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[Federal Register Volume 89, Number 227 (Monday, November 25, 2024)]
[Notices]
[Pages 92981-92989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27476]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101654; File No. SR-LCH SA-2024-002]

Self-Regulatory Organizations; LCH SA; Order Granting Accelerated 
Approval of Proposed Rule Change, as Modified by Amendment No. 1 and 
Partial Amendment No. 1, Relating to the CDSClear Select Membership 
Model

November 19, 2024.

I. Introduction

    On March 13, 2024, 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 (the ``Proposed Rule Change'') to 
amend its CDS Clearing Rule Book (the ``Rule Book'') and CDS Clearing 
Procedures (``Procedures''). The Proposed Rule Change was published for 
comment in the Federal Register on March 28, 2024.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 99847 (Mar. 22, 2024), 
89 FR 21579 (Mar. 28, 2024) (File No. SR-LCH SA-2024-002) 
(``Notice'').
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    On May 9, 2024, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve, disapprove, or institute proceedings to determine whether to 
approve or disapprove the Proposed Rule Change, until June 26, 2024.\5\ 
On June 21, 2024, the Commission instituted proceedings, pursuant to 
Section 19(b)(2)(B) of the Exchange Act,\6\ to determine whether to 
approve or disapprove the Proposed Rule Change.\7\ On September 18, 
2024, the Commission designated a longer period for commission action 
on proceedings to determine whether to approve or disapprove the 
Proposed Rule Change, until November 23, 2024.\8\ On October 11, 2024, 
LCH SA filed Amendment No. 1 to the Proposed Rule Change.\9\ On October 
17, 2024, LCH SA filed Partial Amendment No. 1 to the Proposed Rule 
Change.\10\ Notice of Amendment No.1 and Partial Amendment No. 1 were 
published in the Federal Register on October 24, 2024.\11\ The 
Commission has not received any comments on the Proposed Rule Change, 
as modified by Amendment No. 1 and Partial Amendment 1. For the reasons 
discussed below, the Commission is approving the Proposed Rule Change, 
as modified by Amendment No. 1 and Partial Amendment No. 1 (hereinafter 
defined as ``Proposed Rule Change'') on an accelerated basis.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ Securities Exchange Act Release No. 100094 (May 9, 2024), 89 
FR 42515 (May 15, 2024) (File No. SR-LCH SA-2024-002).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ Securities Exchange Act Release No. 100394 (June 21, 2024), 
89 FR 53685 (June 27, 2024) (File No. SR-LCH SA-2024-002).
    \8\ Securities Exchange Act Release No. 101094 (Sept. 18, 2024), 
89 FR 77919 (Sept. 24, 2024) (File No. SR-LCH SA-2024-002).
    \9\ Amendment No. 1 modified the Proposed Rule Change to require 
a Select Member to participate in competitive bidding in default 
auctions and contribute end-of-day prices should its margins exceed 
a predetermined threshold over a designated time. This requirement 
is discussed in Part II of this Order. It also included an Exhibit 
3.3 to the filing showing LCH SA's responses to an SEC request for 
information related to the Select Membership model.
    \10\ Partial Amendment No. 1 fixed errors in the Exhibit 1A 
filed with Amendment No. 1 by replacing the Statutory Basis and 
Burden on Competition sections of the amended Exhibit 1A with the 
text of the Statutory Basis and Burden on Competition sections of 
the amended 19b-4 narrative.
    \11\ Securities Exchange Act Release No. 101383 (Oct. 18, 2024), 
89 FR 84972 (Oct. 24, 2024) (File No. SR-LCH SA-2024-002) (``Amended 
Notice'').
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II. Description of the Proposed Rule Change

    LCH SA is a clearing agency registered with the Commission. Through 
its CDSClear business unit, LCH SA provides central counterparty 
services for security-based swaps, including credit default swaps, and 
options on credit default swaps.\12\ LCH SA provides these central 
counterparty services to its Clearing Members.\13\ Some of these 
Clearing Members provide clearing services for clients.
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    \12\ What We Clear, https://www.lch.com/services/cdsclear/what-we-clear (last visited Sept. 27, 2024).
    \13\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in the CDSClear Rule Book or CDS Clearing 
Procedures, as applicable.
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    LCH SA has two different types of Clearing Members, General Members 
and Select Members, with different obligations to LCH SA. General 
Members must participate in competitive bidding for auction packages, 
must submit prices to LCH SA, and may provide client clearing services 
to Affiliated Firms \14\ and non-Affiliated Firms.\15\ General Members 
also must nominate representatives for the CDS Default Management 
Committee and CDS Default Management Group.\16\
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    \14\ The Rule Book defines an Affiliated Firm as any Affiliate 
or any entity that is otherwise member to the same institutional 
protection scheme (as defined in the CRR) as the Clearing Member. 
The CRR is defined in the Rule Book as Regulation (EU) No. 575/2013 
and certain related regulations and standards. LCH SA CDS Clearing 
Rule Book Chapter 1 Article 1.1.1 An institutional protection scheme 
under the CRR is a contractual or statutory liability arrangement 
that protects those institutions and in particular ensures their 
liquidity and solvency to avoid bankruptcy where necessary. 
Regulation (EU) No 575/2013 of the European Parliament and of the 
Council of 26 June 2013 on prudential requirements for credit 
institutions and investment firms and amending Regulation (EU) No 
648/2012, Article 113(7), available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013R0575.
    \15\ Notice, 89 FR at 21579.
    \16\ Id. at 21581.
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    Select Members, on the other hand, must participate in competitive 
bidding only for a subset of Auction Packages and may opt out of 
submitting prices.\17\ Select Members also may provide client clearing 
services,\18\ but only for Affiliated Firms. Finally, while Select 
Members also must nominate representatives for the CDS Default 
Management Committee and CDS Default Management Group,\19\ as noted, 
their participation in competitive bidding is limited to a subset of 
Auction Packages.\20\
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    \17\ Notice, 89 FR at 21579, 81.
    \18\ Select Members originally were not allowed to offer client 
clearing services. See LCH SA, Self Certification Letter, Select 
Membership, available at, https://www.cftc.gov/sites/default/files/filings/orgrules/16/07/rule070816lchsadco001.pdf. In 2019, the 
Commission approved amendments to the Rule Book and Procedures to 
allow Select Members to provide client clearing services to 
Affiliated Firms. See Securities Exchange Act Release No. 86376 
(July 15, 2019), 84 FR 34955, 34957 (July 19, 2019) (File No. SR-LCH 
SA-2019-003). LCH SA proposed these to allow client clearing limited 
in this manner because a Select Member requested the ability to 
offer client clearing to an affiliate. LCH SA provided background 
and analysis related to the Select Membership model in confidential 
Exhibit 3.3 to the Proposed Rule Change, which LCH SA added to the 
Proposed Rule change with Amendment No. 1.
    \19\ Notice, 89 FR at 21581.
    \20\ Currently, Select Members and General Members must nominate 
representatives for the CDS Default Management Committee and CDS 
Default Management Group because both Select Members and General 
Members currently must participate in auctions to some extent. 
Notice, 89 FR at 21581; LCH SA provided background and analysis 
related to the Select Membership model in confidential Exhibit 3.3 
to the Proposed Rule Change, which LCH SA added to the Proposed Rule 
change with Amendment No. 1.
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    The obligations of General Members and Select Members differ 
because LCH SA designed the two membership categories with different 
potential members in mind. LCH SA created the

[[Page 92982]]

