82 FR 60254 - Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change Relating to the ICE Clear Europe Procyclicality Framework

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 242 (December 19, 2017)

Page Range		60254-60255
FR Document		2017-27232
Federal Register, Volume 82 Issue 242 (Tuesday, December 19, 2017)
[Federal Register Volume 82, Number 242 (Tuesday, December 19, 2017)]
[Notices]
[Pages 60254-60255]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-27232]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82313; File No. SR-ICEEU-2017-013]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to the ICE Clear Europe 
Procyclicality Framework

December 13, 2017.

I. Introduction

    On October 23, 2017, ICE Clear Europe Limited (``ICE Clear 
Europe'') 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-ICEEU-2017-013) to adopt a new policy 
framework for addressing the procyclicality (``Procyclicality 
Framework'') associated with its risk management policies. 
Specifically, the Procyclicality Framework would establish the risk 
appetite, monitoring and assessment, and management of procyclicality 
in the risk models used by ICE Clear Europe to manage default risk. The 
proposed rule change was published for comment in the Federal Register 
on November 7, 2017.\3\ The Commission did not receive comments on the 
proposed rule change. For the reasons discussed below, the Commission 
is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-81994 (Nov. 1, 2017), 
82 FR 51663 (Nov. 7, 2017) (SR-ICEEU-2017-013) (``Notice'').
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II. Description of the Proposed Rule Change

    ICE Clear Europe proposed to adopt a Procyclicality Framework that 
is intended to set forth, generally, (1) the aspects of ICE Clear 
Europe's risk policies that may exhibit procyclicality; (2) the manner 
in which ICE Clear Europe will assess procyclicality (using both 
qualitative and a quantitative metrics); and (3) how ICE Clear Europe 
will take procyclicality into account with respect to its consideration 
of and response to emerging risks. ICE Clear Europe proposed to define 
``procyclicality'' as the extent to which changes in market conditions 
can have an effect on a clearing member's ability to manage its 
liquidity to meet ICE Clear Europe's changing margin requirements.\4\
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    \4\ Notice, 82 FR at 51663.
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    ICE Clear Europe represented that although it has in place certain 
measures intended to mitigate procyclicality, as required by the 
European Market Infrastructure Regulation,\5\ it proposed to implement 
the Procyclicality Framework in order to establish a more defined 
approach to assessing procyclicality in its risk management policies 
and procedures.\6\ In particular, ICE Clear Europe proposed to identify 
the risk management policies that may introduce procyclical concerns, 
which includes margin models, stress testing, and collateral haircut 
policies. In addition, as part of the Procyclicality Framework, ICE 
Clear Europe also proposed to reference existing methods for mitigating 
procyclicality in the above mentioned areas, as well as certain stress 
testing arrangements.\7\
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    \5\ Article 28 of the Commission Delegated Regulation (EU) No 
153/2013 of 19 December 2012 supplementing Regulation (EU) No 648/
2012 of the European Parliament and of the Council with regard to 
regulatory technical standards on requirements for central 
counterparties.
    \6\ Notice, 82 FR at 51663.
    \7\ Id.
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    Furthermore, ICE Clear Europe proposed to incorporate into the 
Procyclicality Framework the measures by which it would assess the 
level of procyclicality. Specifically, ICE Clear Europe proposed to 
assess procyclicality by monitoring the 95th percentile expected 
shortfall of the 5-day

[[Page 60255]]

