[Federal Register Volume 81, Number 249 (Wednesday, December 28, 2016)]
[Rules and Regulations]
[Pages 95485-95489]
[FR Doc No: 2016-31215]

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 180

[EPA-HQ-OPP-2015-0776 and EPA-HQ-OPP-2015-0831; FRL-9955-82]

Methyl Isobutyrate and Isobutyl Isobutyrate; Exemption From the
Requirement of a Tolerance

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

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SUMMARY: This regulation establishes exemptions from the requirement of
a tolerance for residues of methyl isobutyrate (CAS Reg. No. 547-63-7)
and for residues of isobutyl isobutyrate (CAS Reg. No. 97-85-8) when
used as inert ingredients (solvents) applied to growing crops or raw
agricultural commodities after harvest. Jeneil Biosurfactant Company
submitted a petition to EPA under the Federal Food, Drug, and Cosmetic
Act (FFDCA), requesting establishment of an exemption from the
requirement of a tolerance. This regulation eliminates the need to
establish a maximum permissible level for residues of methyl
isobutyrate and isobutyl isobutyrate when used in accordance with the
conditions.

DATES: This regulation is effective December 28, 2016. Objections and
requests for hearings must be received on or before February 27, 2017,
and must be filed in accordance with the instructions provided in 40
CFR part 178 (see also Unit I.C. of the SUPPLEMENTARY INFORMATION).

ADDRESSES: The docket for this action, identified by docket
identification (ID) number EPA-HQ-OPP-2015-0776 and EPA-HQ-OPP-2015-
0831, is available at http://www.regulations.gov or at the Office of
Pesticide Programs Regulatory Public Docket (OPP Docket) in the
Environmental Protection Agency Docket Center (EPA/DC), West William
Jefferson Clinton Bldg., Rm. 3334, 1301 Constitution Ave. NW.,
Washington, DC 20460-0001. The Public Reading Room is open from 8:30
a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The
telephone number for the Public Reading Room is<PHONE_NUMBER>, and the
telephone number for the OPP Docket is<PHONE_NUMBER>. Please review
the visitor instructions and additional information about the docket
available at http://www.epa.gov/dockets.

FOR FURTHER INFORMATION CONTACT: Michael Goodis, Registration Division
(7505P), Office of Pesticide Programs, Environmental Protection Agency,
1200 Pennsylvania Ave. NW., Washington, DC 20460-0001; main telephone
number:<PHONE_NUMBER>; email address<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

I. General Information

A. Does this action apply to me?

    You may be potentially affected by this action if you are an
agricultural producer, food manufacturer, or pesticide manufacturer.
The following list of North American Industrial Classification System
(NAICS) codes is not intended to be exhaustive, but rather provides a
guide to help readers determine whether this document applies to them.
Potentially affected entities may include:
     Crop production (NAICS code 111).
     Animal production (NAICS code 112).
     Food manufacturing (NAICS code 311).
     Pesticide manufacturing (NAICS code 32532).

B. How can I get electronic access to other related information?

    You may access a frequently updated electronic version of 40 CFR
part 180 through the Government Printing Office's e-CFR site at http://www.ecfr.gov/cgi-bin/text-idx?&c=ecfr&tpl=/ecfrbrowse/Title40/40tab_02.tpl.

C. How can I file an objection or hearing request?

    Under FFDCA section 408(g), 21 U.S.C. 346a, any person may file an
objection to any aspect of this regulation and may also request a
hearing on those objections. You must file your objection or request a
hearing on this regulation in accordance with the instructions provided
in 40 CFR part 178. To ensure proper receipt by EPA, you must identify
docket ID number EPA-HQ-OPP-2015-0776 and EPA-HQ-OPP-2015-0831 in the
subject line on the first page of your submission. All objections and
requests for a hearing must be in writing, and must be received by the
Hearing Clerk on or before February 27, 2017. Addresses for mail and
hand delivery of objections and hearing requests are provided in 40 CFR
178.25(b).
    In addition to filing an objection or hearing request with the
Hearing Clerk as described in 40 CFR part 178, please submit a copy of
the filing (excluding any Confidential Business Information (CBI)) for
inclusion in the public docket. Information not marked confidential
pursuant to 40 CFR part 2 may be disclosed publicly by EPA without
prior notice. Submit the non-CBI copy of your objection or hearing
request, identified by docket ID number EPA-HQ-OPP-2015-0776 and EPA-
HQ-OPP-2015-0831, by one of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the online instructions for submitting comments. Do not submit
electronically any information you consider to be CBI or other
information whose disclosure is restricted by statute.
     Mail: OPP Docket, Environmental Protection Agency Docket
Center (EPA/DC), (28221T), 1200 Pennsylvania Ave. NW., Washington, DC
20460-0001.
     Hand Delivery: To make special arrangements for hand
delivery or delivery of boxed information, please follow the
instructions at http://www.epa.gov/dockets/contacts.html.
    Additional instructions on commenting or visiting the docket, along
with more information about dockets generally, is available at http://www.epa.gov/dockets.

