Document ID: SEC-2017-0007-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: LCH SA
Posted Date: 2017-01-05T05:00Z

[Federal Register Volume 82, Number 3 (Thursday, January 5, 2017)]
[Notices]
[Pages 1398-1415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31940]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79707; File No. 600-36]

Self-Regulatory Organizations; LCH SA; Order Granting Application 
for Registration as a Clearing Agency and Request for Exemptive Relief

December 29, 2016.

I. Introduction

    On July 5, 2016, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission'') a Form CA-1 seeking 
registration as a clearing agency under Section 17A of the Securities 
Exchange Act of 1934 \1\ (``Exchange Act'' or ``Act'') and Rule 17Ab2-1 
thereunder.\2\ LCH SA is seeking to provide central counterparty 
(``CCP'') services for U.S. persons for security-based swaps, in 
particular single-name credit default swaps (``CDS''), through its 
CDSClear business unit.
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    \1\ 15 U.S.C. 78q-1.
    \2\ 17 CFR 240.17Ab2-1.
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    Along with its Form CA-1, LCH SA submitted a request for exemptive 
relief (i) from Sections 5 and 6 of the Act \3\ with respect to its 
end-of-day pricing process; (ii) from Section 19(b) of the Act \4\ and 
Rule 19b-4 thereunder \5\ with respect to filing certain proposed rule 
changes relating to its Non-U.S. Business (as defined below); (iii) 
from the requirements set forth in the introductory paragraph of Rule 
17Ad-22(c)(2) and from Rule 17Ad-22(c)(2)(iii) \6\ with respect to its 
annual audited financial statements; and (iv) Rule 17a-22 \7\ with 
respect to requirements to provide the Commission with physical copies 
of certain materials.\8\ Notice of the application and request for 
exemptive relief was published in the Federal Register on October 3, 
2016 (``Notice'').\9\ The Commission received no comments on the 
Notice. This Order approves LCH SA's application for registration as a 
clearing agency and grants LCH SA's request for exemptive relief.
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    \3\ 15 U.S.C. 78e and 78f.
    \4\ 15 U.S.C. 78s(b).
    \5\ 17 CFR 240.19b-4.
    \6\ 17 CFR 240.17Ad-22(c)(2) and 17 CFR 240.17Ad-22(c)(2)(iii).
    \7\ 17 CFR 240.17a-22.
    \8\ See Letter from Christophe H[eacute]mon, CEO, LCH SA, to 
Brent J. Fields, Secretary, Securities and Exchange Commission 
(August 9, 2016) (hereinafter ``Request for Exemptive Relief'').
    \9\ Securities Exchange Act Release No. 34-78941 (September 27, 
2016), 81 FR 68074 (October 3, 2016) (File No. 600-36).
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II. Overview of LCH SA's Application

    LCH SA maintains its principal office in Paris, France and is a 
wholly-owned subsidiary of LCH.Clearnet Group Limited (``LCH 
Group'').\10\ LCH SA is regulated as a bank and as a CCP under French 
law by the Autorit[eacute] des March[eacute]s Financiers, 
Autorit[eacute] de Contr[ocirc]le Prudentiel et de R[eacute]solution, 
and Banque de France.\11\ In addition, LCH SA is a CCP authorized to 
offer clearing services in the European Union pursuant to the European 
Market Infrastructure Regulation (``EMIR'') and is also registered with 
the U.S. Commodity Futures Trading Commission (``CFTC'') as a 
derivatives clearing organization (``DCO'') to provide clearing 
services for broad-based index CDS to U.S. members and their 
customers.\12\
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    \10\ See LCH SA Form CA-1, Exhibit A, 1.
    \11\ See LCH SA Form CA-1, Exhibit J-3 (CDSClear Service 
Description), Section 2.3.
    \12\ Id.
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    In addition to LCH SA's CDSClear service, LCH SA offers clearing 
services for derivatives, exchange-traded futures and options, cash 
equities, fixed income, and energy instruments through three lines of 
CCP services: EquityClear, CommodityClear, and RepoClear.\13\ These 
three services constitute LCH SA's non-U.S. business in that they 
operate entirely outside the United States and do not have any U.S. 
clearing members (``Non-U.S. Business''). LCH SA's CDS clearing 
services are entirely located in the CDSClear business unit. LCH SA's 
Non-U.S. Business does not provide CDS services. The following sections 
describe relevant portions of LCH SA's Form CA-1 application.\14\
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    \13\ See Request for Exemptive Relief at 4.
    \14\ The titles of the cited rules specify whether the rules are 
associated with CDSClear, LCH SA, or others.
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A. Membership Standards