Select Member tier in 2016 to offer CDSClear direct membership to 
institutions that met the membership criteria, but did not want to be 
direct members due to the Competitive Bidding and price contribution 
obligations of such members.\21\ These institutions tend to be price 
takers with smaller portfolios.\22\ They prefer avoiding Competitive 
Bidding as General Members because they may not have the risk-taking 
capabilities to manage positions that they do not actively trade but 
may win in an auction.\23\ Similarly, they prefer avoiding price 
contribution as General Members because they may only actively transact 
in a limited set of products, thereby making it difficult to provide 
data for all of their open positions.\24\ LCH SA views price 
contribution as less critical for these institutions because, as price 
takers, any prices the Select Members might submit to LCH SA likely 
would have already been provided to LCH SA by CDSClear General 
Members.\25\
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    \21\ LCH SA, Self Certification Letter, Select Membership, 
available at, https://www.cftc.gov/sites/default/files/filings/orgrules/16/07/rule070816lchsadco001.pdf.
    \22\ Securities Exchange Act Release No. 82076 (Nov. 14, 2017), 
82 FR 55139, 55140 (Nov. 20, 2017) (File No. SR-LCH SA-2017-008); 
Notice, 89 FR at 21583.
    \23\ LCH SA provided background and analysis related to the 
Select Membership model in confidential Exhibit 3.3 to the Proposed 
Rule Change, which LCH SA added to the Proposed Rule change with 
Amendment No. 1.
    \24\ LCH SA provided background and analysis related to the 
Select Membership model in confidential Exhibit 3.3 to the Proposed 
Rule Change, which LCH SA added to the Proposed Rule change with 
Amendment No. 1.
    \25\ LCH SA provided background and analysis related to the 
Select Membership model in confidential Exhibit 3.3 to the Proposed 
Rule Change, which LCH SA added to the Proposed Rule change with 
Amendment No. 1.
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    Some prospective Clearing Members may wish to provide clearing 
services to non-affiliated firms but they may not have the capacity to 
participate in Competitive Bidding or submit Market Data.\26\ In order 
to allow prospective Clearing Members that do not have the capacity to 
participate in Competitive Bidding or submit Market Data to provide 
clearing services to non-affiliated firms, without becoming General 
Members, LCH SA proposes changes to adjust those requirements for 
Select Members, and make other related changes.\27\
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    \26\ Notice, 89 FR at 21579.
    \27\ Id. Despite these changes, Select Members must still 
satisfy the membership requirements found in Section 2.2.1 of the 
LCH SA CDS Clearing Rule Book, the same as General Members. Pursuant 
to Section 2.2.1, Select Members must, among other things, comply 
with applicable law, be subject to supervision by competent 
regulatory authorities, meet minimum capital requirements, and 
satisfy a credit risk assessment. See LCH SA CDS Clearing Rule Book, 
Section 2.2.1.
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    Although these changes will allow some Select Members to clear for 
non-affiliated firms without participating in Competitive Bidding or 
submitting Market Data, these changes will not necessarily undermine 
Competitive Bidding or LCH SA's collection of Market Data. This is 
because Select Membership will not be overall more favorable than 
General Membership due to the Proposed Rule Change. Specifically, while 
Select Members will have fewer obligations than General Members and 
still be able to clear for clients, LCH SA's fee grid and Risk 
Management Framework, which the Proposed Rule Change does not affect, 
make client clearing cheaper for General than Select Members, as 
described below.
    Specifically, with respect to the fee grid, currently only General 
Members may subscribe to the unlimited tariff, which allows General 
Members to clear an unlimited number of trades for their own account 
for an annual fixed fee.\28\ Further, General Members that pay a 
variable tariff will have lower fixed and variable fees than Select 
Members.\29\ The Proposed Rule Change would not alter this 
arrangement.\30\
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    \28\ Notice, 89 FR at 21579.
    \29\ Id. at 21580.
    \30\ Id.
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    With respect to the Risk Management Framework, General Members who 
clear for clients may be able to give their clients the same liquidity 
margin as other General Members. Select Members, on the other hand, may 
incur a higher liquidity margin, including a liquidity concentration 
charge, for large positions, including large client positions.\31\ The 
Proposed Rule Change would not alter this liquidity margin or otherwise 
amend the Risk Management Framework.
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    \31\ Id.
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    To further ensure that a sufficient number of Clearing Members 
participate in Competitive Bidding and submit Market Data, as discussed 
below, the Proposed Rule Change would guarantee that at least six 
Clearing Member Financial Groups \32\ participate in default auctions 
and submit Market Data by requiring a Select Member to participate in 
those processes if the margins of its Financial Group exceed a 
predetermined threshold over a designated time.\33\
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    \32\ The Rule Book indicates that a Person shall belong to the 
same Financial Group as (i) any entity controlled, directly or 
indirectly by the Person; (ii) any entity that controls, directly or 
indirectly the Person; or (iii) any entity directly or indirectly 
under common control with the Person. LCH SA CDS Clearing Rule Book, 
Chapter 1 Article 1.1.1. Currently, CDSClear Financial Groups 
include anywhere from 1 to 4 Clearing Members. Member Search, 
https://www.lseg.com/en/post-trade/clearing/membership/member-search#t-sa (last visited Oct. 25, 2024).
    \33\ As described below, the Proposed Rule Change would require 
Select Member participation in Competitive Bidding and submission of 
Market Data when the Group Total Margin Percentage for the Select 
Member's Financial Group exceeds the Participation Threshold for 
sixty consecutive clearing days. The Participation Threshold is the 
percentage which is equal to the lower of 5% and the sixth largest 
Group Total Margin Percentage among all the Group Total Margin 
Percentages calculated in respect of each Financial Group to which 
one or more Clearing Members belong. As noted above, General Members 
must participate in Competitive Bidding and submit Market Data.
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    LCH SA's proposed changes to Select Membership can be grouped into 
five categories.\34\ The first category would allow Select Members to 
provide client clearing services to non-affiliated firms. The second 
and third categories would relate to Select Members' ability to elect 
to participate in Competitive Bidding and submission of end-of-day 
prices. The fourth category would address mandatory participation in 
Competitive Bidding and submission of end-of-day prices by Select 
Members. The fifth category would create a new form through which 
Select Members may make certain elections, including to participate in 
Competitive Bidding and submit Market Data.
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    \34\ LCH SA also proposes changes to correct cross-references, 
grammar, and typographical errors, and provide additional 
clarification.
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A. Non-Affiliated Firm Clearing for Select Members

    As noted above, the Rule Book does not allow Select Members to 
provide CDS Client Clearing Services to non-affiliated firms. Current 
Article 5.1.1.2 of the Rule Book addresses conditions upon which CDS 
Client Clearing Services may be provided by a ``CCM'' \35\ to its CCM 
Clients. Article 5.1.1.2(i) indicates that if a CCM is a Select Member, 
it shall not provide CDS Client Clearing Services to any CCM Client 
other than its Affiliated Firms. Similarly, Article 6.1.1.2 of the Rule 
Book addresses conditions upon which FCM/BD Clearing Members \36\ may