II. Petition for Exemption

    In the Federal Register of March 16, 2016 (81 FR 14030) (FRL-9942-
86), EPA issued a document pursuant to FFDCA section 408, 21 U.S.C.
346a, announcing the filing of two pesticide petitions (PP IN-10848 &
PP IN-10850) by Jeneil Biosurfactant Company, 400 N. Dekora Woods
Blvd., Saukville, WI 53080. The petitions requested that 40 CFR 180.910
be amended by establishing two exemptions from the requirement of a
tolerance: One for residues of methyl isobutyrate (CAS Reg. No. 547-63-
7) (PP IN-10848) and one for isobutyl isobutyrate (CAS Reg. No. 97-85-
8) (PP IN-10850), when used as inert ingredients (solvents) applied to
growing crops or raw agricultural commodities after harvest. That
document referenced a summary of each petition prepared by Jeneil
Biosurfactant Company, the petitioner, which are available in the
respective dockets (PP IN-10848 in docket ID number EPA-HQ-OPP-2015-
0776 and PP IN-10850 in docket ID number EPA-HQ-OPP-2015-0831), http://www.regulations.gov. Comments were received in response to the notice
of filing, requesting the denial of these petitions based only
generally on a concern for the use of ``toxic chemicals'' in or on
food. Because the commenters did not provide any information upon which
to evaluate these specific inert ingredient tolerance exemptions and
because EPA has determined that such exemptions would be safe, EPA is
not denying the petition as requested.

III. Inert Ingredient Definition

    Inert ingredients are all ingredients that are not active
ingredients as defined in 40 CFR 153.125 and include, but are not
limited to, the following types of ingredients (except when they have a
pesticidal efficacy of their own): Solvents such as alcohols and
hydrocarbons; surfactants such as polyoxyethylene polymers and fatty
acids; carriers such as clay and diatomaceous earth; thickeners such as
carrageenan and modified cellulose; wetting, spreading, and dispersing
agents; propellants in aerosol dispensers; microencapsulating agents;
and emulsifiers. The term ``inert'' is not intended to imply
nontoxicity; the ingredient may or may not be chemically active.
Generally, EPA has exempted inert ingredients from the requirement of a
tolerance based on the low toxicity of the individual inert
ingredients.

IV. Aggregate Risk Assessment and Determination of Safety

    Section 408(c)(2)(A)(i) of FFDCA allows EPA to establish an
exemption from the requirement for a tolerance (the legal limit for a
pesticide chemical residue in or on a food) only if EPA determines that
the exemption is ``safe.'' Section 408(c)(2)(A)(ii) of FFDCA defines
``safe'' to mean that ``there is a reasonable certainty that no harm
will result from aggregate exposure to the pesticide chemical residue,
including all anticipated dietary exposures and all other exposures for
which there is reliable information.'' This includes exposure through
drinking water and in residential settings, but does not include
occupational exposure. Section 408(b)(2)(C) of FFDCA requires EPA to
give special consideration to exposure of infants and children to the
pesticide chemical residue and to ``ensure that there is a reasonable
certainty that no harm will result to infants and children from
aggregate exposure to the pesticide chemical residue. . . .''
    EPA establishes exemptions from the requirement of a tolerance only
in those cases where it can be clearly demonstrated that aggregate
exposure to pesticide chemical residues under reasonably foreseeable
circumstances will pose no appreciable risks to human health. In order
to determine the risks from aggregate exposure to pesticide inert
ingredients, the Agency considers the toxicity of the inert in
conjunction with possible exposure to residues of the inert ingredient
through food, drinking water, and through other exposures that occur as
a result of pesticide use in residential settings. If EPA is able to
determine that a finite tolerance is not necessary to ensure that there
is a reasonable certainty that no harm will result from aggregate
exposure to the inert ingredient, an exemption from the requirement of
a tolerance may be established.
    Consistent with FFDCA section 408(c)(2)(A), and the factors
specified in FFDCA section 408(c)(2)(B), EPA has reviewed the available
scientific data and other relevant information in support of this
action. EPA has sufficient data to assess the hazards of and to make a
determination on aggregate exposure for methyl isobutyrate and isobutyl
isobutyrate including exposure resulting from the exemption established
by this action. EPA's assessment of exposures and risks associated with
methyl isobutyrate and isobutyl isobutyrate follows.