percentage change in initial margin (or other relevant risk mitigant) 
over a rolling 250-day window. ICE Clear Europe represented that this 
metric would be used to measure short term spikes in margin.\8\ In 
addition, ICE Clear Europe would also take into consideration the 
largest percentage changes, and use these observations, as well as the 
estimates of the expected shortfall, to detect and remove extreme 
outliers from the data.
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    \8\ Id.
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    In the event procyclicality is identified using this measure, ICE 
Clear Europe proposed an escalation process that provides for review 
and response obligations.\9\ The nature of the response would vary 
based on predetermined thresholds for the expected 95th percentile 
expected shortfall metric described above.\10\
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    \9\ Id.
    \10\ Id.
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    To further assess procyclicality, ICE Clear Europe also proposed to 
incorporate several qualitative factors into the Procyclicality 
Framework. These proposed qualitative factors include the periodicity 
of margin updates, the activities of other central counterparties in 
relevant markets, the expectations of market participants and related 
potential for moral hazard stemming from an expectation of gradual 
margin changes, and the ability of ICE Clear Europe to override, in 
extreme circumstances, standard measures designed to mitigate 
procyclicality.\11\ Moreover, ICEEU proposed to take into account 
differences across markets when implementing measures intended to 
mitigate procyclicality, as well as the varying liquidity resources and 
practices of the different types of Clearing Members that use the 
services of ICE Clear Europe.\12\
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    \11\ Notice, at 82 FR at 51664.
    \12\ Id.
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    With respect to future risk model design, ICE Clear Europe proposed 
to incorporate into the Procyclicality Framework a requirement that its 
model design process take into account any procyclicality 
characteristics that a model may exhibit, and that the model design 
process also take into account the impact of any steps designed to 
mitigate procyclicality.\13\
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    \13\ Notice, 82 FR at 51663-64.
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    Finally, ICE Clear Europe proposed to include in the Procyclicality 
Framework consideration of the procyclicality of new products and 
procyclicality arising from material changes in existing products. ICE 
Clear Europe has represented that much of its Procyclicality Framework 
will be available on its website.\14\
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    \14\ Id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
propose rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\15\ Further, Section 17A(b)(3)(F) of the Act requires, 
among other things, that the rules of a registered clearing agency be 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions and, to the extent applicable, derivative 
agreements, contracts, and transactions, to assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible, and, in general, to 
protect investors and the public interest.\16\ Rule 17Ad-22(e)(2) 
requires, in relevant part, that a covered clearing agency establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to provide for governance arrangements that are 
clear and transparent, that clearly prioritize the safety and 
efficiency of the covered clearing agency, and that support the public 
interest requirements of Section 17A of the Act, applicable to clearing 
agencies, and the objectives of owners and participants.\17\
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    \15\ 15 U.S.C. 78s(b)(2)(C).
    \16\ 15 U.S.C. 78q-1(b)(3)(F).
    \17\ 17 CFR 240.17Ad-22(e)(2).
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    The Commission finds that the proposed rule change, which would 
implement a new Procyclicality Framework, is consistent with the 
requirements of Section 17A of the Act and the relevant provisions of 
Rule 17Ad-22 thereunder. By establishing a Procyclicality Framework 
that (1) identifies risk management policies and procedures exhibiting 
procyclicality, (2) establishes a measure for assessing procyclicality 
in such risk management policies and procedures, and (3) provides for a 
process requiring review and defined responses in the event that 
certain procyclicality thresholds are exceeded, the Commission believes 
that ICE Clear Europe will have an increased ability to identify, 
assess and respond to procyclicality that arises in connection with the 
clearing services it provides. Consequently, the Commission believes 
that the Procyclicality Framework will enhance ICE Clear Europe's 
ability to mitigate the risks associated with procyclicality, thereby 
facilitating ICE Clear Europe's collection of the appropriate level of 
resources to manage its risks in a variety of market conditions, 
including stressed market conditions. This expected outcome, in turn, 
will permit ICE Clear Europe to provide prompt and accurate clearance 
and settlement of the products for which it offers clearing services, 
and more adequately protect its Clearing Members in the event of a 
default, which will enhance ICE Clear Europe's ability to safeguard the 
securities and funds which are in its custody or control. For these 
reasons, the Commission also believes that implementing the 
Procyclicality Framework is in the public interest. Therefore, the 
Commission finds that the proposed rule change implementing a new 
Procyclicality Framework is consistent with the requirements of Section 
17A.
    Additionally, by implementing the Procyclicality Framework, which 
includes a process for review and response to assessments of 
procyclicality based on quantitative and qualitative metrics and the 
relation of those metrics to predefined thresholds, and by publishing 
portions of the Procyclicality Framework on its website, the Commission 
believes that ICE Clear Europe is establishing policies and procedures 
that are consistent with the requirements of Rule 17Ad-22(e)(2).

