On January 5, 2015 ICE Clear Credit LLC (“ICC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change SR–ICC–2015–001 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
ICC proposed revising its End-of-Day Price Discovery Policies and Procedures to incorporate enhancements to its price discovery process. ICC currently utilizes a “cross and lock” algorithm as part of its price discovery process. Under this algorithm, standardized bids and offers derived from Clearing Participant (“CP”) submissions are matched by sorting them from highest to lowest and lowest to highest levels, respectively. This sorting process pairs the CP submitting the highest bid price with the CP submitting the lowest offer price, the CP submitting the second highest bid price with the CP submitting the second-lowest offer price, and so on. The algorithm then identifies crossed and/or locked markets. Crossed markets are the CP pairs generated by the sorting and ranking process for which the bid price of one CP is above the offer price of the matched CP. The algorithm identifies locked markets, where the bid and the offer are equal, in a similar fashion.
Whenever there are crossed and/or locked matched markets, the algorithm applies a set of rules designed to identify standardized submissions that are “obvious errors.” The algorithm sets a high bid threshold equal to the preliminary end-of-day (“EOD”) level plus one EOD bid offer width (“BOW”), and a low offer threshold equal to the preliminary EOD level minus one EOD BOW. The algorithm considers a CP's standardized submission to be an “obvious error” if the bid is higher than the high bid threshold, or the offer is lower than the low offer threshold.
CP pairs identified by the algorithm as crossed or locked markets are required from time to time, under the End-of-Day Price Discovery Policies and Procedures, to enter into cleared trades with each other as part of the ICC EOD price discovery process (“Firm Trade”). Currently, ICC excludes standardized submissions it identifies as obvious errors from Firm Trades and does not use these submissions in its determination of published EOD levels.
ICC has proposed to include all standardized submissions, including those classified as obvious errors, in the process of determining Firm Trades. Further, ICC asserts that it will effectively execute its current EOD algorithm twice, initially in the same way it does today, by eliminating obvious errors, to generate the final EOD levels, and again, without excluding obvious errors, to generate Firm Trades and reversing transactions.
To limit the potential exposure created through Firm Trades that include a bid or offer from an obvious error submission, ICC proposes to adjust trade prices, where appropriate, to fall within a predefined band on either side of the EOD price such that the potential profit or loss (“P/L”) realized by unwinding the trade at the EOD level is capped.
To prevent CPs from receiving Firm Trades with large P/L impact in Index instruments that are less actively traded, and therefore more difficult and/or more expensive to manage the associated risk, ICC proposes to have the ability to automatically generate reversing transactions at the EOD level for specific Index instruments (
Section 19(b)(2)(C) of the Act
The Commission finds that ICC's proposed revisions to its End-of-Day Price Discovery Policies and Procedures is consistent with the requirements of Section 17A of the Act
On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.