April 11, 2011
Mr. David Stawick
Secretary
Commodity Futures Trading Commission
1155 21st Street, NW
Washington, DC 20581
RE: Requirements for Processing, Clearing, and Transfer of Customer Positions
RIN 3038-AC98
Dear Mr. Stawick:
IntercontinentalExchange, Inc.(“ICE”) appreciates the opportunity to comment
on the Commodity Futures Trading Commission’s (“CFTC” or “Commission”) proposed
rulemaking (the “Proposal”) setting forth the requirements for processing, clearing and
transfer of customer positions for derivatives clearing organizations (“DCOs”).
As background, ICE operates five clearinghouses: (1) ICE Clear U.S., a CFTC
registered Derivatives Clearing Organization (“DCO”), located in New York and serving
the markets of ICE Futures U.S.; (2) ICE Clear Europe, a Recognized Clearing House
(and CFTC registered DCO) located in London that serves ICE Futures Europe, ICE’s
OTC energy markets effected through its exempt commercial market under Section 2(h)
(3) of the Commodity Exchange Act (“Act”) and also operates as ICE’s European DCO
for OTC credit default swaps (“CDS”); (3) ICE Clear Canada, a recognized clearing
house located in Winnipeg, Manitoba that serves the markets of ICE Futures Canada; (4)
The Clearing Corporation, a CFTC registered DCO; and (5) ICE Trust, a U.S.-based
clearing house for OTC CDS. As the operator of a diverse set of DCOs based in three
countries, ICE has a practical perspective of the operation of DCOs and the important
risk mitigation roles that they serve.
Executive Summary
In adopting final rules, the Commission should:
• Give DCOs the ability to assess risk before clearing an illiquid or off-market
transaction; and
• Mandate pre-trade risk checks for Swap Execution Facilities (“SEFs”)
General Comments on the Proposal
Clearing is the cornerstone of U.S. and global regulators financial reform efforts
as a properly structured DCO can potentially reduce counter party and systemic risk in
the derivatives markets for standardized contracts. In addition, clearing brings
transparency, and transparency is a prerequisite for greater liquidity, better price
discovery, more efficient markets and effective regulation. Increased liquidity results in
lower transaction costs and tighter bid/ask spreads, reducing the cost of hedging price risk
and lowering operating costs for businesses. Companies operating DCOs, like ICE, have
led this effort and have been very successful. A key contributor to this success has been
the Commission’s flexible core principles regime, which is now to be replaced by the
prescriptive rules proposed in the Proposal.
The Commission should ask itself whether there should be only one way to
comply with the core principles and whether this single method of compliance should
apply to all asset classes in the same way, without regard for their inherent differences. As
ICE knows from operating in many markets, rules that apply to one asset class do not
necessarily transfer to other asset classes.
Finally, the Commission should note that this rulemaking may be premature. The
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) changes
the over the counter derivatives markets by mandating that almost all derivatives
transactions be exchange traded and cleared. As the Proposal notes, the Commission is
attempting to solve perceived problems in the present market and not taking into account
the impact of Dodd-Frank.1 However, many of these issues may be moot if the
transaction is traded on a SEF or DCM before being cleared. For example, the proposed
rules prohibit a DCO from requiring that a clearing member execute a trade before
accepting the transaction for clearing. While this requirement is a laudatory goal, if the
contract is traded on a SEF or DCM, this requirement does not make sense. This could
be the case for many of the rules in the Proposal, thus, the Commission should wait until
the mandatory trading and clearing requirements take effect before implementing these
rules.
1 For example, proposed rule § 39.12(b)(5) requires the DCOs to select contract sizes that “maximize
liquidity, facilitate transparency in pricing, promote open access, and allow for effective risk management.”
Obviously, DCOs have every interest to have highly liquid (and therefore profitable markets), however, the
Commission assumes that DCOs will drive contract size, when in fact, the trading platform may determine
the appropriate contract size.