[[Page 92983]]

provide CDS Clearing Services. Article 6.1.1.2(i) states that if an 
FCM/BD Clearing Member is a Select Member, it shall not provide CDS 
Client Clearing Services to any FCM/BD Client other than its Affiliated 
Firms. LCH SA proposes deleting Articles 5.1.1.2(i) and 6.1.1.2(i), 
since these provisions limit the entities to which Select Members may 
provide client clearing services to Affiliated Firms.\37\
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    \35\ The Rule Book defines a CCM as any legal entity admitted as 
a Clearing Member in accordance with the CDS Clearing Rules at LCH 
SA and a party to the CDS Admission Agreement, including General 
Members and Select Members. LCH SA CDS Clearing Rule Book Chapter 1 
Article 1.1.1.
    \36\ The Rule Book defines FCM/BD Clearing Members as any FCM, 
BD or legal entity that is both FCM and BD that has been admitted as 
a clearing member in accordance with the CDS Clearing Rules and is a 
party to the CDS Admission Agreement and which has not elected to 
become a CCM, provided that if such FCM/BD Clearing Member wishes to 
provide CDS Client Clearing Services described in Title VI, it shall 
either (i) be a General Member or (ii) provide such CDS Client 
Clearing Services to its Affiliated Firms only. LCH SA CDS Clearing 
Rule Book Chapter 1 Article 1.1.1.
    \37\ Notice, 89 FR at 21580.
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    To clarify that Select Members may offer CDS Client Clearing 
Services to any client, including non-affiliates, LCH SA proposes 
adjusting certain defined terms, including the definition of Select 
Member.\38\ Currently, the Rule Book defines Select Member as a CCM or 
FCM/BD Clearing Member that does not provide CDS Client Clearing 
Services to clients other than Affiliated Firms and has been admitted 
by LCH SA as a Select Member in accordance with Section 1 of the 
Procedures. LCH SA proposes deleting the text from the definition, 
noting that Select Members do not provide CDS Client Clearing Services 
to clients other than Affiliated Firms. LCH SA also proposes deleting 
certain text from the Rule Book highlighting the current status quo--
that General Members may provide client clearing services to non-
affiliated firms, while Select Members may not do so--in the 
definitions of CCM and FCM/BD Clearing Member.
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    \38\ Id.
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    Under LCH SA's proposal to allow Select Members to provide CDS 
Client Clearing Services to Clients other than Affiliated Firms, there 
is no need to define the term Affiliated Firm. This term was only used 
with respect to the current Select Member model.\39\ As such, LCH SA 
proposes deleting the defined term Affiliated Firm from the Rule Book.
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    \39\ Id.
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    Similarly, LCH SA proposes updating certain references that are no 
longer necessary or that can no longer exist because of its proposal to 
permit Select Members to provide clearing services to any client and 
the deletion of the defined term Affiliated Firm.\40\ LCH SA 
accordingly proposes deleting references to Affiliated Firms in Article 
5.1.1.1 of the Rule Book and in Article 4.2.7.2 of the Rule Book.\41\ 
As noted above, in 2019, LCH SA made several changes to its Rule Book 
to allow and account for Select Members providing client clearing 
services to Affiliated Firms. The proposed changes to Articles 5.1.1.1 
and 4.2.7.2 eliminate these changes and work to make those provisions 
consistent with LCH SA's new requirements for Select Members. 
Separately, in some provisions of its Rule Book, LCH SA proposes 
replacing the term Affiliated Firm with the term Affiliate \42\ rather 
than deleting it entirely because in certain places, LCH SA refers to 
Affiliates of a Clearing Member. Specifically, LCH SA would make this 
change in the definitions of CCM Indirect Gross Segregated Account 
Client, CCM Indirect Net Segregated Account Client, CCM Individual 
Segregated Account Client, and FCM/BD Client as well as in Article 
6.1.1.2. The proposed changes to the definitions for CCM Indirect Gross 
Segregated Account client, CCM Indirect Net Segregated Account Client, 
and CCM Individual Segregated Account Client reverse 2019 changes made 
to account for Select Members ability to clear for Affiliated Firms. 
The proposed change to Article 6.1.1.2's introduction makes that 
provision consistent with Article 6.1.1.1.\43\ Further, the changes to 
Article 6.1.1.2 in general account for the fact that, after changes to 
its Select Member tier, without the need for the broader term 
Affiliated Firm, LCH SA can revert back to the use of the term 
Affiliate.
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    \40\ Id. at 21580-81.
    \41\ Id.
    \42\ The Rule Book defines Affiliate as any entity that 
controls, directly or indirectly, the Clearing Member, any entity 
controlled, directly or indirectly, by the Clearing Member or any 
entity directly or indirectly under common control with such 
Clearing Member. Affiliated Firm is defined as any Affiliate or any 
entity that is otherwise member to the same institutional protection 
scheme (as defined in the CRR as the Clearing Member). LCH SA CDS 
Clearing Rule Book Chapter 1 Article 1.1.1.
    \43\ Article 6.1.1.1 provides that an FCM/BD Clearing Member may 
not enter into Cleared Transactions for the account of an Affiliate, 
unless such FCM/BD Clearing Member first provides LCH SA with an 
opinion of counsel, in form and content acceptable to LCH SA, 
confirming that entry into such Cleared Transactions would not be 
contrary to Applicable Law. The proposed Article 6.1.1.2 would 
provide that an FCM/BD Clearing Member may provide CDS Clearing 
Services to a Client or, if permitted pursuant to Article 6.1.1.1 an 
Affiliate, rather than an Affiliated Firm, on any terms and 
conditions mutually agreed to by it and such Person.
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    Finally, given the proposal to allow Select Members to clear for 
non-affiliated firms as General Members can, LCH SA proposes changes to 
apply certain existing requirements to both General Members and Select 
Members without distinguishing between the two.\44\ In Articles 
2.2.1.1(iv) and 2.2.1.1(v) of the Rule Book, LCH SA proposes changes 
that would make certain conditions to becoming a Clearing Member 
applicable to all Applicants wishing to provide CDS Client Clearing 
Services, instead of Applicants wishing to be admitted as a General 
Member or as a Select Member providing CDS Client Clearing Services to 
Affiliated Firms. Similarly, LCH SA proposes changes to Article 
2.2.2.1(iv) of the Rule Book that would make certain continuing 
obligations of Clearing Members applicable to Clearing Members which 
have elected to provide CDS Client Clearing Services generally, rather 
than only to General or Select Members that have elected to provide CDS 
Client Clearing Services to Affiliated Firms. LCH SA also proposes 
deleting text from Article 4.2.7.2 of the Rule Book limiting Clearing 
Members authorized to provide Markit LCH Settlement Prices under 
certain conditions to General Members, or Select Members that opt to be 
Price Contribution Participants and that provide CDS Client Clearing 
Services to Affiliated Firms.\45\ After making this change, all 
Clearing Members, as opposed to just a subset of Clearing Members, 
would be authorized to provide Markit LCH Settlement Prices to certain 
clients under certain conditions.
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    \44\ Notice, 89 FR at 21580.
    \45\ A Price Contribution Participant is a Select Member that 
has opted for submitting Market Data in accordance with Section 5 of 
the Procedures or each General Member, or in each case, its Price 
Contribution Delegate. LCH SA CDS Clearing Rule Book Chapter 1 
Article 1.1.1.
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B. Participation in Competitive Bidding

    In the event of a Clearing Member default, LCH SA shall auction off 
the defaulting Clearing Member's positions.\46\ Currently, the LCH SA 
CDS Default Management Process requires all Non-Defaulting Clearing 
Members, including Select Members, to participate in Competitive 
Bidding during such auctions, with a few exceptions.\47\ For example, a 
Select Member does not need to bid for any Auction Package if that 
Auction Package contains a product that the Select Member does not 
transact