    LCH SA has established requirements concerning membership, which 
include standards for financial responsibility, operational capacity, 
business experience, and creditworthiness.\15\ Members must comply with 
these requirements on an ongoing basis.\16\
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    \15\ See LCH SA Form CA-1, Exhibit E-4 (CDSClear CDS Clearing 
Rule Book), Section 2.2.1 (hereinafter, ``CDSClear Rulebook'').
    \16\ See id. at Section 2.2.2.
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    With respect to financial responsibility, LCH SA's CDSClear 
Rulebook contains net capital requirements that, among other things, 
establish minimum net capital requirements for members that are 
scalable based on the risk the members introduce to LCH SA. To assess a 
member's creditworthiness, LCH SA uses an internal credit scoring 
framework to determine the member's credit risk based on financial and 
qualitative factors.\17\
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    \17\ See id. at Article 2.2.4.1.
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    Regarding operational capacity and business experience 
requirements, a member must be able to demonstrate that it has 
sufficient expertise in clearing activities. This demonstration 
includes, among other things, that a member's systems and operations 
are sufficiently reliable and capable of supporting the performance of 
the member in meeting its obligations (including having sufficient 
facilities, equipment, personnel, hardware and software systems). 
Similarly, any prospective member of LCH SA must also demonstrate that 
it has appropriate banking arrangements.\18\
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    \18\ See id. at Section 2.2.1.
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    LCH SA ensures ongoing compliance with membership obligations by 
monitoring its members and imposing several reporting obligations on 
them. LCH SA monitors certain indicators on an ongoing basis, including 
but not limited, financial ratios, operational capabilities, external 
ratings, and market implied ratings. In addition, each member is 
required to notify LCH SA in writing of material changes to itself or 
its operations, such as changes in the direct or indirect controlling 
ownership, reduction in capital of more than 10%, the occurrence of 
insolvency proceedings, the default of any of the member's customers, 
and any change to the member's systems or operations that materially 
impact the member's ability

[[Page 1399]]

to meet its obligations as a member. Furthermore, members are required 
to provide LCH SA with audited financial statements on an annual basis, 
as well as interim financial statements during the course of the 
year.\19\
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    \19\ See LCH SA Form CA-1, Schedule A at 9; see also CDSClear 
Rulebook, Sections 2.3.1 and 2.3.2.
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B. Capacity To Enforce Rules and Discipline Members in Accordance With 
Fair Procedures

    LCH SA has established CDSClear rules and procedures to monitor for 
breaches of its membership standards and rules, enforce its rules, and 
discipline members. The members are required to notify LCH SA of 
certain breaches relating to financial or operational capacity, and are 
required to submit to inspections and audits by LCH SA.\20\ In the 
event that a member breaches its obligations, LCH SA may impose certain 
risk-reducing measures, including restricting a member's ability to 
submit additional transactions for clearing, or impose disciplinary 
sanctions, such as fines or public censure.\21\ LCH SA also may suspend 
or terminate the membership in certain circumstances, such as upon a 
member's material breach of its obligations, upon suspension or 
termination of a member's membership in another clearing house, or upon 
the occurrence of an event that materially impacts the member's ability 
to meet its obligations under relevant membership agreements.\22\
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    \20\ See id. at Section 2.3.3.
    \21\ See id. at Section 2.4.1; and LCH SA Form CA-1, Exhibit E-
6.8 (CDSClear CDS Clearing Procedures, Section 8: Disciplinary 
Proceedings) Section 8.4.
    \22\ See CDSClear Rulebook, Article 2.4.1.1.
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    LCH SA also has established pre-defined procedures for member 
discipline and for affording a member the opportunity to dispute a 
decision by LCH SA to impose disciplinary measures. These disciplinary 
procedures require investigations of an alleged breach and written 
notifications to a member regarding the details of the investigation 
and an opportunity for the member to object. Such procedures also 
provide members with the right to bring to the attention of LCH SA 
potential conflicts of interest involving investigative personnel 
appointed by LCH SA to perform an investigation of a member's alleged 
breach. Following an investigation, LCH SA is required to provide a 
written report of its findings to the member and, where LCH SA has 
determined to impose disciplinary proceedings, form a disciplinary 
committee and provide the member the opportunity to respond to the 
report. The disciplinary committee is required to provide the member 
with notice of its decision and any sanctions imposed. Members are 
permitted to dispute the decision and imposition of sanctions, and to 
submit such dispute to arbitration or litigation, as applicable.\23\
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    \23\ See LCH SA Form CA-1, Exhibit E-6.8 (CDSClear CDS Clearing 
Procedures, Section 8: Disciplinary Proceedings).
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    In addition, LCH SA has established procedures to notify a 
membership applicant if the applicant is denied membership. These 
procedures require LCH SA to communicate the reason(s) for such denial 
by registered mail to the applicant.\24\
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    \24\ See LCH SA Form CA-1, Exhibit E-6.1 (CDSClear CDS Clearing 
Procedures, Section 1: Membership).
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C. Governance--Fair Representation and Operational and Risk 
Transparency

