78888 Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / Notices 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Capitalized terms used but not defined herein 

have the meanings specified in the LCH SA CDS 

Clearing Rule Book, Supplement, Procedures, or the 

Framework as applicable. 

4See Notice infra note 5, 85 FR at 68935. 

5Self-Regulatory Organizations; LCH SA; Notice 

of Filing of Proposed Rule Change Relating to the 

Amendments of LCH SA Risk Liquidity Modeling 

Framework, Exchange Act Release No. 90270 

(October 26, 2020), 85 FR 68935 (October 30, 2020) 

(SR–LCH SA–2020–006) (‘‘Notice’’). 

6See Notice, 85 FR at 68936. 

7 Id. 

8 Id. 

9 Id. 

10 Id. 

11 Id. 

12 Id. 

13 Id. 

14 15 U.S.C. 78s(b)(2)(C). 

15 15 U.S.C. 78q–1(b)(3)(F). 

16 17 CFR 240.17Ad–22(e)(7)(i). 

17 15 U.S.C. 78q–1(b)(3)(F). 

consolidation model with competing 

consolidators. 

CONTACT PERSON FOR MORE INFORMATION: 

For further information and to ascertain 

what, if any, matters have been added, 

deleted or postponed, please contact 

Vanessa A. Countryman, Office of the 

Secretary, at (202) 551–5400. 

Dated: December 2, 2020. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2020–26899 Filed 12–3–20; 11:15 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–90541; File No. SR–LCH 

SA–2020–006] 

Self-Regulatory Organizations; LCH 

SA; Order Approving Proposed Rule 

Change Relating to the Amendments 

to LCH SA’s Liquidity Risk Modelling 

Framework 

December 1, 2020. 

I. Introduction 

On October 20, 2020, Banque Centrale 

de Compensation, which conducts 

business under the name LCH SA (‘‘LCH 

SA’’), filed with the Securities and 

Exchange Commission (‘‘Commission’’), 

pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a 

proposed rule change to amend its 

Liquidity Risk Modelling Framework 

(the ‘‘Framework’’) 3 with respect to the 

assignment and exercise of equity 

American options.4 The Proposed Rule 

Change was published for comment in 

the Federal Register on October 30, 

2020.5 The Commission did not receive 

comments on the proposed rule change. 

For the reasons discussed below, the 

Commission is approving the proposed 

rule change. 

II. Description of the Proposed Rule 

Change 

LCH SA is proposing to amend the 

Framework in order to address more 

accurately its liquidity requirements 

arising from the physical settlement of 

equity American options involving a 

defaulting clearing member during any 

liquidation of such clearing member. 

The current Framework accounts for 

liquidity provision related to the risk of 

assignment and exercise of equity 

American options and equity European 

options at expiration.6 Given that equity 

American options can be exercised 

before their expiration dates (referred to 

below as ‘‘expiry’’), LCH SA represented 

that there is a resulting funding risk 

with respect to the exercise of equity 

American options prior to expiry during 

the liquidation period of a defaulting 

clearing member that needs to be 

modelled and accounted for in its daily 

liquidity coverage ratio (‘‘LCR’’) 

calculation.7

The LCR is the ratio of available assets 

over the liabilities of LCH SA under the 

stressed scenario of the default of the 

two largest clearing members (‘‘Cover 2 

scenario’’), based on their liquidity 

needs.8 On a daily basis, the LCR 

calculation identifies all of the potential 

option positions that are in the money 

or at the money on that day and the next 

business day.9 Given the potential 

option exercise, the LCR calculation 

generates a liquidity need.10 LCH SA 

represented that the proposed rule 

change would be an enhancement to the 

current Framework to address the 

funding risk posed by the potential 

exercise of an equity American option at 

any time before expiry when the two 

largest clearing members in terms of 

liquidity needs may face liquidity 

issues.11

To address this risk, LCH SA is 

proposing specific modifications to the 

Framework that would enable its LCR 

calculation to generate an enhanced 

liquidity need in a Cover 2 scenario 

involving the physical settlement of 

equity American options. The proposed 

rule change would replace the term 

‘‘expiry’’ with the term ‘‘exercise’’ in 

both section 5.3.1.3 (Cash Equity) and 

section 5.3.4 (Cover 2 selection, Cash 

Equity Settlement Liquidity 

Requirement) to account for equity 

settlements arising from the options’ 

