83 FR 7096 - Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change, Security-Based Swap Submission or Advance Notice Relating to Amendments to the ICE Clear Europe CDS Clearing Stress Testing Policy (the “Stress Testing Policy”)

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 33 (February 16, 2018)

[Federal Register Volume 83, Number 33 (Friday, February 16, 2018)]
[Notices]
[Pages 7096-7098]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-03201]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82692; File No. SR-ICEEU-2018-001]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change, Security-Based Swap Submission or 
Advance Notice Relating to Amendments to the ICE Clear Europe CDS 
Clearing Stress Testing Policy (the ``Stress Testing Policy'')

February 12, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 6, 2018, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule changes described in Items I, II, and III below, which 
Items have been prepared by ICE Clear Europe. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    ICE Clear Europe proposes revising its Stress Testing Policy, among 
other matters, to recategorize certain CDS stress testing scenarios and 
make certain other enhancements and clarifications. These revisions do 
not involve any changes to the ICE Clear Europe Clearing Rules or 
Procedures.\3\
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    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the ICE Clear Europe Clearing Rules (the 
``Rules'').
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, ICE Clear Europe included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. ICE Clear Europe has prepared summaries, 
set forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(a) Purpose
    ICE Clear Europe proposes revising its Stress Testing Policy, among 
other matters, to recategorize certain CDS stress testing scenarios, 
address specific wrong way risk, introduce new forward looking credit 
event scenarios and make certain other enhancements and clarifications. 
These revisions do not involve any changes to the ICE Clear Europe 
Clearing Rules or Procedures.\4\
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    \4\ Capitalized terms used but not defined herein have the 
meanings specified in the ICE Clear Europe Clearing Rules (the 
``Rules'').
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    ICE Clear Europe currently maintains a broad array of stress 
testing scenarios that are applied to portfolios of positions as part 
of its risk management practices for the CDS product category. As part 
of the existing policy, the Clearing House management regularly 
evaluates whether to retire certain scenarios or portfolios as outdated 
or otherwise inapplicable, and whether to add new scenarios or 
portfolios for testing purposes. ICE Clear Europe is not proposing to 
change the frequency of stress testing or of its regular reviews of 
stress testing scenarios, models and underlying parameters and 
assumptions.
    The amendments generally reorganize the existing stress testing 
scenarios into two broad categories: Extreme but plausible market 
scenarios and extreme market scenarios. Extreme but plausible scenarios 
include both historical scenarios (such as those involving the 2008/
2009 credit crisis, the Lehman Brothers default and discordant 
scenarios, where there are discordant moves among major indices) and 
hypothetical scenarios (such as

[[Page 7097]]