    LCH SA is governed by its Board of Directors (``Board''), which 
determines LCH SA's business strategies and oversees implementation of 
those strategies. The Terms of Reference of LCH SA's Board of Directors 
require the Board to be composed of between three and eighteen 
directors and must include a non-executive chair, executive directors, 
independent \25\ non-executive directors, at least one director 
representing the London Stock Exchange Group plc (``LSEG''),\26\ and 
user directors, among other categories of directors.\27\
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    \25\ Independent director means a director, who satisfies 
applicable regulatory requirements regarding independent directors 
and who is appointed in accordance with the Nomination Committee 
terms of reference. See LCH SA Form CA-1, Exhibit A-2 (LCH SA Terms 
of Reference of the Board of Directors), Article 2. Under EMIR, LCH 
SA is required to maintain certain minimum number of members of the 
board that are independent and EMIR defines an independent member of 
the board as ``a member of the board who has no business, family or 
other relationship that raises a conflict of interest regarding the 
CCP concerned or its controlling shareholders, its management or its 
clearing members, and who has had no such relationship during the 
five years preceding his membership of the board.'' See Article 27 
and Article 2(28), Regulation (EU) No. 648/2012 of the European 
Parliament and of the Council of 4 July 2012 on OTC derivatives, 
central counterparties and trade repositories, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32012R0648. In 
addition, in determining whether a person is fit for appointment as 
an independent director, the Nomination Committee will consider 
whether such person is independent in character and judgment, and 
whether there are relationships or circumstances (including any with 
LSEG or any of its subsidiary undertakings and/or with any 
significant user or venue shareholder) which are likely to affect, 
or could appear to affect, such person's judgment.'' See 
LCH.Clearnet Group Limited Terms of Reference of the Nomination 
Committee of the Board of Directors, Article 5.3, available at 
http://www.lch.com/documents/731485/762675/qccp-status-lch-9+feb-2015.pdf/fa48a090-d90c-4193-91d8-52f8068a4c56.
    \26\ As described in the Notice, LSEG is a majority owner of LCH 
Group.
    \27\ See LCH SA Form CA-1, Exhibit A and Exhibit A-2 (LCH SA 
Terms of Reference of the Board of Directors), Article 3. A user 
director is ``a director who is nominated by a shareholder of [LCH 
Group] which is a user or who is otherwise connected to such user 
shareholder by virtue of his employment or directorship.'' Id. at 
Article 2. For purposes of the definition of a ``user director,'' 
``users'' include inter-dealer brokers, clearing members, financial 
institutions or investors which are buy-side, indirect `users', 
including asset managers. See LCH SA Form CA-1, Exhibit E-2 (Special 
Resolution of LCH Group), Article 1.1. However, the category of user 
directors does not include customer directors, as ``customer'' is 
used under the CFTC rules.
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    LCH SA has also established various Board-level committees to 
facilitate the Board's work. Specifically, LCH SA's Board has an Audit 
Committee tasked with determining whether LCH SA's management has put 
in place adequate internal control systems and assisting the Board in 
reviewing LCH SA's audited financial statements, regulatory compliance, 
risk governance framework, internal control environment and information 
security and business continuity plans.\28\ The Audit Committee is made 
up of at least four non-executive directors of the Board, at least 
three of whom must be independent.\29\ Additionally, one member of the 
Audit Committee must be a member of the Risk Committee (described 
below), one must be a user director and one must be recommended or 
approved by LSEG so long as LSEG controls at least 20% of the votes of 
LCH Group.\30\
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    \28\ See LCH SA Form CA-1, Exhibit A-5 (LCH SA Terms of 
Reference of the Audit Committee of the Board of Directors), Section 
1.
    \29\ Id. at Section 2.1.
    \30\ Id.
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    As noted above, LCH SA's Board also has a Risk Committee to 
consider LCH SA's risk appetite, tolerance and strategy. The Risk 
Committee reviews on an annual basis LCH SA's operational risk policy 
and regularly reviews reports prepared by LCH SA's risk management 
department.\31\ Representatives of members and customers are directly 
represented on the Risk Committee \32\ and are chosen based on several 
factors, including asset classes cleared, volume cleared, contribution 
to relevant default funds and whether they have previously been a 
voting member of the Risk Committee.\33\ The remainder of the committee 
is made up of independent, non-executive directors. The chairman of the 
Risk Committee must be an