exercise, rather than their expiry. The 

proposed rule change would also revise 

the assumption about when equity 

American options are considered to be 

exercised, which is set forth in the 

‘‘Options Expiry’’ paragraph of section 

5.3.1.3 of the Framework. In that 

paragraph, the proposed rule change 

would replace the term ‘‘at expiry’’ with 

the phrase ‘‘any time by defaulting 

members in order to raise liquidity.’’ 12

In practice, LCH SA represents that 

the process under the amended 

Framework will work as follows on a 

daily basis: 

• The liquidity needs arising from the 

equity American options that are in the 

money or at the money will be 

computed, without applying a stress 

scenario to the equities. 

• The liquidity needs from the equity 

American options that are in the money 

or at the money will be computed, by 

applying a stress scenario to the 

equities. 

• LCH SA will select the positions 

consistent with the two largest clearing 

members in terms of liquidity needs for 

both modes described above and will 

retain the most punitive one. 

• This liquidity amount that LCH SA 

will potentially need for the settlement 

of equity American options (i.e., the 

most punitive amount identified in the 

previous bullet) will then be added to 

the current cash equity settlement 

amount in the LCR.13

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 the proposed 

rule change is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

the organization.14 For the reasons given 

below, the Commission finds that the 

proposed rule change is consistent with 

Section 17A(b)(3)(F) of the Act 15 and 

Rule 17Ad–22(e)(7)(i) thereunder.16

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 LCH SA be designed to promote 

the prompt and accurate clearance and 

settlement of securities transactions 

and, to the extent applicable, derivative 

agreements, contracts, and transactions, 

to assure the safeguarding of securities 

and funds which are in the custody or 

control of LCH SA or for which it is 

responsible.17

As described above, the proposed rule 

change would amend the Framework 

with specific changes in order to 

address more accurately LCH SA’s 


khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / Notices 78889 

18 15 U.S.C. 78q–1(b)(3)(F). 

19 17 CFR 240.17Ad–22(e)(7)(i). 

20 17 CFR 240.17Ad–22(e)(7)(i). 

21 15 U.S.C. 78q–1(b)(3)(F). 

22 17 CFR 240.17Ad–22(e)(7)(i). 

23 15 U.S.C. 78s(b)(2). 

24 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). 

25 17 CFR 200.30–3(a)(12). 

liquidity requirements arising from the 

physical settlement of equity American 

options involving a defaulting clearing 

member during any liquidation of such 

clearing member. Such changes should 

enhance LCH SA’s daily LCR 

calculations to determine more accurate 

liquidity levels in the event of the 

assignment and exercise of equity 

American options involving a defaulting 

clearing member prior to expiry. The 

Commission believes the proposed rule 

change should help LCH SA anticipate 

increased liquidity needs and maintain 

appropriate levels of liquidity in a Cover 

2 scenario in which LCH SA would be 

required, pursuant to the Framework, to 

step in and meet a defaulter’s obligation 

in the event of the assignment or 

exercise of equity American options. 

The Commission also believes that, by 

anticipating and ensuring that LCH SA 

meets its liquidity needs in this manner, 

the proposed rule change should 

facilitate LCH SA’s ability to meet its 

obligations as a central counterparty in 

stressed situations, which, in turn, 

should allow LCH SA to continue to 

meet its obligation to promptly and 

accurately clear and settle securities 

transactions in such situations. 

In addition, the proposed rule change 

should help mitigate the funding risk 

that may arise when equity American 

options are exercised before expiry and 

settled during the liquidation period of 

a defaulting clearing member, which in 

turn should help LCH SA safeguard 

securities and funds for which it is 

responsible. 