[[Page 92984]]

in,\48\ as set out in that Select Member's Product Family Form.\49\
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    \46\ Specifically, where there is an Event of Default with 
respect to a Clearing Member, LCH SA will auction ``Auction 
Packages.'' LCH SA CDS Clearing Rule Book, Appendix 1, Clause 2.1. 
An Auction Package is defined as a portfolio of Auction Transactions 
reflecting one or more Cleared Transactions registered in the name 
of the Defaulting Clearing Member, together with any connected 
hedging trades that have been concluded by LCH SA through Hedging. 
LCH SA CDS Clearing Rule Book, Appendix 1, Clause 1.1.
    \47\ These exceptions are described in Clause 5.4.1 of the CDS 
Default Management Process in the Rule Book.
    \48\ Specifically, a Select Member does not need to engage in 
Competitive Bidding for Auction Packages containing any Cleared 
Transaction that does not belong to any Product Family as set out in 
that Select Member's Product Family Form. The Rule Book defines 
Product Family as each category of CDS or Index Swaption for which 
LCH SA provides CDS Clearing Services and that may be selected by a 
Select Member in its Product Family Form. LCH SA CDS Clearing Rule 
Book, Chapter 1 Article 1.1.1.
    \49\ The Rule Book defines Product Family Form as, in respect of 
a Select Member, the form referencing the Product Families that a 
Select Member intends to clear through LCH SA, as amended from time 
to time in accordance with Section 5 of the Procedures. Id.
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    Even with this exception, LCH SA has found that some Select Members 
may not have the operational capacity to participate in default 
auctions.\50\ LCH SA believes that it does not need certain Select 
Members to participate in Competitive Bidding because Select Members 
have had minimal impact on winning bids during previously conducted 
fire drills.\51\ Accordingly, LCH SA is now proposing to make 
participation in Competitive Bidding optional for Select Members, 
subject to a minimum participation requirement, as discussed below.\52\
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    \50\ Notice, 89 FR at 21579. Specifically, LCH SA notes that 
Select Members have historically required assistance managing 
default files and have routinely requested assistance addressing 
questions during fire drill exercises. Id. at 21582 n19.
    \51\ LCH SA provided background and analysis related to past 
firedrill bidding in confidential Exhibit 3.2 and background and 
analysis related to the Select Membership model in confidential 
Exhibit 3.3 to the Proposed Rule Change. Confidential Exhibit 3.2 
was a part of the originally filed Proposed Rule Change. 
Confidential Exhibit 3.3 was added to the Proposed Rule Change with 
Amendment No. 1.
    \52\ As discussed In Section D below, LCH SA recognizes that 
changes to its membership tiers require that LCH SA maintains 
sufficient participation in Competitive Bidding and the price 
contribution process. See Amended Notice, 89 FR at 84975.
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    Specifically, LCH SA proposes to revise current Article 2.2.0.5 of 
the Rule Book to alter which Select Members are required to participate 
in Competitive Bidding. Further, these revisions will clarify that a 
Select Member, under circumstances where it is not required to 
participate in Competitive Bidding as described in Section D below, may 
opt to participate in Competitive Bidding pursuant to Clause 5 of the 
CDS Default Management Process, subject to Article 2.2.1.1(xi) of the 
Rule Book.\53\ Related to this change, LCH SA will also clarify that a 
Select Member that elects, or is required, to participate in 
Competitive Bidding will be subject to the provisions of the CDS 
Clearing Documentation that apply to any Non-Defaulting Clearing Member 
that must participate in Competitive Bidding for each Auction Package, 
as a General Member will be.
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    \53\ As is noted in footnote 59, the Proposed Rule Change would 
delete current Article 2.2.0.4. Thus, current Article 2.2.0.5 and 
proposed Article 2.2.0.4 are the same provision.
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    To further effectuate this change, LCH SA also proposes revisions 
to Clause 5.4.1(ii) of the CDS Default Management Process, which is 
found in Appendix 1 to the Rule Book. Clause 5.4.1 identifies 
exceptions to the requirement that all Non-Defaulting Clearing Members 
participate in Competitive Bidding. The Proposed Rule Change would add 
an exception from the Competitive Bidding requirement for Select 
Members that are not required to participate in Competitive Bidding 
under proposed Article 2.2.0.4, and that also have not elected to 
participate in Competitive Bidding by following the requirements of 
proposed Article 2.2.0.4 within one hour of the declaration of an Event 
of Default by LCH SA.\54\
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    \54\ As noted above, under the LCH SA's proposal, a Select 
Member that voluntarily chooses to participate in Competitive 
Bidding must abide by its obligations under Article 2.2.1.1(xi) and 
elect to participate in Competitive Bidding in order to opt into 
Competitive Bidding.
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    LCH SA proposes to revise certain other provisions--specifically, 
those related to conditions on Applicants wishing to be admitted as 
Clearing Members--to reflect that Competitive Bidding will be elective 
for Select Members going forward, subject to the minimum participation 
requirement described below. Article 2.2.1.1(xi) of the Rule Book 
currently requires a Clearing Member Applicant to participate in the 
implementation of the CDS Default Management Process or demonstrate 
that it has an associated entity or an LCH Approved Outsourcing Agent 
that can successfully do so.\55\ It also requires a Clearing Member 
Applicant to participate in (and satisfy LCH SA's requirements with 
respect to the carrying out of) regular fire drills run by LCH SA from 
time to time in accordance with the Rule Book, or demonstrate that it 
has an associated entity or an LCH Approved Outsourcing Agent that can 
successfully do so. The proposed rule change would add language to 
Article 2.2.1.1(xi) specifying that it applies to an Applicant seeking 
to be admitted as a General Member, or as a Select Member that will 
elect to participate in Competitive Bidding. Relatedly, the proposed 
rule change would amend Section 1.1(d) of the Procedures to note that 
an Applicant must accept that, during the review process, LCH SA is 
entitled to request that the Applicant applying to be a Select Member 
and wishing to participate in Competitive Bidding must pass LCH SA-
administered tests to ensure that the Applicant can successfully 
participate in Competitive Bidding.
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    \55\ Associated entities under Article 2.2.1.1(xi) would include 
affiliated Clearing Members or alternatively a non-clearing member 
Affiliate that clears through the Clearing Member.
---------------------------------------------------------------------------

    Because certain Select Members will no longer be required to 
participate in Competitive Bidding, they also will no longer be 
required to use the Product Family Form. The Product Family Form is 
used by Select Members to identify the Product Families that a Select 
Member intends to clear through LCH SA.\56\ A form identifying the 
Product Families that a Select Member intends to clear through LCH SA 
is currently necessary because Select Members only must participate in 
Competitive Bidding for Auction Packages if the Cleared Transactions in 
the Auction Package all belong to Product Families set out in the 
Select Member's Product Family Form.\57\ Under the Proposed Rule 
Change, because Select Members are no longer required to participate in 
Competitive Bidding, subject to the minimum participation requirement 
discussed below, there is no longer a need for Select Members to use 
the Product Family Form.\58\ As such, LCH SA proposes deleting the 
defined terms Product Family and Product Family Form from the Rule 
Book, and proposes deleting references to the terms Product Family and 
Product Family Form in Articles 2.2.0.4,\59\ 3.1.6.2(ii),\60\ 3.1.6.5, 
and Appendix 1 Clauses 5.4.1(ii) \61\ and 6.1 of the Rule Book.\62\
---------------------------------------------------------------------------

    \56\ LCH SA CDS Clearing Rule Book Chapter 2 Article 2.2.0.4.
    \57\ Notice, 89 FR at 21580.
    \58\ Id.
    \59\ LCH SA proposes deletion of this entire provision. This 
provision discusses the use of the Product Family Form and updating 
the Product Family Form. From this point forward references to 
Article 2.2.0.4 will be to the proposed Article 2.2.0.4/current 
Article 2.2.0.5 of the Rule Book.
    \60\ LCH SA proposes deletion of text noting that LCH SA will 
inform relevant Clearing Members of, in respect of a Select Member, 
any cleared Transaction, as a result of the novation process 
pursuant to Article 3.1.6.1, that does not belong to any of the 
Product Families indicated in the Product Family Form of that Select 
Member.
    \61\ LCH SA proposes the deletion of text in this provision 
indicating that a Non-Defaulting Clearing Member is not required to 
participate in Competitive Bidding for an Auction Package containing 
any Cleared Transaction that does not belong to any Product Family 
as set out in that Select Member's Product Family Form in force on 
the Business Day immediately preceding the CDS Post Default Period.
    \62\ LCH SA proposes the deletion of text in this provision 
highlighting circumstances under which and how a Product Family Form 
will be updated. With the deletion of this text there is also no 
need for the references to General Members and Select Members in 
Clause 6.1.2(ii)(a) which acknowledge the differences between Select 
Members and General Members under the current Rule Book. Notice, 89 
FR at 21580. Thus, LCH SA proposes to delete references to the terms 
General Member and Select Member in Clause 6.1.2(ii)(a).

