Via CFTC Portal

1 July 2022

Mr Christopher J. Kirkpatrick

Office of the Secretariat

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street NW

Washington, DC 20581

Re: Proposed amendments to LCH SA CDS Clearing Rules – Itraxx Australia and WWR margin instability

Dear Mr. Kirkpatrick,

Pursuant to CFTC regulation §40.6(a), LCH SA (“LCH SA”), a derivatives clearing organization (“DCO”) 

registered with the Commodity Futures Trading Commission (the “CFTC”), is submitting for selfcertification the proposed amendments to its CDS Clearing framework to enhance and expand its 

clearing services (the “Proposed Rule Change”).1

The Proposed Rule Change is expected to be effective by early September, 2022 however, in no event,

will either be implemented earlier than 10 business days after the proposed changes are filed with the 

CFTC.

The text of the Proposed Rule Change is attached hereto as Appendix.

Part I: Explanation and Analysis

LCH SA is proposing to revise its CDS Clearing risk methodology, rules, procedures and supplement to (i) 

permit the clearing of Markit iTraxx® Australia indices and the associated single name constituents and 

(ii) provide a remediation to one independent model validation recommendation regarding the Wrong 

Way Risk (“WWR”) margin instability.

Part II: Description of Rule Changes

As specified in Appendix, the purpose of the Proposed Rule Change is to (i) permit the clearing of Markit 

iTraxx® Australia indices and the associated single name constituents and (ii) provide the remediation to 

the WWR margin instability as follows :

1 Capitalized terms used but not defined herein shall have the meaning specified in LCH SA’s existing CDS 

Clearing Rule Book or Clearing Supplement.
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1. Proposed amendments to permit the clearing of Markit iTraxx® Australia indices

a) Amendments to the Clearing Supplement

The Clearing Supplement has been amended in order to include the relevant provisions to allow the 

clearing of the new Markit iTraxx® Australia indices.

In Part B of the Clearing Supplement, Section 1.2 (Terms defined in the CDS Clearing Supplement) has 

been amended to include a new sub-paragraph (a) to the definition of an “Index Cleared Transaction 

Confirmation” in order to make a reference to the form of confirmation which incorporates the iTraxx® 

Asia/Pacific Untranched Standard Terms Supplement. As a consequence, the following sub-paragraphs 

have been renumbered. 

Section 2.2 (Index Cleared Transaction Confirmation) of Part B of the Clearing Supplement has been also 

amended to make appropriate references to any Index Cleared Transaction that is a Markit iTraxx 

Australia Index in paragraphs (a) (i), (b) (i), (c)(i) and (f)(i).

b) Proposed amendments to the CDSClear Risk Methodology documentation

LCH SA is proposing to amend its CDSClear Risk methodology documentation under Section 2.1.1.1 to 

proceed with the removal of the interest rate curve name used with the ISDA pricer that doesn’t need 

to be clearly specified in a such risk documentation. The objective now is to refer to the original website 

when the market moves to the new Risk Free Rates.

The second proposed change specified under section 3.4.5 is intending to add iTraxx Australia to the list 

of indices on which index basis packages can be cleared.

As there are financial single name constituents in the iTraxx Australia index family, positions on this index 

will be subject to the Wrong Way Risk margin. This coupled with the need to address a recommendation 

raised by the independent risk model validation on the instability of the Wrong Way Risk margin 

component result in LCH SA also proposing to amend the provisions under section 3.8 about the Wrong 

Way Risk margin to introduce the following updates:

- one is the introduction of the shocks applied to Australian entities, alongside the ones given for existing 

products.

- a second one is to describe the way the shocks on indices are defined, being derived directly from the 

shocks applied on constituents. This would apply to iTraxx Australia as well as other indices containing 

financial names, although no financial impact is expected.

- an additional change, specifying that the contribution to the spread margin used to derive the 

spread_SM under sections 3.8.1.5 and 3.8.1.6 is now considering the contribution of a single tenor, 

instead of the joint contribution of all tenors on a given product, to address the instability observed with 

curve trades.

- the last update is to introduce iTraxx Australia alongside other regions under section 3.8.1 when 

aggregating Wrong way and Right way across regions.
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Further, the liquidity charge section is updated, to specify that iTraxx Australia will be used for hedging 

and would define an additional sub-portfolio when considering liquidation costs.

Finally, LCH SA is also taking this opportunity to make changes for consistency purposes by removing 

from its CDSClear risk methodology documentation any reference to IBOR curves.

Part III: Core Principle Compliance

LCH SA has reviewed the Proposed Rule Changes against the requirements of Commission’ regulations 

and DCO Core Principles, and finds that these changes will continue to comply with all the requirements 

and standards therein and in particular with the following principles and Commission’s regulations 

including, but not limited to § 30.13 and 39.27.

DCO Core Principle D – Risk management. CFTC Regulation 39.13 requires a DCO to ensure that it 

possesses the ability to manage the risks associated with discharging the responsibilities of the 

derivatives clearing organization through the use of appropriate tools and procedures. From a financial 

risk management and margin requirements, clearing of the new iTraxx Australia index and the associated 

single name constituents would not require changes to the existing margin methodology, default 

management policies and procedures and operational process as the proposed products do not include 

any new risk factor compared to the Corporates and Financials indices or single names already cleared 

by LCH SA CDSClear service. LCH SA will also apply its existing clearing arrangements and related financial 

safeguards, protections and risk management procedures procedures for iTraxx Australia transactions

to be cleared in accordance with the requirements of Core Principle D and § 39.13.

DCO Core Principle R – Legal risk considerations. LCH SA has determined that the Proposed Rule 

Changes are consistent with the requirements of CFTC Regulation 39.27 to remain in good standing at 

all times in the relevant jurisdictions and to operate pursuant to a well-founded, transparent, and 

enforceable legal framework that addresses each aspect of its activities. As described above, the 

CDSClear framework for indices and single names CDS was modified to take into account the new 

product iTraxx® Australia indices and the associated single name constituents and provide for a clear and 

transparent legal basis for LCH SA's CDS Clearing rules which is fully consistent with the requirements of 

Core Principle R and § 39.27.

Part IV: Public Information

LCH SA has posted a notice of pending certifications with the CFTC and a copy of the submission on LCH’s 

website at: https://www.lch.com/resources/rulebooks/proposed-rule-changes

Part V: Opposing Views

There were no opposing views expressed to LCH SA by governing board or committee members, 

members of LCH SA that were not incorporated into the rule.

Certification

LCH SA hereby certifies to the CFTC, pursuant to the procedures set forth in the Commission regulation 

§ 40.6, that attached changes submission complies with the Commodity Exchange Act, as amended, 

and the regulations promulgated there under.
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Should you have any questions please contact me.

Francois Faure

Chief Compliance Officer

+33 1 70 37 65 96

françois.faure@lseg.com
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APPENDIX

Proposed Rule changes to LCH SA CDS Clearing framework:

1) CDS Clearing Supplement

2) LCH SA Reference Guide: CDS Margin Framework - V3.13 (to be filed separately with the CFTC 

under Confidential Treatment request