For the reasons stated above, the 

Commission believes that the proposed 

rule change is consistent with Section 

17A(b)(3)(F) of the Act.18

B. Consistency With Rule 17Ad– 

22(e)(7)(i) 

Rule 17Ad–22(e)(7)(i) requires that, 

among other things, LCH SA establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to, as applicable, 

effectively measure, monitor, and 

manage the liquidity risk that arises in 

or is borne by the covered clearing 

agency, including measuring, 

monitoring, and managing its settlement 

and funding flows on an ongoing and 

timely basis, and its use of intraday 

liquidity by maintaining sufficient 

liquid resources at the minimum in all 

relevant currencies to effect same-day, 

and, where appropriate, intraday and 

multiday settlement of payment 

obligations with a high degree of 

confidence under a wide range of 

foreseeable stress scenarios, that 

includes, but is not limited to, the 

default of the participant family that 

would generate the largest aggregate 

payment obligation for LCH SA in 

extreme but plausible market 

conditions.19

As discussed above, LCH SA is 

proposing specific modifications to the 

Framework that would enable its daily 

LCR calculation to generate an 

enhanced liquidity need in a Cover 2 

scenario involving the physical 

settlement of equity American options. 

By using the daily LCR calculation 

process to determine in advance LCH 

SA’s liquidity needs in the event of the 

assignment and exercise of equity 

American options arising in a Cover 2 

scenario, the Commission believes the 

amended Framework should enhance 

LCH SA’s ability to determine whether 

it has sufficient resources to meet its 

liquidity needs should such a default 

occur, thus requiring LCH SA to step in 

and meet a defaulter’s payment 

obligation. The Commission believes 

that this should, in turn, enable LCH SA 

to avoid any potential disruptions to its 

operations caused by the liquidity needs 

arising from such a default. 

By applying both stressed and nonstressed scenarios to the underlying 

equities, and then selecting the option 

positions that are consistent with the 

two largest clearing members in terms of 

liquidity needs under both scenarios to 

determine the largest liquidity need, 

LCH SA’s daily LCR calculation process 

under the amended Framework should 

help LCH SA determine a more accurate 

amount to add to the current cash equity 

settlement amount in the LCR to cover 

a potential increase in liquidity needs 

arising from the physical settlement of 

equity American options that are 

exercised prior to expiry under stressed 

liquidity conditions. The Commission 

therefore believes that the amended 

Framework should enable LCH SA to 

maintain sufficient liquid resources to 

effect settlement of its payment 

obligations under a wide range of 

foreseeable stress scenarios, including 

the default of the participant family that 

would generate the largest aggregate 

payment obligation for LCH SA in 

extreme but plausible market 

conditions. 

For the above reasons, the 

Commission therefore finds that the 

proposed rule change is consistent with 

Rule 17Ad–22(e)(7)(i).20

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 the requirements of 

Section 17A(b)(3)(F) of the Act 21 and 

Rule 17Ad–22(e)(7)(i) thereunder.22

It is therefore ordered pursuant to 

Section 19(b)(2) of the Act 23 that the 

proposed rule change (SR–LCH SA– 

2020–006) be, and hereby is, 

approved.24

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.25

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2020–26783 Filed 12–4–20; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

Sunshine Act Meetings 

TIME AND DATE: 2:00 p.m. on Wednesday, 

December 9, 2020. PLACE: The meeting 

will be held via remote means and/or at 

the Commission’s headquarters, 100 F 

Street NE, Washington, DC 20549. 

STATUS: This meeting will be closed to 

the public. 

MATTERS TO BE CONSIDERED: 

Commissioners, Counsel to the 

Commissioners, the Secretary to the 

Commission, and recording secretaries 

will attend the closed meeting. Certain 

staff members who have an interest in 

the matters also may be present. 

In the event that the time, date, or 

location of this meeting changes, an 

announcement of the change, along with 

the new time, date, and/or place of the 

meeting will be posted on the 

Commission’s website at https://

www.sec.gov. 

The General Counsel of the 

Commission, or his designee, has 

certified that, in his opinion, one or 

more of the exemptions set forth in 5 

U.S.C. 552b(c)(3), (5), (6), (7), (8), 9(B) 

and (10) and 17 CFR 200.402(a)(3), 

(a)(5), (a)(6), (a)(7), (a)(8), (a)(9)(ii) and 

(a)(10), permit consideration of the 

scheduled matters at the closed meeting. 

The subject matter of the closed 

meeting will consist of the following 

topic: 

Institution and settlement of 

injunctive actions; 

Institution and settlement of 

administrative proceedings; 


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