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[[Page 92985]]

    For a similar reason, the Proposed Rule Change would delete Article 
3.1.6.8 of the Rule Book. This provision is no longer needed because it 
describes how LCH SA would deal with situations where LCH SA registers 
a Cleared Transaction, in respect of a Select Member, which does not 
belong to any of the Product Families indicated in the Select Member's 
Product Family Form.\63\
---------------------------------------------------------------------------

    \63\ Notice, 89 FR at 21580.
---------------------------------------------------------------------------

    Finally, because Select Members' obligations with respect to 
Competitive Bidding would change and therefore, their perspective would 
provide less added value with respect to the design of LCH SA's 
liquidation strategy than it did in the past, Select Members also will 
no longer be required to nominate representatives to the CDS Default 
Management Committee or Group.\64\
---------------------------------------------------------------------------

    \64\ LCH SA provided background and analysis related to the 
Select Membership model in confidential Exhibit 3.3 to the Proposed 
Rule Change, which LCH SA added to the Proposed Rule Change with 
Amendment No. 1.
---------------------------------------------------------------------------

    The CDS Default Management Committee meets at least quarterly, 
primarily to ensure continued preparedness for an Event of Default. The 
Default Management Committee's duties include participating in regular 
fire drills in relation to the CDS Default Management Process, keeping 
under review the terms of reference for both the CDS Default Management 
Committee and the CDS Default Management Group, determining the 
provisions of the CDS Default Management Guidance Manual that will 
supplement the principles set out in the CDS Default Management 
Process, and assisting the members of the CDS Default Management Group 
in implementing the CDS Default Management Process.\65\ Appendix 1, 
Clause 10.2 of the Rule Book indicates that the CDS Default Management 
Committee shall consist of representatives nominated by each of the 
Clearing Members.
---------------------------------------------------------------------------

    \65\ LCH SA CDS Clearing Rule Book Appendix 1 Clause 10.1.
---------------------------------------------------------------------------

    The CDS Default Management Group meets as soon as reasonably 
practicable following notification by LCH SA that a Clearing Member is 
the subject of an Event of Default. This group assists LCH SA in the 
implementation of the CDS Default Management Process.\66\ Appendix 1, 
Clause 11.2.2 of the Rule Book notes that each Clearing Member is 
required to notify LCH SA of at least two representatives that can be 
called upon to participate as a member of the CDS Default Management 
Group.
---------------------------------------------------------------------------

    \66\ LCH SA CDS Clearing Rule Book Appendix 1 Clause 11.1.
---------------------------------------------------------------------------

    LCH SA proposes changes to current Article 2.2.0.5 (proposed 
Article 2.2.0.4) to give Select Members the option to nominate 
representatives to the CDS Default Management Committee and to the CDS 
Default Management Group. LCH SA proposes conforming changes to 
Appendix 1, Clauses 10.2.1 and 11.2.2 of the Rule Book, to clarify that 
going forward Select Members may, but are not required to, nominate 
representatives to the Committee and Group. LCH SA proposes these 
changes to make Select Members' obligations with respect to nominating 
these representatives consistent with the ability to opt out of 
Competitive Bidding.\67\
---------------------------------------------------------------------------

    \67\ Notice, 89 FR at 21581.
---------------------------------------------------------------------------

C. Submission of Market Data

    Unlike Competitive Bidding, under LCH SA's Rule Book, participation 
in the end of day price contribution process is currently optional for 
Select Members. As described in Section D below, the Proposed Rule 
Change would require some Select Members to submit Market Data, while 
continuing to give other Select Members the option to submit Market 
Data. LCH SA also proposes two changes to Select Members' price 
submissions, if they choose to do so. First, the Proposed Rule Change 
would note that Select Members elect to receive Price Requirement Files 
\68\ for relevant Trading Cities.\69\ Second, LCH SA proposes a change 
so that, with respect to the Price Requirement Files received for 
relevant Trading Cities only, Select Members that elect to be Price 
Contribution Participants are bound by all obligations of a Price 
Contribution Participant as set out in the Rule Book and Section 5 of 
the Procedures, including the obligation to submit Market Data.
---------------------------------------------------------------------------

    \68\ Price Requirement Files are files listing the Open 
Positions in respect of which Price Contribution Participants are 
required to submit Market Data. LCH SA CDS Clearing Procedures, 
Section 5.18.3.
    \69\ A Trading City is the city in which a CDS or Index Swaption 
is typically traded, as published on the website. LCH SA CDS 
Clearing Rule Book Chapter 1 Article 1.1.1.
---------------------------------------------------------------------------

    As noted, Select Members already may opt to submit Market Data. As 
such, they have the choice to become Price Contribution Participants. 
However, under current Article 2.2.0.5, even when a Select Member 
elects to be a Price Contribution Participant it may choose not to 
submit Market Data. This differs from General Members, who must act as 
Price Contribution Participants and submit Market Data. Given that 
potential Select Members may lack the capacity to submit Market Data, 
LCH SA's proposed revisions to select membership will still allow 
certain Select Members to choose whether they would like to submit 
Market Data.\70\
---------------------------------------------------------------------------

    \70\ Id. at 21579.
---------------------------------------------------------------------------

D. Mandatory Competitive Bidding and Submission of Market Data

    As part of the changes to make Competitive Bidding and price 
contribution optional for Select Members, LCH SA also will require 
certain Clearing Members to participate in these processes, regardless 
of whether they are General or Select Members. LCH SA proposes these 
changes to guarantee that it has enough participants for those 
processes.\71\
---------------------------------------------------------------------------

    \71\ Amended Notice, 89 FR at 84975.
---------------------------------------------------------------------------

    As noted above, Select Members currently must participate in 
Competitive Bidding for Auction Packages containing Cleared 
Transactions that belong to any Product Family as set out in that 
Select Member's Product Family Form. Select Members also currently may 
choose whether to submit Market Data. The Proposed Rule Change would 
add text to proposed Article 2.2.0.4, requiring that Select Members 
submit Market Data for all the Trading Cities and participate in 
Competitive Bidding when the Group Total Margin Percentage calculated 
for its Financial Group exceeds the Participation Threshold for sixty 
consecutive Clearing Days. Additionally, LCH SA's proposal provides 
that this obligation ends when the Group Total Margin Percentage 
remains one percentage point below the Participation Threshold for 
sixty consecutive Clearing Days. LCH SA's proposed changes further 
indicate that if LCH SA reasonably believes that a Select Member will 
be required to participate in Competitive Bidding and the price 
contribution process under proposed Article 2.2.0.4, LCH SA may request 
for that Select Member to carry out such tests as LCH SA may reasonably 
require to assess its ability to participate in Competitive Bidding.
    To implement this change, LCH SA proposes several new defined terms 
for its Rule Book. The Participation Threshold for determining when a 
Select Member must participate in Competitive Bidding and the price 
contribution process would be defined as the percentage as determined 
by LCH SA, which is equal to the lower of five percent (5%) and the 
sixth largest Group Total Margin Percentage among all the

