Daily Rules, Proposed Rules, and Notices of the Federal Government
ICC submits proposed amendments to its Rules to implement the enhanced margin segregation model for cleared swaps that the Commodity Futures Trading Commission ("CFTC") adopted in Part 22 of the CFTC regulations (generally referred to as "legal segregation with operational commingling" or "LSOC"). CFTC rules require ICC (like other derivatives clearing organizations) to implement LSOC by November 8, 2012. As result of the LSOC requirements, ICC principally proposes to (i) introduce new procedures for allocating initial margin to the positions carried for each customer on a customer-by-customer basis, (ii) introduce new procedures for calling for, holding and returning customer margin in light of the requirement to allocate initial margin on a customer-by-customer basis, and (iii) change the default "waterfall" to limit ICC's ability to use customer margin in the event that a clearing member defaults, consistent with the requirements of LSOC. The LSOC requirements are intended to mitigate the risk that one customer of a clearing member would suffer a loss because of a default by another clearing member. ICC will also be removing existing provisions of the Rules that addressed the holding of excess margin and will not be necessary in ICC's initial implementation of LSOC.
ICC proposes to amend Parts 3, 4, 8, 20 and 20A of the ICC Rules, as well as related definitions, to incorporate Part 22 of the CFTC Regulations. The other proposed changes in the ICC Rules reflect conforming changes and drafting clarifications and do not affect the substance of the ICC Rules or forms of cleared products. All capitalized terms not defined herein are defined in the ICC Rules.
In its filing with the Commission, ICC included statements concerning the purpose of and basis for the proposed rule changes and discussed any comments it received on the proposed rule changes. The text of these statements may be examined at the places specified in Item III below. ICC has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of these statements.
As noted above, the principal purpose of the proposed rule amendments is intended to update the particular characteristics of the Rules applicable to the segregation of customer margin. Specifically, the proposed rule changes affect Parts 3, 4, 8, 20 and 20A of the ICC Rules, and related definitions, by providing, in summary, that initial margin allocated to a particular customer's positions may not be used to cover losses arising from another customer's positions. Each of these changes is described in detail as follows.
In Part 1 of the ICC Rules, the definitions of "custodial asset policies," "custodial client omnibus margin account," "eligible custodial assets,"
Existing Rule 304(b), which pertains to offsets, has been revised to conform to LSOC requirements that ICC calculate and collect Client-Related Initial Margin on a gross basis as opposed to a net basis. Existing Rule 307 has been revised so that the Statement of Open Positions now lists the Net House Margin Requirement and the Net Client-Related Mark-To-Market Margin Requirement, and Existing Rule 308 has been modified so that the Statement of Initial Margin states the Net House Margin Requirement and the Non-Participant Party Portfolio Margin Requirement for each Non-Participant Party Portfolio.
Existing Rule 401(a) has been revised so that it only applies to house margin. ICC has adopted a new Rule 401(b) that governs for client-related margin, which is the margin posted by a Participant in respect of Client-Related Positions. To comply with LSOC as it relates to "initial margin," under new Rule 401(b)(i), ICC will calculate the initial margin requirement separately for each Non-Participant Party Portfolio and compare it to the value of initial margin provided by the Participant and allocated by ICC under CFTC Rules to that portfolio. In each margin cycle, ICC will call for additional initial margin for each Non-Participant Party Portfolio for which there is a shortfall. ICC will separately make available for return to the Participant any excess initial margin held with respect to a Non-Participant Party Portfolio.
For "mark-to-market margin" under new Rule 401(b)(ii), ICC will continue to calculate a net amount for all Client-Related Positions in all Non-Participant Party Portfolios and compare it to the value of the mark-to-market margin held by ICC or the value of the mark-to-market margin held or deemed held by the Participant. For each margin cycle, ICC will make a net call or payment of mark-to-market margin, as appropriate.
Under the proposed revised Rule 402(h), ICC has incorporated the new CFTC Rule 22.15, which limits ICC's use of the Initial Margin posted in respect of Client-Related Positions. Revisions to Rule 406 eliminate various provisions that are now covered by CFTC regulations and are no longer necessary with the implementation of the LSOC framework. Further, under the proposed new Rule 406(l), ICC states that it will not accept the deposit of Margin from a Participant in respect of Client-Related Positions in excess of the amount required by ICC.
ICC proposes to revise Rule 20-605(c)(i)(A) in order to modify the default "waterfall" for application of resources in the Closing-out Process for Client-Related Positions upon a Participant default to reflect new CFTC Rule 22.15. The principal change to the rule is in subclause (C), which provides that ICC is only entitled to use Initial Margin allocated to a particular Non-Participant Party Portfolio to cover losses from that portfolio. Initial Margin for Client-Related Positions could not otherwise be applied by ICC as part of the default waterfall. Rule 20-605(c)(i)(A) and (B) also contain various non-substantive drafting improvements and clarifications as compared to the existing Rule. Revisions to Rule 20-605(d) address ICC's ability to allocate margin to a particular Non-Participant Party Portfolio for purposes of the default waterfall. ICC has also made conforming changes to Chapter 8 of the Rules, which addresses the use of the guaranty fund in the default waterfall.
The proposed changes to Part 20A of the ICC Rules, which address transfer of positions, are also intended to conform to the changes in the default waterfall.
Finally, in addition to rule changes designed to address Part 22 of the CFTC Regulations, existing Rule 405 has been deleted because it is no longer applicable.
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.
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 email to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
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-2012-17 and should be submitted on or before November 2, 2012.
Section 19(b) of the Act
In its filing, ICC requested that the Commission approve this proposed rule change on an accelerated basis for good cause shown. ICC believes there is good cause for accelerated approval because the rule change is required to be in compliance with Part 22 of the CFTC Regulations, which will become effective on November 8, 2012.
The Commission finds good cause, pursuant to Section 19(b)(2) of the Act,