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (ICEEU-2017-013) be, and hereby, 
is approved.\19\
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    \18\ 15 U.S.C. 78s(b)(2).
    \19\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27232 Filed 12-18-17; 8:45 am]
 BILLING CODE 8011-01-P
60254 Federal Register / Vol. 82, No. 242 / Tuesday, December 19, 2017 / Notices

(‘‘Commission’’) has submitted to the respond to, a collection of information Register on November 7, 2017.3 The
Office of Management and Budget under the PRA unless it displays a Commission did not receive comments
(‘‘OMB’’) a request for approval of currently valid OMB control number. on the proposed rule change. For the
extension of the previously approved The public may view background reasons discussed below, the
collection of information provided for in documentation for this information Commission is approving the proposed
Rule 15c2–7 (17 CFR 240.15c2–7) under collection at the following website: rule change.
the Securities Exchange Act of 1934 (15 www.reginfo.gov. Comments should be II. Description of the Proposed Rule
U.S.C. 78a et seq.). directed to: (i) Desk Officer for the
Rule 15c2–7 places disclosure Change
Securities and Exchange Commission, ICE Clear Europe proposed to adopt a
requirements on broker-dealers who
Office of Information and Regulatory Procyclicality Framework that is
have correspondent relationships, or
Affairs, Office of Management and intended to set forth, generally, (1) the
agreements identified in the rule, with
Budget, Room 10102, New Executive aspects of ICE Clear Europe’s risk
other broker-dealers. Whenever any
Office Building, Washington, DC 20503, policies that may exhibit procyclicality;
such broker-dealer enters a quotation for
or by sending an email to: Shagufta_ (2) the manner in which ICE Clear
a security through an inter-dealer
Ahmed@omb.eop.gov; and (ii) Pamela Europe will assess procyclicality (using
quotation system, Rule 15c2–7 requires
Dyson, Director/Chief Information both qualitative and a quantitative
the broker-dealer to disclose these
relationships and agreements in the Officer, Securities and Exchange metrics); and (3) how ICE Clear Europe
manner required by the rule. The inter- Commission, c/o Remi Pavlik-Simon, will take procyclicality into account
dealer quotation system must also be 100 F Street NE, Washington, DC 20549, with respect to its consideration of and
able to make these disclosures public in or by sending an email to: PRA_ response to emerging risks. ICE Clear
association with the quotation the Mailbox@sec.gov. Comments must be Europe proposed to define
broker-dealer is making. submitted to OMB within 30 days of ‘‘procyclicality’’ as the extent to which
When Rule 15c2–7 was adopted in this notice. changes in market conditions can have
1964, the information it requires was Dated: December 14, 2017. an effect on a clearing member’s ability
necessary for execution of the Eduardo A. Aleman, to manage its liquidity to meet ICE Clear
Commission’s mandate under the Europe’s changing margin
Assistant Secretary.
Securities Exchange Act of 1934 to requirements.4
[FR Doc. 2017–27314 Filed 12–18–17; 8:45 am] ICE Clear Europe represented that
prevent fraudulent, manipulative and
deceptive acts by broker-dealers. In the BILLING CODE 8011–01–P although it has in place certain
absence of the information collection measures intended to mitigate
required under Rule 15c2–7, investors procyclicality, as required by the
and broker-dealers would have been SECURITIES AND EXCHANGE European Market Infrastructure
unable to accurately determine the COMMISSION Regulation,5 it proposed to implement
market depth of, and demand for, the Procyclicality Framework in order to
securities in an inter-dealer quotation [Release No. 34–82313; File No. SR–ICEEU– establish a more defined approach to
system. 2017–013] assessing procyclicality in its risk
There are approximately 3,939 broker- management policies and procedures.6
dealers registered with the Commission. Self-Regulatory Organizations; ICE In particular, ICE Clear Europe proposed
Any of these broker-dealers could be Clear Europe Limited; Order Approving to identify the risk management policies
potential respondents for Rule 15c2–7, Proposed Rule Change Relating to the that may introduce procyclical
so the Commission is using that number ICE Clear Europe Procyclicality concerns, which includes margin
as the number of respondents. Rule Framework models, stress testing, and collateral
15c2–7 applies only to quotations haircut policies. In addition, as part of
December 13, 2017.
entered into an inter-dealer quotation the Procyclicality Framework, ICE Clear
system, such as the OTC Bulletin Board I. Introduction Europe also proposed to reference
(‘‘OTCBB’’) or OTC Link (formerly existing methods for mitigating
‘‘Pink Sheets’’), operated by OTC On October 23, 2017, ICE Clear procyclicality in the above mentioned
Markets Group Inc. (‘‘OTC Link’’). Europe Limited (‘‘ICE Clear Europe’’) areas, as well as certain stress testing
According to representatives of both filed with the Securities and Exchange arrangements.7
OTC Link and the OTCBB, neither Commission (‘‘Commission’’), pursuant Furthermore, ICE Clear Europe
entity has recently received, or to Section 19(b)(1) of the Securities proposed to incorporate into the
anticipates receiving any Rule 15c2–7 Exchange Act of 1934 (‘‘Act’’),1 and Procyclicality Framework the measures
notices. However, because such notices Rule 19b–4 thereunder,2 a proposed rule by which it would assess the level of
could be made, the Commission change (SR–ICEEU–2017–013) to adopt procyclicality. Specifically, ICE Clear
estimates that one filing is made a new policy framework for addressing Europe proposed to assess procyclicality
annually pursuant to Rule 15c2–7. the procyclicality (‘‘Procyclicality by monitoring the 95th percentile
Based on prior industry reports, the Framework’’) associated with its risk expected shortfall of the 5-day
Commission estimates that the average management policies. Specifically, the
time required to enter a disclosure Procyclicality Framework would 3 Securities Exchange Act Release No. 34–81994