A. Toxicological Profile

    EPA has evaluated the available toxicity data and considered their
validity, completeness, and reliability as well as the relationship of
the results of the studies to human risk. EPA has also considered
available information concerning the variability of the sensitivities
of major identifiable subgroups of consumers, including infants and
children. Specific information on the studies received and the nature
of the adverse effects caused by methyl isobutyrate and isobutyl
isobutyrate as well as the no-observed-adverse-effect-level (NOAEL) and
the lowest-observed-adverse-effect-level (LOAEL) from the toxicity
studies are discussed in this unit.
    Methyl isobutyrate and isobutyl isobutyrate are rapidly metabolized
through hydrolysis to form an alcohol and carboxylic acid in the body.
Many of the supporting data for methyl isobutyrate comes directly from
the closely related and similarly metabolized compound isobutyl
isobutyrate. Where separate information for methyl isobutyrate and
isobutyl isobutyrate is available, the studies will be presented along
with information for their common metabolite isobutanol.
    An LD50 value of 16,000 milligrams/kilogram body weight
(mg/kg bw) was determined in rats for methyl isobutyrate. The
LC50 of methyl isobutyrate was 25.5 milligrams per Liter
(mg/L) in mice. The acute oral LD50 for isobutyl isobutyrate
value in rats and mice was >6,400 mg/kg. The acute inhalation
LC50 (6 hour exposure duration) was between 3.88 and 31.94
mg/L isobutyl isobutyrate in rats. The dermal LD50 value for
isobutyl isobutyrate in guinea pigs was >8,550 mg/kg.
    No repeat-dose studies of methyl isobutyrate were identified in a
search of the toxicological literature. In an 18-week oral gavage study
in rats with isobutyl isobutyrate, there were no treatment related
effects in hematology, clinical chemistry parameters, urinalysis,
histological examination, behavior, appearance, body weight, or food/
water consumption. The NOAEL was 1,000 mg/kg/day; the highest dose
tested. In a 90-day oral toxicity study in rats with isobutanol,
treatment related effects were seen only at 1,000 mg/kg bw/day, and
included hypoactivity, which was significant during week one and
decreased markedly after week 4, and lower body weight gain (18% below
that of control rats) in males during week one. The NOAEL was 316 mg/kg
bw/day.
    In a 90-day study toxicity study in rats exposed to isobutanol in
drinking water, no effects on body weight, food/water consumption, and
clinical signs of toxicity and organ weights (livers, kidneys, adrenal
glands, and testes) were observed at doses up to 1,450 mg/kg/day. The
NOAEL for isobutanol was 1,450 mg/kg/day.
    In a 90-day isobutanol inhalation study, no differences were found
in body weight, food consumption, ophthalmoscopic examination, clinical
observation, clinical chemistry, neurobehavioral observations, organ
weights, gross pathology, and histopathology. The NOAEL for repeat-dose
effects including neurotoxicity was 2,500 ppm.
    In two prenatal developmental toxicity studies via inhalation,
female rats and Himalayan rabbits were exposed to vapor of isobutanol.
In rats, no mortality or significant differences in clinical signs,
body weight development, or gross pathology between controls and
treated groups and no effects on development were noted. The maternal
and developmental rat NOAELs were 3,030 ppm. In rabbits, no mortality
or significant differences in clinical signs, body weight development,
or gross pathology between controls and treated groups and no effects
on development were noted. The maternal no observed adverse effect
level (NOAEL) for rabbits was 758 ppm. Fetuses exhibited no signs of
developmental changes in response to isobutanol. Therefore, the
developmental NOAEL was 3,030 ppm, the highest dose.
    In a 2-generation reproduction study in rats with isobutanol via
inhalation, no exposure-related effects were observed on F0 and F1
parental survival or on F0 and F1 reproductive performance, body
weights, food

consumption and food efficiency in males or females. The NOAEL for
isobutanol for parental systemic, reproductive and neonatal toxicity is
2,500 ppm (7,380 mg/m\3\ the maximum concentrations exposed).
    There were no adequate studies on the carcinogenic potential of
methyl isobutyrate or isobutanol isobutyrate. Methyl isobutyrate did
not significantly induce chromosome loss in mitotically growing
Saccharomyces cerevisiae. The structurally similar isobutyl isobutyrate
did not induce reverse mutations at concentrations as high as 5,000
microgram/milliliter (ug/mL). An evaluation of the structure of methyl
isobutyrate for alerts to genotoxicity yields no identifiable
structures of concern. Based on negative results in genotoxicity assays
and an extensive history of exposure to isobutyl isobutyrate,
carcinogenic potential of this compound is likely to be low. Methyl
isobutyrate was not genotoxic in one study and it does not contain
reactive substructures of concern and isobutyl isobutyrate was also
negative in genotoxic assays and in extensive exposure history;
therefore the carcinogenic potential of both compounds is low.
    Metabolism of aliphatic esters such as methyl isobutyrate and
isobutyl isobutyrate proceeds rapidly through hydrolysis to form an
alcohol and carboxylic acid. These are reactions of the
carboxylesterases or esterases, which predominate in hepatocytes but
are present in most tissues throughout the body, including small
intestine, colon, kidney, trachea and lung. Hydrolysis of methyl
isobutyrate is extensive and will form methanol and isobutyric acid.
Isobutyric acid is metabolized to propionic acid which, in turn, is
converted to succinic acid and ultimately to glucose and glycogen.
Methanol is oxidized and excreted ultimately as CO2 and
water. In male rats injected intravenously with isobutyl isobutyrate,
the parent compound decreased rapidly in blood and was undetected after
166 seconds. The half-life was calculated at 11.1 seconds. Isobutanol
and isobutyric acid levels increased rapidly, with the acid
consistently higher than the alcohol, suggesting that the former is a
metabolic product of the alcohol in addition to the parent compound.
Isobutyric acid will be conjugated and excreted or will undergo [beta]-
oxidation in the fatty acid metabolic pathway.

B. Toxicological Points of Departure/Levels of Concern

    Once a pesticide's toxicological profile is determined, EPA
identifies toxicological points of departure (POD) and levels of
concern to use in evaluating the risk posed by human exposure to the
pesticide. For hazards that have a threshold below which there is no
appreciable risk, the toxicological POD is used as the basis for
derivation of reference values for risk assessment. PODs are developed
based on a careful analysis of the doses in each toxicological study to
determine the dose at which no adverse effects are observed (the NOAEL)
and the lowest dose at which adverse effects of concern are identified
(the LOAEL). Uncertainty/safety factors are used in conjunction with
the POD to calculate a safe exposure level--generally referred to as a
population-adjusted dose (PAD) or a reference dose (RfD)--and a safe
margin of exposure (MOE). For non-threshold risks, the Agency assumes
that any amount of exposure will lead to some degree of risk. Thus, the
Agency estimates risk in terms of the probability of an occurrence of
the adverse effect expected in a lifetime. For more information on the
general principles EPA uses in risk characterization and a complete
description of the risk assessment process, see http://www.epa.gov/pesticides/factsheets/riskassess.htm.
    EPA has not identified any toxicological points of departure for
assessing methyl isobutyrate and isobutyl isobutyrate. On the basis of
the metabolism of as methyl isobutyrate and isobutyl isobutyrate
proceeding rapidly through hydrolysis to form an alcohol and carboxylic
acid and ultimately to glucose and glycogen, low acute toxicity for
animals via the dermal, inhalation, and oral routes of exposure, and
low toxicity of the metabolite isobutyl alcohol, no adverse effect is
expected from methyl isobutyrate and isobutyl isobutyrate as a result
of exposure by any route.

