Daily Rules, Proposed Rules, and Notices of the Federal Government
The purpose of the proposed rule change is to adopt new rules that will provide the basis for ICC to clear additional credit default swap ("CDS") contracts. Specifically, ICC is proposing to amend Chapter 26 of its rules to add Sections 26D and 26E to provide for the clearance of Emerging Markets Standard Sovereign CDS ("Standard Emerging Sovereign Single Names" or "SES Contracts").
As discussed in more detail in Item II(A) below, Section 26D (Standard Emerging Sovereign Single Names) provides for the definitions and certain specific contract terms for cleared SES Contracts. Section 26E (CDS Restructuring Rules) provides the rules applicable to SES Contracts in the event of a restructuring credit event.
In its filing with the Commission, ICC 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. ICC has prepared summaries, set forth in sections (A), (B),
ICC has identified SES Contracts as a product that has become increasingly important for market participants to manage risk and express views. ICC believes that clearance of SES Contracts will facilitate the prompt and accurate settlement of security-based swaps and contribute to the safeguarding of securities and funds associated with security-based swap transactions.
SES Contracts have similar terms to the North American Corporate CDS ("Corporate Single Name CDS") contracts currently cleared by ICC and governed by Section 26B of the ICC rules. Accordingly, the proposed rules found in Section 26D largely mirror the ICC rules for Corporate Single Name CDS in Section 26B, with certain modifications that reflect differences in terms and market conventions between SES Contracts and Corporate Single Name CDS. In the event that a clearing participant is domiciled in a country that is the reference entity for an SES Contract, ICC will not permit the clearing participant to clear such SES Contract.
Rule 26D-102 (Definitions) sets forth the definitions used for the SES Contracts. An "Eligible SES Reference Entity" is defined as "each particular Reference Entity included from time to time in the List of Eligible Reference Entities," which is a list maintained, updated and published from time to time by ICC containing certain specified information with respect to each reference entity.
Rules 26D-203 (Restriction on Activity), 26D-206 (Notices Required of Participants with respect to SES Contracts), 26D-303 (SES Contract Adjustments), 26D-309 (Acceptance of SES Contracts by ICE Trust), 26D-315 (Terms of the Cleared SES Contract), 26D-316 (Relevant Physical Settlement Matrix Updates), 26D-502 (Specified Actions), and 26D-616 (Contract Modification) reflect or incorporate the basic contract specifications for SES Contracts and are substantially the same as under ICC Section 26B for Corporate Single Name CDS. For the avoidance of doubt, ICC will not accept a trade for clearance and settlement if at the time of submission or acceptance of the trade or at the time of novation the CDS Participant submitting the trade is domiciled in the country of the Eligible SES Reference Entity for such SES Contract.
In addition to various non-substantive conforming changes, the proposed rules differ from the existing Corporate Single Name CDS rules in that the contract terms in Rule 26D-315 incorporate the relevant published ISDA physical settlement matrix terms for Standard Latin American Sovereign transactions, rather than Standard North American Corporate transactions, and, as noted in the preceding paragraph, certain elections and supplements used for Corporate Single Name CDS that are not applicable to SES Contracts.
New Section 26E (CDS Restructuring Rules) provides rules applicable to cleared Contracts in the event of a restructuring credit event. Corporate Single Name CDS currently cleared by ICC are not subject to these restructuring rules. Unlike other credit events, following a restructuring credit event, parties to a cleared SES Contract must determine whether or not to trigger their credit protection. To facilitate this election while permitting ICC to maintain a matched book of cleared Contracts, Section 26E provides that protection buyers and protection sellers under a Restructuring CDS Contract (defined as a CDS Contract where a restructuring credit event has occurred) will be matched into pairs, called Matched Restructuring Pairs, by ICC for purposes of sending and receiving such triggering notices. Rule 26E-102 sets forth the definitions used throughout Section 26E in connection with a restructuring credit event.
The procedures for creation of Matched Restructuring Pairs are set forth in Rule 26E-103 (Allocation of Matched Restructuring Pairs). Following the announcement that a restructuring credit event has occurred with respect to an SES Contract, ICC will match each protection seller in that contract with one or more protection buyers in that contract, such that the notional amount of the contract of each protection seller is fully allocated to one or more protection buyers. In order to be matched, positions in an SES Contract must be of the same type (
The mechanics associated with the delivery and receipt of notices by clearing participants under Matched Restructuring Pairs are set forth in Rule 26E-104 (Matched Restructuring Pairs; Designations and Notices). This rule provides that once ICC has created the Matched Restructuring Pairs, ICC will be deemed to have designated the matched CDS buyer and matched CDS seller as its designee to receive and deliver credit event notices in relation to the Restructuring CDS Contract. The rule also contains a mechanism for notifying ICC of disputes with respect to such notices.
Finally, Rule 26E-105 (Separation of Matched Restructuring Pairs) addresses situations where an announcement of a
ICC does not believe the proposed rule change would have any impact, or impose any burden, on competition.
Written comments relating to the proposed rule change have not been solicited or received. ICC will notify the Commission of any written comments received by ICC.
Within 45 days of the date of publication of this notice in the
(A) By order approve or disapprove the proposed rule change or
(B) Institute proceedings to determine whether the proposed rule change should be disapproved.
Interested persons are invited to submit written data, views, and 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:
* Use the Commission's Internet comment form (
* Send an e-mail to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.