establish the risk appetite, monitoring (Nov. 1, 2017), 82 FR 51663 (Nov. 7, 2017) (SR–
pursuant to the rule is .75 minutes, or ICEEU–2017–013) (‘‘Notice’’).
and assessment, and management of
sradovich on DSK3GMQ082PROD with NOTICES

45 seconds. The Commission sees no 4 Notice, 82 FR at 51663.

reason to change this estimate. We procyclicality in the risk models used 5 Article 28 of the Commission Delegated

estimate that impacted respondents by ICE Clear Europe to manage default Regulation (EU) No 153/2013 of 19 December 2012
spend a total of .0125 hours per year to risk. The proposed rule change was supplementing Regulation (EU) No 648/2012 of the
European Parliament and of the Council with regard
comply with the requirements of Rule published for comment in the Federal to regulatory technical standards on requirements
15c2–7 (1 notice (×) 45 seconds/notice). for central counterparties.
An agency may not conduct or 1 15 U.S.C. 78s(b)(1). 6 Notice, 82 FR at 51663.

sponsor, and a person is not required to 2 17 CFR 240.19b–4. 7 Id.

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Federal Register / Vol. 82, No. 242 / Tuesday, December 19, 2017 / Notices 60255

percentage change in initial margin (or Procyclicality Framework will be procyclicality, thereby facilitating ICE
other relevant risk mitigant) over a available on its website.14 Clear Europe’s collection of the
rolling 250-day window. ICE Clear appropriate level of resources to manage
III. Discussion and Commission
Europe represented that this metric its risks in a variety of market
Findings
would be used to measure short term conditions, including stressed market
spikes in margin.8 In addition, ICE Clear Section 19(b)(2)(C) of the Act directs conditions. This expected outcome, in
Europe would also take into the Commission to approve a propose
turn, will permit ICE Clear Europe to
consideration the largest percentage rule change of a self-regulatory
provide prompt and accurate clearance
changes, and use these observations, as organization if it finds that such
proposed rule change is consistent with and settlement of the products for
well as the estimates of the expected which it offers clearing services, and
shortfall, to detect and remove extreme the requirements of the Act and the
rules and regulations thereunder more adequately protect its Clearing
outliers from the data. Members in the event of a default,
In the event procyclicality is applicable to such organization.15
identified using this measure, ICE Clear Further, Section 17A(b)(3)(F) of the Act which will enhance ICE Clear Europe’s
Europe proposed an escalation process requires, among other things, that the ability to safeguard the securities and
that provides for review and response rules of a registered clearing agency be funds which are in its custody or
obligations.9 The nature of the response designed to promote the prompt and control. For these reasons, the
would vary based on predetermined accurate clearance and settlement of Commission also believes that
thresholds for the expected 95th securities transactions and, to the extent implementing the Procyclicality
percentile expected shortfall metric applicable, derivative agreements, Framework is in the public interest.
described above.10 contracts, and transactions, to assure the Therefore, the Commission finds that
To further assess procyclicality, ICE safeguarding of securities and funds the proposed rule change implementing
Clear Europe also proposed to which are in the custody or control of a new Procyclicality Framework is
incorporate several qualitative factors the clearing agency or for which it is consistent with the requirements of
into the Procyclicality Framework. responsible, and, in general, to protect Section 17A.
These proposed qualitative factors investors and the public interest.16 Rule
17Ad–22(e)(2) requires, in relevant part, Additionally, by implementing the
include the periodicity of margin Procyclicality Framework, which