C. Exposure Assessment

    1. Dietary exposure from food and feed uses. In evaluating dietary
exposure to methyl isobutyrate and isobutyl isobutyrate, EPA considered
exposure under the proposed exemption from the requirement of a
tolerance. EPA assessed dietary exposures from methyl isobutyrate and
isobutyl isobutyrate in food as follows:
    Acute and chronic dietary assessments take into account exposure
estimates from dietary consumption of food and drinking water. Because
no adverse effects attributable to a single or repeat exposures to
methyl isobutyrate and isobutyl isobutyrate were seen in the toxicity
databases, quantitative dietary risk assessments are not appropriate.
Due to expected use of methyl isobutyrate and isobutyl isobutyrate in
pesticide formulations applied to growing crops and raw agricultural
commodities after harvest, it is reasonable to expect that there will
be some exposure to these substances from their use in pesticide
products. In addition, FDA has approved the use of methyl isobutyrate
and isobutyl isobutyrate as synthetic flavoring substances in food for
direct human consumption (21 CFR 172.515), so there is expected to be
additional dietary exposure to these substances from non-pesticidal
sources.
    2. Dietary exposure from drinking water. For the purpose of the
screening level dietary risk assessment to support this request for an
exemption from the requirement of a tolerance for methyl isobutyrate
and isobutyl isobutyrate, a conservative drinking water concentration
value would normally be included in dietary exposure screening level
model. However, because no adverse effects attributable to a single or
repeat exposures to methyl isobutyrate and isobutyl isobutyrate were
seen in the toxicity databases, quantitative dietary risk assessments
are not appropriate.
    3. From non-dietary exposure. The term ``residential exposure'' is
used in this document to refer to non-occupational, non-dietary
exposure (e.g., textiles (clothing and diapers), carpets, swimming
pools, and hard surface disinfection on walls, floors, tables).
    It is possible that methyl isobutyrate or isobutyl may be used as
an inert ingredient in pesticide products that may result in
residential exposures, although no residential uses are currently
proposed.
    4. Cumulative effects from substances with a common mechanism of
toxicity. Section 408(b)(2)(D)(v) of FFDCA requires that, when
considering whether to establish, modify, or revoke a tolerance or
exemption from a tolerance, the Agency consider ``available
information'' concerning the cumulative effects of a particular
pesticide's residues and ``other substances that have a common
mechanism of toxicity.''
    Because methyl isobutyrate and isobutyl isobutyrate do not have a
toxic mode of action or a mechanism of toxicity, this provision does
not apply.

D. Safety Factor for Infants and Children

    1. In general. Section 408(b)(2)(C) of FFDCA provides that EPA
shall apply an additional tenfold (10X) margin of safety for infants
and children in the case of threshold effects to account for

prenatal and postnatal toxicity and the completeness of the database on
toxicity and exposure unless EPA determines based on reliable data that
a different margin of safety will be safe for infants and children.
This additional margin of safety is commonly referred to as the FQPA
Safety Factor (SF). In applying this provision, EPA either retains the
default value of 10X, or uses a different additional safety factor when
reliable data available to EPA support the choice of a different
factor.
    Because methyl isobutyrate and isobutyl isobutyrate do not have
threshold effects and because of the lack of safety factors needed for
this qualitative assessment, this provision does not apply to the
assessment of methyl isobutyrate and isobutyl isobutyrate.

E. Aggregate Risks and Determination of Safety

    Determination of safety section. Based on the lack of any endpoints
of concern, EPA concludes that there is a reasonable certainty that no
harm will result to the general population or to infants and children
from aggregate exposure to methyl isobutyrate and isobutyl isobutyrate
residues.

V. Analytical Enforcement Methodology

    An analytical method is not required for enforcement purposes since
the Agency is establishing an exemption from the requirement of a
tolerance without any numerical limitation.

VI. Conclusions

    Therefore, exemptions from the requirement of a tolerance are
established under 40 CFR 180.910 for methyl isobutyrate (CAS Reg. No.
547-63-7) and isobutyl isobutyrate (CAS Reg. No. 97-85-8) when used as
inert ingredients (solvents) in pesticide formulations applied to
growing crops or raw agricultural commodities after harvest.