[[Page 92986]]

Group Total Margin Percentages calculated in respect of each Financial 
Group to which one or more Clearing Members belong. LCH SA's proposal 
would define Group Total Margin Percentage as, in respect of a 
Financial Group to which one or more Clearing Members belong and in 
respect of any Clearing Day, the ratio of its Average Group Total 
Margin divided by the Average CDSClear Total Margin. LCH SA proposes to 
define Average CDSClear Total Margin as the average over the last sixty 
Clearing Days of the sum of all the Margins (excluding Variation 
Margins) calculated by LCH SA in respect of the Account Structures of 
all the Clearing Members. The Proposed Rule Change would define Average 
Group Total Margin as the average over the last sixty Clearing Days of 
the sum of all the Margins (excluding Variation Margins) calculated by 
LCH SA in respect of all the Account Structure(s) of the Clearing 
Members belonging to the same Financial Group.
    Finally, the Proposed Rule Change would make a few edits to account 
for the possibility that Select Members will need to participate in the 
price contribution process.\72\ In proposed Article 2.2.0.4, LCH SA 
would delete language suggesting that a Select Member would never have 
any obligation to submit Market Data. LCH SA also proposes language for 
the definition of Price Contribution Participant, which would broaden 
the definition's application to include Select Members that are 
required to submit Market Data in addition to Select Members that have 
opted to submit Market Data.
---------------------------------------------------------------------------

    \72\ Id. at 84976.
---------------------------------------------------------------------------

    In practice, this will mean that any Clearing Member that is part 
of the top six Financial Groups at LCH SA will be required to 
participate in Competitive Bidding and provide prices, even if that 
Clearing Member is a Select Member.

E. Select Member Form

    Finally, the Proposed Rule Change would create a new Select Member 
Form, through which Select Members would make the elections described 
above. Specifically, Select Members would use this form to elect to 
participate in Competitive Bidding, submit Market Data, and nominate 
representatives to the Default Management Committee and Default 
Management Group. The Proposed Rule Change would carry out this change 
by creating a new definition for Select Member Form, editing certain 
aspects of its rules to note the use of the Select Member Form, 
deleting references to the obsolete Product Family Form, and 
establishing a process for Select Members to obtain and update the 
form.
    First, to provide a definition for this form, LCH SA proposes a new 
defined term.\73\ LCH SA's proposal would define Select Member Form as 
the form referencing the elections made by a Select Member, in 
accordance with Article 2.2.0.4, as amended from time to time in 
accordance with Section 5 of the Procedures.
---------------------------------------------------------------------------

    \73\ Id. at 21580.
---------------------------------------------------------------------------

    Second, LCH SA proposes changes that would provide that Select 
Members choose certain parameters of their membership through the 
Select Member Form. Currently, Select Member Price Contribution 
Participants may choose to receive Price Requirement Files in 
accordance with the conditions set out in Section 1 of the Procedures. 
The Proposed Rule Change would edit current Article 2.2.0.5 so that it 
indicates that a Select Member shall notify LCH SA of its elections 
with respect to Competitive Bidding, submission of Market Data, and 
nomination of representatives to the Default Management Committee and 
Default Management Group by providing a duly completed and signed 
Select Member Form in the conditions and manner set out in Section 1 of 
the Procedures. Similarly, LCH SA proposes to add text to current 
Article 2.2.0.5 to explain that a Select Member may change these 
elections by providing LCH SA with a copy of a duly signed updated 
Select Member Form, in accordance with the conditions set out in 
Section 5 of the Procedures. With the process for opting to submit 
Market Data being described in current Article 2.2.0.5 (proposed 
Article 2.2.0.4), LCH SA proposes clarifying the definition of Price 
Contribution Participant to include Select Members that have opted, or 
are required, to submit Market Data in accordance with Article 2.2.0.4, 
rather than Section 5 of the Procedures.
    Additionally, because there is no longer a need to use the Product 
Family Form, the Proposed Rule Change would replace references to this 
form and other references no longer needed with references to the new 
Select Member Form. The Proposed Rule Change would delete the term 
Product Family Form from Section 1.1 of the Procedures and replace it 
with the newly created term, Select Member Form.\74\ As such, an 
Applicant that wishes to be admitted as a Select Member shall provide 
LCH SA with the Select Member Form completed by the Select Member as 
opposed to the Product Family Form. Likewise, LCH SA proposes to edit 
Section 5.11(c) of the Procedures to focus on updating the Select 
Member Form rather than the Product Family Form. The proposal would 
delete references to the Product Family Form, replacing those 
references with the term Select Member Form where relevant, and delete 
references to provisions that focus on the Product Family Form. 
Further, instead of noting that a Select Member is entitled to add or 
remove any Product Family indicated in its Product Family Form via 
email in accordance with Article 2.2.0.4 (2.2.0.5 of the currently 
effective Rule Book), LCH SA proposes that the provision specify that a 
Select Member is entitled to change any of its election(s) by email. 
The Proposed Rule Change also replaces the term Product Family Form 
with Select Member Form in the Rule Book definition of CDS Clearing 
Documentation.
---------------------------------------------------------------------------

    \74\ Id. at 21580.
---------------------------------------------------------------------------

    Certain other proposed changes delete text that is no longer 
relevant due to the introduction of the Select Member Form. 
Specifically, because LCH SA proposes using the Select Member Form for 
making elections, it would delete a paragraph from Section 5.18.1 of 
the Procedures that describes the current process for choosing to 
receive or to stop receiving Price Requirement Files.\75\
---------------------------------------------------------------------------

    \75\ Id. at 21581.
---------------------------------------------------------------------------

    Finally, LCH SA proposes to add additional text related to 
obtaining and updating the Select Member Form. First, LCH SA proposes 
to add language to Section 1.1 of the Procedures, clarifying that the 
Select Member Form is made available by LCH SA's CDS Clear Business 
Development and Relationship Management team. LCH SA also proposes to 
add language to Section 5.11(c) of the Procedures to note that updates 
to the Select Member Form may require the Select Member to provide LCH 
SA with additional information, or take and pass tests that LCH SA may 
require. The Proposed Rule Change would add text to Section 5.11(c) of 
the Procedures to clarify that, in situations where a Select Member 
elects to stop taking part in Competitive Bidding, the election is not 
effective until the eighth Clearing Day following the Clearing Day on 
which the updated Select Member Form is received. This would ensure 
that a Select Member will be required to participate in Competitive 
Bidding if there is an Event of Default with respect to a separate 
Clearing Member at the same time LCH SA receives the new Select Member 
Form.\76\ To clarify this point, LCH SA proposes to add a final

[[Page 92987]]

paragraph to Section 5.11(c) to indicate that, until the Select Member 
Form update is effective, the Select Member will continue to be subject 
to the provisions of the CDS Clearing Documentation applying to any 
Non-Defaulting Clearing Member required to participate in Competitive 
Bidding for each Auction Package.
---------------------------------------------------------------------------

    \76\ Id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act requires 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.\77\ Under the Commission's Rules of Practice, the 
``burden to demonstrate that a proposed rule change is consistent with 
the Exchange Act and the rules and regulations issued thereunder . . . 
is on the self-regulatory organization [`SRO'] that proposed the rule 
change.'' \78\
---------------------------------------------------------------------------

    \77\ 15 U.S.C. 78s(b)(2)(C).
    \78\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
---------------------------------------------------------------------------

    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\79\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\80\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\81\
---------------------------------------------------------------------------

    \79\ Id.
    \80\ Id.
    \81\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------