updates, the activities of other central that a covered clearing agency establish,
implement, maintain, and enforce includes a process for review and
counterparties in relevant markets, the
written policies and procedures response to assessments of
expectations of market participants and
reasonably designed to provide for procyclicality based on quantitative and
related potential for moral hazard
stemming from an expectation of governance arrangements that are clear qualitative metrics and the relation of
gradual margin changes, and the ability and transparent, that clearly prioritize those metrics to predefined thresholds,
of ICE Clear Europe to override, in the safety and efficiency of the covered and by publishing portions of the
extreme circumstances, standard clearing agency, and that support the Procyclicality Framework on its
measures designed to mitigate public interest requirements of Section website, the Commission believes that
procyclicality.11 Moreover, ICEEU 17A of the Act, applicable to clearing ICE Clear Europe is establishing policies
proposed to take into account agencies, and the objectives of owners and procedures that are consistent with
differences across markets when and participants.17 the requirements of Rule 17Ad–22(e)(2).
implementing measures intended to The Commission finds that the
proposed rule change, which would IV. Conclusion
mitigate procyclicality, as well as the
varying liquidity resources and implement a new Procyclicality
It is therefore ordered, pursuant to
practices of the different types of Framework, is consistent with the
Section 19(b)(2) of the Act,18 that the
Clearing Members that use the services requirements of Section 17A of the Act
and the relevant provisions of Rule proposed rule change (ICEEU–2017–
of ICE Clear Europe.12 013) be, and hereby, is approved.19
With respect to future risk model 17Ad–22 thereunder. By establishing a
design, ICE Clear Europe proposed to Procyclicality Framework that (1) For the Commission, by the Division of
incorporate into the Procyclicality identifies risk management policies and Trading and Markets, pursuant to delegated
Framework a requirement that its model procedures exhibiting procyclicality, (2) authority.20
design process take into account any establishes a measure for assessing Eduardo A. Aleman,
procyclicality characteristics that a procyclicality in such risk management Assistant Secretary.
model may exhibit, and that the model policies and procedures, and (3) [FR Doc. 2017–27232 Filed 12–18–17; 8:45 am]
design process also take into account provides for a process requiring review
BILLING CODE 8011–01–P
the impact of any steps designed to and defined responses in the event that
mitigate procyclicality.13 certain procyclicality thresholds are
Finally, ICE Clear Europe proposed to exceeded, the Commission believes that
include in the Procyclicality Framework ICE Clear Europe will have an increased
consideration of the procyclicality of ability to identify, assess and respond to
new products and procyclicality arising procyclicality that arises in connection
from material changes in existing with the clearing services it provides.
products. ICE Clear Europe has Consequently, the Commission believes
sradovich on DSK3GMQ082PROD with NOTICES

represented that much of its that the Procyclicality Framework will
enhance ICE Clear Europe’s ability to
8 Id. mitigate the risks associated with 18 15 U.S.C. 78s(b)(2).
9 Id. 19 In approving the proposed rule change, the
10 Id. 14 Id. Commission considered the proposal’s impact on
11 Notice, at 82 FR at 51664. 15 15 U.S.C. 78s(b)(2)(C). efficiency, competition and capital formation. 15
12 Id. 16 15 U.S.C. 78q–1(b)(3)(F). U.S.C. 78c(f).
13 Notice, 82 FR at 51663–64. 17 17 CFR 240.17Ad–22(e)(2). 20 17 CFR 200.30–3(a)(12).

VerDate Sep<11>2014 17:47 Dec 18, 2017 Jkt 244001 PO 00000 Frm 00083 Fmt 4703 Sfmt 9990 E:\FR\FM\19DEN1.SGM 19DEN1
Document Created: 2017-12-19 01:31:08
Document Modified: 2017-12-19 01:31:08
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		82 FR 60254