VII. Statutory and Executive Order Reviews

    This action establishes exemptions from the requirement of a
tolerance under FFDCA section 408(d) in response to a petition
submitted to the Agency. The Office of Management and Budget (OMB) has
exempted these types of actions from review under Executive Order
12866, entitled ``Regulatory Planning and Review'' (58 FR 51735,
October 4, 1993). Because this action has been exempted from review
under Executive Order 12866, this action is not subject to Executive
Order 13211, entitled ``Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use'' (66 FR
28355, May 22, 2001) or Executive Order 13045, entitled ``Protection of
Children from Environmental Health Risks and Safety Risks'' (62 FR
19885, April 23, 1997). This action does not contain any information
collections subject to OMB approval under the Paperwork Reduction Act
(PRA) (44 U.S.C. 3501 et seq.), nor does it require any special
considerations under Executive Order 12898, entitled ``Federal Actions
to Address Environmental Justice in Minority Populations and Low-Income
Populations'' (59 FR 7629, February 16, 1994).
    Since tolerances and exemptions that are established on the basis
of a petition under FFDCA section 408(d), such as the exemptions in
this final rule, do not require the issuance of a proposed rule, the
requirements of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et
seq.), do not apply.
    This action directly regulates growers, food processors, food
handlers, and food retailers, not States or tribes, nor does this
action alter the relationships or distribution of power and
responsibilities established by Congress in the preemption provisions
of FFDCA section 408(n)(4). As such, the Agency has determined that
this action will not have a substantial direct effect on States or
tribal governments, on the relationship between the national government
and the States or tribal governments, or on the distribution of power
and responsibilities among the various levels of government or between
the Federal Government and Indian tribes. Thus, the Agency has
determined that Executive Order 13132, entitled ``Federalism'' (64 FR
43255, August 10, 1999) and Executive Order 13175, entitled
``Consultation and Coordination with Indian Tribal Governments'' (65 FR
67249, November 9, 2000) do not apply to this action. In addition, this
action does not impose any enforceable duty or contain any unfunded
mandate as described under Title II of the Unfunded Mandates Reform Act
(UMRA) (2 U.S.C. 1501 et seq.).
    This action does not involve any technical standards that would
require Agency consideration of voluntary consensus standards pursuant
to section 12(d) of the National Technology Transfer and Advancement
Act (NTTAA) (15 U.S.C. 272 note).

VIII. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
EPA will submit a report containing this rule and other required
information to the U.S. Senate, the U.S. House of Representatives, and
the Comptroller General of the United States prior to publication of
the rule in the Federal Register. This action is not a ``major rule''
as defined by 5 U.S.C. 804(2).

List of Subjects in 40 CFR Part 180

    Environmental protection, Administrative practice and procedure,
Agricultural commodities, Pesticides and pests, Reporting and
recordkeeping requirements.

    Dated: December 15, 2016.
Daniel J. Rosenblatt,
Acting Director, Registration Division, Office of Pesticide Programs.

    Therefore, 40 CFR chapter I is amended as follows:

PART 180--[AMENDED]

0
1. The authority citation for part 180 continues to read as follows:

    Authority: 21 U.S.C. 321(q), 346a and 371.

0
2. In Sec.  180.910, add alphabetically the inert ingredients
``Isobutyl isobutyrate (CAS Reg. No. 97-85-8)''; and ``Methyl
isobutyrate (CAS Reg. No. 547-63-7)'' to the table to read as follows:

Sec.  180.910   Inert ingredients used pre- and post-harvest;
exemptions from the requirement of a tolerance.

* * * * *

------------------------------------------------------------------------
        Inert ingredients                 Limits              Uses
------------------------------------------------------------------------

                              * * * * * * *
Isobutyl isobutyrate (CAS Reg.     None...............  Solvent
 No. 97-85-8).

                              * * * * * * *
Methyl isobutyrate (CAS Reg. No.   None...............  Solvent
 547-63-7).

                              * * * * * * *
------------------------------------------------------------------------

[FR Doc. 2016-31215 Filed 12-27-16; 8:45 am]
 BILLING CODE 6560-50-P


[Federal Register Volume 88, Number 95 (Wednesday, May 17, 2023)]
[Notices]
[Pages 31571-31575]
[FR Doc No: 2023-10472]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97489; File No. SR-ICC-2023-003]

Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to British Pounds Sterling as
Client-Related Margin

May 11, 2023.

I. Introduction

    On March 13, 2023, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
section 19(b)(2) of the Securities Exchange Act of 1934 (the ``Act'')
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to accept
British Pounds Sterling in satisfaction of client-related margin
requirements. The proposed rule change was published for comment in the
Federal Register on March 30, 2023.\3\ The Commission did not receive
comments regarding the proposed rule change. For the reasons discussed
below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Proposed Rule Change Relating to British Pounds
Sterling as Client-Related Margin; Exchange Act Release No. 97196
(March 24, 2023), 88 FR 19183 (March 30, 2023) (File No. SR-ICC-
2023-003) (``Notice'').
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II. Description of the Proposed Rule Change

A. Background

    ICC is registered with the Commission as a clearing agency for the
purpose of clearing CDS contracts. ICC requires that its Clearing
Participants post margin to collateralize their credit exposure to ICC,
based on the size and risk of their cleared positions. On a daily
basis, ICC determines margin requirements (i) for a Clearing
Participant's own cleared positions (referred to as ``house''
positions) and (ii) for the cleared positions of its clients.
    The proposed rule change relates to the second category, margin
requirements for the cleared positions of clients. Specifically, the
proposed rule change would allow Clearing Participants to use cash
British pounds sterling (``GBP'') to satisfy client-related margin
requirements. Currently, a Clearing Participant may meet client-related
margin requirements with US dollars, Euros, or US Treasuries. ICC
previously accepted GBP in satisfaction of client-related margin
requirements, but it revoked that option in 2017.\4\ ICC did so because
no Clearing Participants posted GBP at that time, and ICC considered
GBP a less liquid resource due to the potential need to convert it to
either US dollars or Euros.
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    \4\ See Securities Exchange Act Release No. 81037 (June 28,
2017), 82 FR 31121 (July 5, 2017) (SR-ICC-2017-010) (notice). The
Commission subsequently approved ICC's proposal to remove the
eligibility of GBP cash (as well as certain other currencies) as
acceptable collateral. See Securities Exchange Act Release No. 81386
(Aug. 14, 2017), 82 FR 39484 (Aug. 18, 2017) (SR-ICC-2017-010).
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    ICC has decided to once again accept GBP in satisfaction of client-
related margin requirements. ICC is doing so in response to feedback
from customers. Several UK and EU market participants have asked ICC
for the ability to post GBP in addition to the asset types currently
accepted by ICC.
    In addition to satisfying the request of these customers, ICC
believes that accepting GBP would overall better serve other UK and EU-
based market participants. Such participants may be seeking an
alternative CDS clearing service, given that ICE Clear Europe is
intending to close its UK-based CDS clearing service in October of this
year.\5\
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    \5\ See Circular C22/109 Cessation of clearing of CDS Contracts:
Postponement of Withdrawal Date, available at https://www.ice.com/publicdocs/clear_europe/circulars/C22109.pdf.
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    To carry out this change, ICC would amend the ICE Clear Credit
Rulebook (``ICC Rules'') and the ICE Clear Credit Treasury Operations
Policies & Procedures (``Treasury Policy''), as described in detail
below.\6\
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    \6\ Capitalized terms not otherwise defined herein have the
meanings provided to them in the Rules or Treasury Policy, as
applicable.
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B. ICC Rules