hypothetical inversion or steepening of credit spread curves, and 
scenarios that are the opposite of certain of the historical 
scenarios). The amendments also add a new category of forward looking 
credit event scenarios, which are based on historically observed 
extreme but plausible market scenarios augmented with the occurrence of 
specified adverse credit events involving both clearing member 
reference entities and non-clearing member reference entities. In 
addition it is proposed to explicitly incorporate in the range of 
stress test scenarios the Opposite Lehman Brothers scenario, which is 
derived from the existing Lehman Brothers scenario by applying a factor 
of -0.75 to reflect the reduced magnitude of observed price increases 
during the considered period.
    The treatment of extreme market scenarios, which generally apply 
certain of the base ``extreme but plausible'' scenarios but with higher 
magnitudes of spread widening or tightening, would be clarified to 
state in greater detail the approach used for scaling up such factors. 
In particular, the approach reflects the CDS market structure and the 
resulting asymmetric effects of spread widening versus tightening. The 
amendments also remove certain specific scenario tables from the policy 
as unnecessary given that they are reflected in the revised general 
description.
    The Stress Testing Policy has also been amended to expressly 
address specific wrong-way risk in the calculation of hypothetical 
losses as part of stress testing. If a portfolio being stress tested 
presents specific wrong way risk (i.e., the risk arising where a 
clearing member has provided credit protection on itself or an 
affiliate), the calculation takes into account the full 
uncollateralized loss given default (in other words, it is assumed that 
the clearing member whose portfolio is being analyzed will default).
    The provisions of the Stress Testing Policy relating to the 
analysis of CDS guaranty fund adequacy are being revised to clarify 
that stress testing is conducted for both sold and bought credit 
protection, in order to test the main risk drivers of clearing member 
portfolios which would result in full depletion of the Guaranty Fund. 
With respect to hypothetical spread realizations, maximum levels would 
similarly be set to result in full depletion of the CDS guaranty fund.
    The amendments also incorporate the overall Board risk appetite and 
limit framework, in a manner similar to other Clearing House policies. 
The amendments make various other drafting updates and clarifications, 
including updating references to relevant Clearing House personnel 
titles, management structures and governance policies. The amendments 
further address annual validation of models supporting the policy, 
routine review of the policy by Clearing House personnel, the CDS Risk 
Committee and Board Risk Committee, and procedures for escalation and 
notification of breaches of relevant thresholds.
(b) Statutory Basis
    ICE Clear Europe believes that the changes described herein are 
consistent with the requirements of Section 17A of the Act \5\ and the 
regulations thereunder applicable to it, and in particular are 
consistent with the prompt and accurate clearance of and settlement of 
securities transactions and, to the extent applicable, derivative 
agreements, contracts and transactions, the safeguarding of securities 
and funds in the custody or control of ICE Clear Europe or for which it 
is responsible and the protection of investors and the public interest, 
within the meaning of Section 17A(b)(3)(F) of the Act.\6\ ICE Clear 
Europe is implementing the amendments in order to clarify the stress 
scenarios being tested as well as make certain enhancements to elements 
of its stress testing practices. These include addressing specific 
wrong way risk, introduction of new forward looking credit event stress 
testing scenarios, and clarification of the scaling factors used to 
generate extreme spread widening and tightening scenarios. The 
amendments do not affect the Rules or Procedures, and do not otherwise 
affect the rights or obligations of clearing members. In ICE Clear 
Europe's view, the amendments will thus enhance its ongoing stress 
testing practices and strengthen its risk management infrastructure, 
consistent with the prompt and accurate clearance and settlement of 
transactions and the protection of market participants and the public 
interest, within the meaning of Section 17A(b)(3)(F) of the Act.\7\ In 
addition, the amendments are for similar reasons consistent with, and 
will facilitate compliance with, the specific stress testing 
requirements of Rule 17Ad-22(e)(4)(vi).\8\
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    \5\ 15 U.S.C. 78q-1.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 17 CFR 240.17Ad-22(e)(4)(vi).
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed changes to the rules 
would have any impact, or impose any burden, on competition not 
necessary or appropriate in furtherance of the purpose of the Act. The 
amendments will solely affect the method and factors utilized by ICE 
Clear Europe for purposes of CDS stress testing. ICE Clear Europe is 
not changing the Rules or Procedures, or the rights or obligations of 
Clearing Members. As a result, ICE Clear Europe does not believe the 
amendments would adversely affect Clearing Members, materially affect 
the cost of clearing, adversely affect access to clearing in CDS 
Contracts for Clearing Members or their customers, or otherwise 
adversely affect competition in clearing services. Although revisions 
to stress testing could ultimately affect the required level of margin 
or guaranty fund contributions, any such changes would, in ICE Clear 
Europe's view, be appropriate in furtherance of the risk management of 
the Clearing House, consistent with the standards of the Act and 
regulations thereunder. As a result, ICE Clear Europe does not believe 
that the amendments would impose any impact or burden on competition 
that is not appropriate in furtherance of the purpose of the Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the proposed amendments have not been 
solicited or received by ICE Clear Europe. ICE Clear Europe will notify 
the Commission of any comments received with respect to the proposed 
rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and

[[Page 7098]]

arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to [email protected]. Please include 
File Number SR-ICEEU-2018-001 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-ICEEU-2018-001. 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 website (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 website viewing and printing in 
the Commission's Public Reference Section, 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 Europe and on ICE 
Clear Europe's website at https://www.theice.com/clear-europe/regulation#rule-filings.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ICEEU-2018-001 and should be 
submitted on or before March 9, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-03201 Filed 2-15-18; 8:45 am]
BILLING CODE 8011-01-P