    After carefully considering the Proposed Rule Change, the 
Commission finds that the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) of the Act \82\ and Rules 17Ad-22(e)(13) \83\ and 
(e)(18) \84\ thereunder, as described in detail below.
---------------------------------------------------------------------------

    \82\ 15 U.S.C. 78q-1(b)(3)(F).
    \83\ 17 CFR 240.17Ad-22(e)(13).
    \84\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Under Section 17A(b)(3)(F) of the Act, LCH SA's rules, among other 
things, must be ``designed to promote the prompt and accurate clearance 
and settlement of securities transactions . . . derivative agreements, 
contracts, and transactions . . . .'' \85\ Based on the Commission's 
review of the record, and for the reasons discussed below, LCH SA's 
changes are consistent with Section 17A(b)(3)(F) of the Act because 
they may help to expand LCH SA's provision of clearing services, 
contribute to the smooth operation of LCH SA's default auctions, help 
LCH SA better contain losses, and clarify the process Select Members 
use to make elections.
---------------------------------------------------------------------------

    \85\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Proposed Rule Change would potentially improve access to 
clearing for clients. Currently, Select Members may only provide 
clearing services to Affiliated Firms. The Proposed Rule Change would 
allow Select Members to provide clearing services to non-affiliated 
firms as well. Assuming Select Members begin offering clearing services 
to clients that are not Affiliated Firms, this change could expand the 
clearing services available to firms that seek to clear transactions as 
clients. Additionally, as noted above, certain potential Clearing 
Members are not positioned to provide Market Data or bids on products 
in default auctions, as currently required under LCH SA's Rule Book for 
General Members. These requirements could potentially act as barriers 
to these potential Clearing Members becoming Clearing Members. As such, 
LCH SA's proposed changes allowing Select Members to choose not to 
submit Market Data or participate in Competitive Bidding if their 
Financial Group's Group Total Margin Percentage remains below the 
Participation Threshold potentially may allow firms to join LCH SA as 
Select Members or current Select Members to provide clearing services 
for clients. This may also work to expand clearing services available 
to clients, which in turn potentially allows LCH SA to clear more 
trades. Importantly, the Proposed Rule Change does not alter LCH SA's 
fee grid, Risk Management Framework,\86\ or any other membership 
standards for Select Members.\87\ By foregoing changes to its tariffs 
(specifically the unlimited tariff and variable tariff) and liquidity 
margining, and thereby maintaining the current structure whereby a 
General Member may clear for its own account and its clients at less 
cost than a Select Member, LCH SA provides incentive for its twenty-two 
CDSClear General Members \88\ to remain General Members even though, 
under the proposed change, Select Members can clear for non-affiliated 
firms too. Further, under the Proposed Rule Change, a General Member 
would likely still have to participate in Competitive Bidding and 
submit Market Data due to its Group Total Margin Percentage.\89\ As 
such, these changes would promote the prompt and accurate clearance and 
settlement of securities transactions.
---------------------------------------------------------------------------

    \86\ Notice, 89 FR at 21580.
    \87\ For example, Select Members must still satisfy the 
membership requirements found in Section 2.2.1 of the LCH SA CDS 
Clearing Rule Book, the same as General Members. Pursuant to Section 
2.2.1, Select Members must, among other things, comply with 
applicable law relating to their status as a Clearing Member and the 
performance of their obligations pursuant to the CDS Clearing 
Documentation, be subject to supervision by Competent Authorities, 
meet minimum capital requirements, and satisfy a credit risk 
assessment. See LCH SA CDS Clearing Rule Book, Section 2.2.1.
    \88\ In total, CDSClear has twenty-seven members, five of which 
are Select Members. LCH, Member Search, https://www.lch.com/membership/member-search.
    \89\ LCH SA provided background and analysis related to the 
Select Membership model in confidential Exhibit 3.3 to the Proposed 
Rule Change, which LCH SA added to the Proposed Rule Change with 
Amendment No. 1.
---------------------------------------------------------------------------

    LCH SA also proposes changes that would contribute to the smooth 
operation of LCH SA's default auctions. As noted above, if there is an 
Event of Default, LCH SA shall auction off the defaulting Clearing 
Member's positions.\90\ Select Members currently must participate in 
these auctions to the extent the Cleared Transactions in the Auction 
Packages all belong to the Product Families set out in that Select 
Member's Product Family Form. However, sometimes Select Members do not 
actively trade in the Product Families selected on their Product Family 
Form, or they may not have the operational capacity to take part in 
default auctions. In LCH SA's experience, Select Members have required 
assistance managing default files and routinely request assistance 
addressing questions during fire drill exercises.\91\ The proposed 
changes allow some Select Members to choose whether they would like to 
participate in Competitive Bidding without regard to the content of 
Auction Packages and eliminate the concepts of Product Families and the 
Product Family Form. These proposed changes should allow LCH SA's 
default auction process to function more efficiently. The efficiency of 
these auctions potentially impacts LCH SA's ability to limit losses 
resulting from a Clearing Member default. Because losses from a 
Clearing Member default could disrupt LCH SA's ability to operate, this 
aspect of the Proposed

[[Page 92988]]

Rule Change also helps promote LCH SA's operations and therefore the 
prompt and accurate clearance and settlement of transactions.
---------------------------------------------------------------------------

    \90\ LCH SA CDS Clearing Rule Book, Appendix 1, Clause 2.1.
    \91\ Notice, 89 FR at 21582.
---------------------------------------------------------------------------

    At the same time, the Proposed Rule Change would require certain 
Select Members to participate in Competitive Bidding because of their 
Financial Group's Group Total Margin Percentage. This makes it more 
likely that LCH SA will have sufficient participation in its default 
auctions to successfully offload Auction Packages and ultimately 
continue operation through a Clearing Member default. By establishing a 
minimum level of participation, these proposed changes therefore would 
promote the efficiency of LCH SA's default auctions without necessarily 
undermining the efficacy of those auctions, thus promoting LCH SA's 
operations and therefore the prompt and accurate clearance and 
settlement of transactions.
    LCH SA's proposed changes related to price submissions by Select 
Members also help promote the prompt and accurate clearance and 
settlement of securities transactions. The Proposed Rule Change would 
allow some Select Members to choose whether to receive Price 
Requirement Files for relevant Trading Cities and become bound, in 
respect of the Price Requirement Files received for relevant Trading 
Cities only, to submit market data. Under the Proposed Rule Change, 
other Select Members would have to submit Market Data as a result of 
their Financial Group's Group Total Margin Percentage. By permitting 
and requiring Select Members to submit market data under certain 
circumstances, this aspect of the Proposed Rule Change could enhance 
the Market Data that LCH SA receives. Enhanced Market Data could, in 
turn, improve the accuracy of LCH SA's end-of-day prices, which could 
contribute to the accuracy of LCH SA's outputs, including margin 
amounts, resulting from these prices. LCH SA uses this Market Data to 
determine margin amounts and manage the risks associated with clearing 
and settling securities transactions. These risks, if not properly 
managed, could cause losses to LCH SA that compromise its ability to 
operate. As such the proposed changes related to participation in price 
contribution also promote the prompt and accurate clearance and 
settlement of transactions.
    LCH SA's proposed changes also clarify the process Select Members 
use to make elections through the Select Member Form. For example, the 
Proposed Rule Change notes that, under certain circumstances, Select 
Members may elect to submit Market Data and participate in Competitive 
Bidding through the Select Member Form. They can also nominate certain 
representatives through the Select Member Form. Relatedly, LCH SA's 
proposal would indicate how a Select Member could change its elections. 
The Proposed Rule Change would also provide details related to the 
timing of the effectiveness of updates to the Select Member Form under 
certain circumstances. By clarifying the process through which Select 
Members can make elections through the Select Member Form, LCH SA gives 
effect to its other proposed changes, which as described above, expand 
LCH SA's provision of clearing services, contribute to the smooth 
operation of LCH SA's default auctions, and help enhance Market Data 
that LCH SA receives. As such, the proposed changes related to the 
introduction of the Select Member Form promote the prompt and accurate 
clearance and settlement of transactions.
    Therefore, the Proposed Rule Change is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.\92\
---------------------------------------------------------------------------