    Currently, Schedule 401 of the ICC Rules sets out the collateral
that ICC accepts to satisfy client-related margin requirements.
Schedule 401 describes this collateral in terms of the CDS contract for
which the margin is required. Specifically, Schedule 401 categorizes
the collateral as that which ICC accepts for client-related US-dollar
denominated products and client-related Euro denominated products.\7\
For each of those products, Schedule 401 requires that a Clearing
Participant meet a certain percentage of the relevant margin
requirement in particular collateral. Below is what Schedule 401
currently provides for client-related margin.
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    \7\ Currently, ICC only clears US-dollar denominated and Euro
denominated products, and the proposed rule change would not alter
this.
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Client-Related Initial Margin Liquidity Requirements
Client-Related US Dollar Denominated Product Requirement

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                 Asset Type                                                       Minimum Percentage of Requirement
--------------------------------------------------------------------------------------------------------------------------------------------------------
US Dollar Denominated Assets                                                 65%
(US Cash and/or US Treasuries)
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Eligible Collateral                                                      +35% (for a total of 100%)
(US Cash, Euro Cash, and/or US Treasuries)
--------------------------------------------------------------------------------------------------------------------------------------------------------

Client-Related Euro Denominated Product Requirement

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                 Asset Type                                                       Minimum Percentage of Requirement
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Eligible Collateral                                                      100%
(US Cash, Euro Cash, and/or US Treasuries)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The proposed rule change would update Schedule 401 by adding GBP to
the list of ``all eligible collateral.'' In addition, ICC would modify
the client-related margin requirements set forth in Schedule 401 of the
ICC Rules as follows. For US dollar denominated products, ICC would
change (i) the percentage of the requirement that must be met in US
dollars and US Treasuries from 65% to 45% and (ii) the percentage that
may be met in any eligible collateral (US dollars, Euros, GBP, and US
Treasuries) from 35% to 55%. For Euro denominated products, ICC would
change (i) the minimum percentage of the requirement that must be met
in US dollars, Euros, or US Treasuries from 100% to 45% and (ii) add a
new category that permits the remaining 55% of the requirement to be
met in any eligible collateral (US dollars, Euros, GBP, and US
Treasuries).
Client-Related Initial Margin Liquidity Requirements (as Amended)
Client-Related US Dollar Denominated Product Requirement
[GRAPHIC] [TIFF OMITTED] TN17MY23.000

Client-Related Euro Denominated Product Requirement
[GRAPHIC] [TIFF OMITTED] TN17MY23.001

    Thus, ICC would amend Schedule 401 of the ICC Rules to add GBP as
Eligible Collateral for client-related margin requirements and modify
the percentages for both US-dollar denominated products and Euro
denominated products. With respect to these changes in particular, the
Commission notes that ICC would accept a smaller percentage of US
dollars for a client-related margin requirement relating to a US-dollar
denominated product than it does currently (65% versus 45%). Similarly,
ICC would accept a smaller percentage of US dollars/Euro/Treasuries for
a client-related margin requirement relating to a US-dollar denominated
product than it does currently (100% versus 45%). Because ICC does not
treat any collateral posted for clients as a liquidity resource
available in the event of a default, the Commission does not believe
that the changes in percentages or acceptance of GBP will affect ICC's
liquidity resources.\8\ Moreover, as ICC explained, the proposed
modified thresholds reflect the fact that only the first-day liquidity
needs (measured as 45% of requirements) must be met in a form of
collateral for which ICC maintains committed repurchase agreements and
committed FX facilities.\9\ The remaining 55% can be met with any type
of accepted collateral. The Commission therefore believes that with the
proposed modified thresholds,

ICC continues to maintain a conservative approach by directly requiring
that client-related first-day liquidity needs (i.e., 45% of Initial
Margin requirements) are met in the forms of permitted collateral for
which either collateral transformations are not necessary, or committed
agreements are in place to provide all necessary immediate liquidity.
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    \8\ As explained in its Liquidity Risk Management Framework, ICC
only uses client margin deposits in case of a client default, and
when ICC conducts stress testing of its liquidity resources, it
assumes that no client margin deposits are available.
    \9\ Notice, 88 FR at 19184.
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C. Treasury Policy

