exchange
                                                                                                          without change; the Commission does
                                                                                                                                                                   Commission, Office of FOIA Services,
                                                     31 See Notice, 81 FR 83914–15. The Commission
                                                                                                          not edit personal identifying
                                                  also notes that in addition to consulting                                                                        100 F Street NE., Washington, DC
                                                                                                          information from submissions. You
                                                  Participants on the proposed rule change and the                                                                 20549–2736
                                                  governance surrounding the use of recovery tools,       should submit only information that
                                                                                                          you wish to make available publicly. All                Extension:
                                                  ICC also consulted with the customers of
                                                                                                                                                                    Rule 8c–1; SEC File No. 270–455, OMB
                                                  Participants. In particular, ICC discussed the          submissions should refer to File                            Control No. 3235–0514.
                                                  proposed rule change individually with members of       Number SR–ICC–2016–013 and should
                                                  its buy-side advisory committee, which consists of                                                                 Notice is hereby given that pursuant
                                                  customers of Participants. ICC also considered the      be submitted on or before February 2,
                                                  views of industry groups representing customers of      2017.                                                   to the Paperwork Reduction Act of 1995
                                                  Participants, both through discussions with                                                                     (‘‘PRA’’) (44 U.S.C. 3501 et seq.), the
                                                  members of such groups and through the public           VI. Accelerated Approval of Proposed                    Securities and Exchange Commission
                                                  statements and positions of such groups. ICC has        Rule Change, as Modified by                             (‘‘Commission’’) is soliciting comments
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                                                  taken these views into account and incorporated         Amendment No. 1
                                                  them into the proposed rule change, including                                                                     33 15
                                                  limiting the use of reduced gains distributions to        The Commission finds good cause,                               U.S.C. 78q–1.
                                                                                                                                                                    34 15  U.S.C. 78s(b)(2).
                                                  scenarios where all other financial resources of the    pursuant to section 19(b)(2) of the Act,32
                                                                                                                                                                     35 In approving the proposed rule changes, the
                                                  clearing house have been exhausted, and moving          to approve the proposed rule changes,
                                                  the priority of ICC’s contributions in the waterfall                                                            Commission considered the proposal’s impact on
                                                  such that they are used prior to the guaranty fund      as modified by Amendment No. 1, prior                   efficiency, competition and capital formation. 15
                                                  contributions of non-defaulting Participants. See id.                                                           U.S.C. 78s(f).
                                                  at 83915.                                                 32 15   U.S.C. 78s(b)(2).                                36 17 CFR 200.30–3(a)(12).




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Document Created: 2017-03-21 14:40:26
Document Modified: 2017-03-21 14:40:26
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 Citation82 FR 3831 

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