2
Specific Issues in the Proposal
Acceptance and Clearing Standards
Proposed rule § 39.12 prescribes the acceptance and clearing standards for DCO
offering swap clearing services. Specifically, proposed rule § 39.12(b)(7) requires DCOs
to have rules that the DCO “will accept for clearing immediately upon execution, all
contracts...that are listed for clearing by the [DCO]” if such transactions are executed on
a SEF or DCM. ICE is generally supportive of “open offer” models where when a
transaction is executed a contract automatically arises between the clearing member and
DCO. As ICE has commented previously on the Commission’s Core Principles for Risk
Management proposed rules 2, straight through processing of exchange (SEF or DCM)
executed swaps through an “open offer” model is more efficient than the traditional
novation method of clearing.
However, ICE cautions that the Commission should note that not all contracts and
SEFs are equal and that mandating acceptance for clearing immediately upon execution
just because a contract is executed on a SEF or DCM (regardless of its liquidity) might
not always be appropriate. Post Dodd-Frank, DCOs, SEFs and DCMs are likely to list
numerous types of instruments and many of the instruments are likely to be relatively
illiquid. Moreover, the trading of the relatively illiquid contracts might be spread across
multiple SEFs and any individual SEF might have relatively limited trade. Illiquid
contracts are much more likely to trade at prices that are “off the market.” Mandating the
immediate clearing of “off the market” transactions just because they are executed on a
SEF or DCM would impose significant risk on a DCO. Historically, DCOs have been
allowed to manage their risk by maintaining rules that provide that certain transactions
are not accepted/guaranteed until the DCO has had time to assess the risk of the
transaction and/or collect the transaction’s associated payments (i.e., variation and initial
margin).
Pre-trade Risk Management
In its release entitled Risk Management Requirements for Derivatives Clearing
Organizations, the Commission has proposed Rule 39.13(h)(1) that would require a
derivatives clearing organization to “impose limits on each clearing member, by customer
origin and house origin, in order to prevent a clearing member from carrying positions for
which the risk exposure exceeds a specified threshold relative to the clearing member’s
2 76 Fed. Reg 3698, 3706 (January 20, 2011).
3
and/or the derivative clearing organization’s financial resources.” If the Commission
adopts proposed Rule § 39.12(b)(7) requiring acceptance immediately upon execution,
then the risk filter proposed by Rule 39.13(h)(1) will necessary need to be implemented
by the SEF or DCM prior to execution at the SEF and/or DCM level. Moreover, if a
DCO has a clearing relationship with multiple SEFs and/or DCMs, then the multiple
SEFs and/or DCMs will need to coordinate with respect to implementing the risk filters.
Otherwise, a DCO will be exposed to the scenario where individually the SEFs and/or
DCMs do not execute transactions that exceed a DCO’s risk limits but when aggregated
the executed transactions exceed the risk limits. As ICE explained in its comment letter
on the Core Principles for Swap Execution Facilities proposed rules, it is essential to the
DCO for SEFs to have adequate pre-trade risk checks in order for the DCO to accept the
transaction. This requirement has been adopted by the Pre-trade Functionality
Subcommittee of the Commission’s Technology Advisory Committee, which
recommended that all trading platforms (SEFs or DCMs) adopt pre-trade risk checks or
controls. For SEFs, it is critically important given that a SEF can use an RFQ as a
permitted method of execution. For example, on January 18, the U.S. Treasury markets
moved from 3.298% to 3.378% in twelve minutes when a trader “fat fingered” an RFQ to
sell $6 billion instead of $6 million. This type of error could have been prevented by an
adequate pre-trade risk control. This is especially important in thinly traded markets
where RFQs are more common. If the Commission determines not to require pre-trade
risk controls for SEFs, it should prohibit SEFs that do not have these risk controls from
offering direct access to their markets. A firm with direct access to a SEF that does not
have adequate pre-trade risk controls could significantly disrupt a market.
Conclusion
We appreciate the opportunity to comment on the proposed rulemaking. Please do
not hesitate to contact the undersigned if you have any questions regarding our
comments.
Sincerely,
R. Trabue Bland
Vice President and Assistant General Counsel
IntercontinentalExchange, Inc.