    The overall purpose of the ICC Treasury Policy is to articulate the
policies and procedures used by the ICC Treasury Department. ICC's
Treasury manages ICC's cash and collateral, including the assets that
Clearing Participants transfer to ICC to satisfy client-related margin
requirements. The Treasury Policy therefore would apply to GBP provided
by Clearing Participants to satisfy client-related margin requirements.
Accordingly, ICC would modify the Treasury Policy to incorporate GBP,
as discussed below.
i. Section III, Funds Management
    ICC first would modify Section III of the Policy, which concerns
ICC's funds management. Section III explains the types of funds in
which ICC's Treasury invests cash and collateral and ICC's overall
strategy with respect to such investments. For example, with respect to
Euros posted by Clearing Participants, Section III currently provides
that Treasury may, among other things, hold such cash in bank deposits
or allocate it to outside investment managers. The proposed rule change
would add to Section III a similar explanation of ICC's strategy with
respect to cash posted by Clearing Participants in GBP that is Client
Margin. With respect to those funds, ICC would not invest such GBP but
would instead hold it in bank deposits.
ii. Section IV, Cash Management
    ICC next would update Section IV of the Policy, which explains how
ICC moves and transfers cash in the conduct of its business. Section
IV, among other things, describes how ICC monitors the daily collection
of margin to ensure the timely receipt of payment for settlement,
including the deadlines for the collection of margin and for the
withdrawal or substitution of collateral. Currently, ICC requires that
Clearing Participants notify it of withdrawals or substitutions
involving Euros by 9:00 a.m. ET. The proposed rule change would not
alter this deadline, but it would add GBP to the existing 9:00 a.m. ET
deadline. Thus, under the proposed rule change, Clearing Participants
would be required to notify ICC of withdrawals or substitutions
involving Euro cash and GBP collateral by 9:00 a.m. ET.
iii. Section V, Collateral Valuation
    ICC also would update Section V of the Policy, which explains the
type of assets that ICC accepts as collateral and how ICC custodies
Clearing Participants' collateral. With respect to the assets that ICC
accepts as collateral, Section V of the Policy explains that Clearing
Participants are generally required to post assets as collateral that
meet ICC's standards for acceptable collateral. Section V also lists
the assets that ICC considers to be acceptable collateral. Currently,
as discussed above, ICC accepts US dollars, Euros, and US Treasuries.
The proposed rule change would add GBP to this list, with the caveat
that ICC accepts it as collateral for client positions only (as opposed
to Clearing Participants' house positions).
    With respect to the assets that ICC accepts as collateral, ICC
prices those assets to determine their value (and therefore how much of
the margin requirement those assets satisfy). ICC also discounts the
value of the collateral to account for market risks and currency risks
(a process known as haircutting). Section V describes ICC's process for
valuing each of the types of collateral that it accepts. The proposed
rule change would update this valuation process to include GBP. The
process for valuing GBP would be as follows.
    ICC would first convert the value of the GBP to an amount in US
dollars. ICC would then reduce this US-dollar value using the currency
haircut it has established for GBP. ICC would then apply this reduced
value to determine how much of the margin requirement the GBP
collateral satisfies.
    If the GBP is being used to satisfy a margin requirement for a
Euro-denominated product, ICC would take one additional step. Margin
requirements for Euro-denominated products are expressed in Euros.
Thus, to determine how much of this margin requirement the GBP
collateral satisfies, ICC would convert the Euro margin requirement to
a US-dollar value. This is needed because, as discussed above, ICC
would convert the value of the GBP collateral to US dollars. In
converting the Euro margin requirement to a US-dollar value, ICC would
increase the value by the currency haircut it has established for Euro.
ICC would take this additional step because, as a default, ICC's
treasury system would have already haircut the Euro value in converting
it to US dollars. Thus, increasing the value by the haircut ensures
that, when determining how much of the margin requirement the GBP
collateral satisfies, ICC is considering the full amount of the margin
requirement (rather than only the amount post-haircut).
iv. Section VI, Treasury Management for Client Business
    Finally, the proposed rule change would update Section VI of the
Policy. Section VI specifically describes how ICC manages margin
requirements associated with client trades. Among other things, Section
VI describes the types of collateral that ICC accepts to satisfy a
client-related margin requirement. Currently, Section VI lists US
dollars, Euros, and US government securities as collateral eligible for
client margin, and explains that these assets are in line with the
current eligible collateral for house-related margin requirements. The
proposed rule change would add GBP to this list, and also would delete
the explanation that these assets are in line with the current eligible
collateral for House margin. This particular explanation would no
longer be correct, given that ICC would accept GBP for client-related
margin requirements but not for house-related margin requirements.
    Section VI of the Policy also explains the percentages of these
assets that a Clearing Participant can use to satisfy a particular
client-related margin requirement. This information mirrors Schedule
401 of ICC's rules, discussed above. Thus, the proposed rule change
would amend this description to match the revisions to Schedule 401
described above. For a client-related margin requirement relating to a
US-dollar denominated product, a Clearing Participant would be required
to meet (i) 45% of the requirement with US dollars and/or US Treasuries
and (ii) the remaining 55% with US dollars, Euros, US Treasuries, and/
or GBP. For a client-related margin requirement relating to a Euro
denominated product, a Clearing Participant would be required to meet
(i) 45% of the requirement with US dollars, Euros, and/or US Treasuries
and (ii) the remaining 55% with US dollars, Euros, US Treasuries, and/
or GBP.
    With respect to these changes in particular, the Commission notes
that ICC would accept a smaller percentage of US dollars/Treasuries for
a client-related margin requirement relating to a US-dollar denominated
product than it does currently (65% versus 45%). Similarly, ICC would
accept a smaller percentage of US dollars/Euros/Treasuries for a
client-related margin requirement relating to a Euro denominated
product than it does

currently (100% versus 45%). Because ICC does not treat any collateral
posted for clients as a liquidity resource available in the event of a
default, the Commission does not believe that the changes in
percentages or acceptance of GBP will affect ICC's liquidity
resources.\10\ Moreover, as discussed above, the Commission believes
that with the proposed modified thresholds, ICC would continue to
maintain a conservative approach by directly requiring that client-
related first-day liquidity needs (i.e., 45% of Initial Margin
requirements) are met in the forms of permitted collateral for which
either collateral transformations are not necessary, or committed
agreements are in place to provide all necessary immediate liquidity.
---------------------------------------------------------------------------