    \92\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(13) Under the Act

    Rule 17Ad-22(e)(13) requires covered clearing agencies to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to ensure the covered clearing agency 
has the authority and operational capacity to take timely action to 
contain losses and liquidity demands and continue to meet its 
obligations by, at a minimum, requiring the covered clearing agency's 
participants and, when practicable, other stakeholders to participate 
in the testing and review of its default procedures, including any 
close-out procedures, at least annually and following material changes 
thereto.\93\
---------------------------------------------------------------------------

    \93\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

    As discussed above, the Proposed Rule Change would make 
participating in Competitive Bidding and default management drills 
elective for certain Select Members. At the same time, certain Select 
Members would still be required to participate in Competitive Bidding, 
specifically if their Financial Group's Group Total Margin Percentage 
exceeds the specified threshold. As discussed above, in practice, this 
means that any Clearing Member that is part of the top six Financial 
Groups at LCH SA will be required to participate in Competitive Bidding 
and provide Market Data, even if that Clearing Member is a Select 
Member. This will help ensure that LCH SA will have sufficient 
participation in its default auctions to successfully offload Auction 
Packages and ultimately continue operation through a Clearing Member 
default. By establishing a minimum level of participation, these 
proposed changes therefore ensure LCH SA has the authority and 
operational capacity to take timely action to contain losses and 
liquidity demands and continue to meet its obligations.
    Additionally, under the Proposed Rule Change, certain Clearing 
Members and Applicants would still be required to participate in 
default management drills. Specifically, a Clearing Member Applicant 
seeking Select Membership and seeking to elect to participate in 
Competitive Bidding would be required to participate in (and satisfy 
LCH SA's requirements with respect to the carrying out of) regular fire 
drills run by LCH SA from time to time in accordance with the Rule 
Book, or demonstrate that it has an associated entity or an LCH 
Approved Outsourcing Agent that can successfully do so. Similarly, 
Select Members that LCH SA reasonably believes will breach the 
Participation Threshold for sixty consecutive Clearing Days will also 
need to participate in testing to assess their capacity and ability to 
participate in Competitive Bidding. Ultimately, this will provide LCH 
SA with the information it needs to ensure it has the operational 
capacity to take timely action to contain losses and liquidity demands 
and continue to meet its obligations through its default management 
process.
    Proposed changes that improve a clearing agency's ability to 
conduct a successful auction have been found to be consistent with Rule 
17Ad-22(e)(13). For example, a proposed change to except an auction 
participant from a minimum bid requirement when the auction participant 
does not have the operational capacity to clear contracts in the 
relevant auction lot is consistent with the Act, because it improved 
the clearing agency's auction process by helping to ensure that bids 
received in an auction are provided by members most able to value and 
risk manage the defaulter's portfolio.\94\ As discussed above, the 
Proposed Rule change would allow certain Select Members to choose to 
participate in Competitive Bidding and would require those Select 
Members participating in Competitive Bidding to undergo default 
management drills. This change would allow certain Select Members who 
do not have the

[[Page 92989]]

operational capacity to participate in the default auction process to 
choose not to participate in an auction rather than requiring them to 
place a bid.\95\ It would also work to identify, manage, and avoid 
issues LCH SA has encountered with its Select Members in navigating 
fire drill exercises.\96\ Thus, these aspects of the Proposed Rule 
Change would work to improve LCH SA's auction process.
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    \94\ Securities Exchange Act Release No. 98147 (Aug. 16, 2023), 
88 FR 57164, 57165-66 (Aug. 22, 2023) (File No. SR-ICC-2023-009) 
(``Order'').
    \95\ Notice, 89 FR at 21579.
    \96\ Id. at 21582.
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    Therefore, the Proposed Rule Change is consistent with the 
requirements of Rule 17Ad-22(e)(13) under the Act.\97\
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    \97\ 17 CFR 240.17Ad-22(e)(13).
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C. Consistency With Rule 17Ad-22(e)(18) Under the Act

    Rule 17Ad-22(e)(18) requires covered clearing agencies to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to establish objective, risk-based, and 
publicly disclosed criteria for participation, which permit fair and 
open access by direct and, where relevant, indirect participants and 
other financial market utilities.\98\ As noted above, the Proposed Rule 
Change would expand access to LCH SA and facilitate fair and open 
access to LCH SA by indirect participants by allowing Select Members to 
provide clearing services to non-affiliated firms rather than just to 
Affiliated Firms. The Proposed Rule Change also would establish 
objective and publicly-disclosed criteria for participation by 
Applicants wishing to be Select Members, with respect to participation 
in competitive bidding, as discussed above.
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    \98\ 17 CFR 240.17Ad-22(e)(18).
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    Therefore, the Proposed Rule Change is consistent with the 
requirements of Rule 17Ad-22(e)(18) under the Act.\99\
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    \99\ 17 CFR 240.17Ad-22(e)(18).
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IV. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1 and Partial Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Exchange Act,\100\ to approve the Proposed Rule Change prior to the 
30th day after the date of publication of notice of the filing of 
Amendment No. 1 and Partial Amendment No. 1 in the Federal Register. As 
discussed above, Amendment No. 1 added a requirement that a Select 
Member participate in Competitive Bidding in default auctions and 
contribute end-of-day prices should its Financial Group's margins 
exceed a predetermined threshold over a designated time, and Partial 
Amendment No. 1 fixes certain errors in Amendment No. 1. These 
amendments do not otherwise change the purpose of or statutory basis 
for the Proposed Rule Change.
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    \100\ 15 U.S.C. 78s(b)(2).
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    For the reasons discussed above, the Commission finds that Proposed 
Rule Change, as modified by Amendment No. 1 and Partial Amendment No. 
1, is consistent with the requirement that LCH SA's rules be designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions under Section 17A(b)(3)(F) of the Exchange 
Act.\101\ Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Exchange Act,\102\ to approve the Proposed Rule 
Change, as modified by Amendment No.1 and Partial Amendment No. 1, on 
an accelerated basis, pursuant to Section 19(b)(2) of the Exchange 
Act.\103\
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    \101\ 15 U.S.C. 78q-1(b)(3)(F).
    \102\ 15 U.S.C. 78s(b)(2).
    \103\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change, as modified by Amendment No. 1 and Partial 
Amendment No. 1, is consistent with the requirements of the Act, and in 
particular, Section 17A(b)(3)(F) of the Act \104\ and Rules 17Ad-
22(e)(13) \105\ and (e)(18) thereunder.\106\
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    \104\ 15 U.S.C. 78q-1(b)(3)(F).
    \105\ 17 CFR 240.17Ad-22(e)(13).
    \106\ 17 CFR 240.17Ad-22(e)(18).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the Proposed Rule Change, as modified by Amendment No. 1 and 
Partial Amendment No. 1 (SR-LCH SA-2024-002), be, and hereby is, 
approved on an accelerated basis.\107\
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    \107\ In approving the Proposed Rule Change, the Commission 
considered the proposal's impacts on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\108\
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    \108\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27476 Filed 11-22-24; 8:45 am]
BILLING CODE 8011-01-P
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