    \10\ As explained in its Liquidity Risk Management Framework,
ICC only uses client margin deposits in case of a client default,
and when ICC conducts stress testing of its liquidity resources, it
assumes that no client margin deposits are available.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\11\ For the reasons discussed below, the Commission finds
that the proposed rule change is consistent with section 17A(b)(3)(F)
\12\ of the Act and Rule 17Ad-22(e)(5) \13\ thereunder.
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(e)(5).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions.\14\ Based on its
review of the record, and for the reasons discussed below, the
Commission believes the proposed changes to ICC's Rules and the
Treasury Policy are consistent with the promotion of the prompt and
accurate clearance and settlement of securities transactions.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As discussed above, the proposed revisions to the ICC Rules and
Treasury Policy would allow Clearing Participants to post GBP to
satisfy client-related margin requirements. The Commission believes
that these changes, by expanding the collateral that clients could
provide to Clearing Participants to satisfy margin requirements, would
encourage clients to clear their positions at ICC. The Commission
believes this could be especially true for clients that are based in
the UK or otherwise have reserves of GBP. Thus, the Commission believes
this aspect of the proposed rule change would promote the prompt and
accurate clearance and settlement of securities transactions among
clients.
    Moreover, as noted above, ICC requires that Clearing Participants
satisfy a certain percentage of a client-related margin requirement in
US dollars and/or Euros, as applicable. The proposed rule change would
lower the minimum percentage that a Clearing Participant must meet in
US dollars and/or Euros. The proposed rule change also would allow
Clearing Participants to use GBP to satisfy the non-US dollar/Euros
portion. Again, the Commission believes these changes would encourage
clients to clear transactions at ICC, especially those who may have
reserves of GBP. The Commission further believes that doing so would
not materially affect ICC's available liquidity resources in case of a
default because, consistent with its current practice, ICC would not
treat the GBP posted to satisfy a client's margin requirement as a
liquidity resource available in the event of a default. As discussed
above, ICC only uses client margin deposits in case of a client
default, and when ICC conducts stress testing of its liquidity
resources, it assumes that no client margin deposits are available.
Moreover, as discussed above, ICC would continue to maintain a
conservative approach by directly requiring that client-related first-
day liquidity needs (i.e., 45% of Initial Margin requirements) are met
in the forms of permitted collateral for which either collateral
transformations are not necessary, or committed agreements are in place
to provide all necessary immediate liquidity.
    The Commission therefore finds that the proposed revisions to the
ICC Rules and Treasury Policy are designed to promote the prompt and
accurate settlement of securities transactions, derivatives agreements,
contracts, and transactions for which ICC is responsible, consistent
with section 17A(b)(3)(F) of the Exchange Act.\15\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(5) Under the Act

    Rule 17Ad-22(e)(5) requires that ICC, among other things,
establish, implement, maintain and enforce written policies and
procedures reasonably designed to limit the assets it accepts as
collateral to those with low credit, liquidity, and market risks, and
set and enforce appropriately conservative haircuts and concentration
limits.\16\ As discussed above, the proposed rule change would allow
Clearing Participants to use GBP to satisfy client-related margin
requirements. The proposed rule change also would lower the minimum
percentage of a client-related margin requirement that a Clearing
Participant must meet in US dollars and/or Euros. The proposed rule
change would not alter ICC's current collateral haircuts or
concentration limits. Indeed, as discussed above, ICC would convert the
GBP posted as collateral to a US dollar value and then reduce the US
dollar value using the GBP currency haircut.
---------------------------------------------------------------------------

    \16\ 17 CFR 240.17Ad-22(e)(5).
---------------------------------------------------------------------------

    Moreover, consistent with its current practice, ICC would not treat
the GBP posted to satisfy a client's margin requirement as a liquidity
resource available in the event of a Clearing Participant's default.
ICC only uses client margin deposits in case of a client default, and
when ICC conducts stress testing of its liquidity resources, it assumes
that no client margin deposits are available.
    For these reasons, the Commission believes that ICC would continue
to limit the assets it accepts as collateral to those with low credit,
liquidity, and market risks, and set and enforce appropriately
conservative haircuts and concentration limits while accepting GBP as
collateral, consistent with Rule 17Ad-22(e)(5).\17\
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    \17\ 17 CFR 240.17Ad-22(e)(5).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, with section 17A(b)(3)(F) \18\ of the Act and Rule
17Ad-22(e)(5) \19\ thereunder.
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    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(e)(5).
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    It is therefore ordered pursuant to section 19(b)(2) of the Act
\20\ that the proposed rule change (SR-ICC-2023-003), be, and hereby
is, approved.\21\
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    \20\ 15 U.S.C. 78s(b)(2).
    \21\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).

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    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-10472 Filed 5-16-23; 8:45 am]
BILLING CODE 8011-01-P