[[Page 1400]]

independent, non-executive director.\34\ Management and additional 
member representatives may be invited to attend Risk Committee meetings 
in a non-voting capacity.\35\
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    \31\ See LCH SA Form CA-1, Exhibit A-4 (LCH SA Terms of 
Reference of the Risk Committee of the Board of Directors).
    \32\ Id. at Section 1.1.3.
    \33\ Id. at Section 1.7.
    \34\ Id. at Section 1.1.1.
    \35\ Id. at Sections 1.2 and 1.3.
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    In addition to these internal governance structures, LCH SA also 
has established a consultative process for considering external views 
regarding changes to its rules, as set forth in its CDSClear Rulebook, 
among other material documentation.\36\ When LCH SA is considering 
changes to rules that apply to its clearing members, it must first 
consult with legal, risk, operational and/or other committees that it 
establishes, in which clearing members may request to participate.\37\ 
If LCH SA determines to pursue the changes after this initial 
consultation, it must issue a proposal to all clearing members, 
providing at least 14 days for clearing members to comment.\38\ 
Following the completion of the comment period, LCH SA may publish the 
new rule, for effectiveness no sooner than two days after its 
publication, presuming LCH SA has complied with all other regulatory 
requirements for changing its rules.\39\
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    \36\ See CDSClear Rulebook, Article 1.2.2. The consultative 
process applies to changes in CDS Clearing Documentation, which 
includes CDSClear's CDS Admission Agreement, CDS Clearing Rules, CDS 
Clearing Supplement Documents, Index Cleared Transaction 
Confirmation and Single Name Cleared Transaction Confirmation, among 
other documents, as each is individually defined in Section 1.1.1 of 
the CDSClear Rulebook.
    \37\ See id. at Article 1.2.2.2.
    \38\ Id. The consultation process is not required, however, for 
certain limited, technical, or administrative changes; changes 
required to comply with applicable laws; or changes necessary to 
manage risks under certain extreme market developments. See CDSClear 
Rulebook, Article 1.2.2.4.
    \39\ See CDSClear Rulebook, Article 1.2.2.3.
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    Furthermore, LCH SA must publish and keep updated on its Web site 
its CDSClear Rulebook, as well as other material rules and other 
documents concerning CDSClear services.\40\ Similarly, LCH SA must 
publish proposals and notices concerning any changes to the provisions 
of these documents,\41\ as well as a current schedule of fees.\42\
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    \40\ See CDSClear Rulebook, Section 1.2.3.
    \41\ See id. at Section 1.2.3.
    \42\ See id. at Article 1.2.6.1.
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D. Safeguarding of Securities and Funds and Financial Resources

i. Financial Resources
    LCH SA employs a risk-based margin methodology specific to its 
CDSClear service to calculate its exposures to CDSClear members and to 
set initial margin requirements.\43\ Specifically, LCH SA uses a Value 
at Risk (``VaR'') model to calculate member initial margin requirements 
sufficient to cover losses under normal market conditions with a 99.7% 
confidence interval.\44\ This model takes into account a variety of 
risks, including changes to credit spreads, recovery rates, and 
interest rates,\45\ and is reviewed on a monthly basis via back testing 
and stress testing (including reporting of the results of such review 
to risk management personnel). LCH SA performs an independent model 
validation annually, which includes a review of the parameters and 
assumptions that underlie the model by qualified and independent 
personnel. LCH SA imposes additional margin requirements on members to 
address position concentrations, wrong way risk, and illiquid positions 
over and above that calculated pursuant to its VaR model.\46\ LCH SA 
also requires additional margin from members with lower internal credit 
scores, as well as for those members whose scores deteriorate or fall 
below a certain threshold.\47\ LCH SA requires each member to post 
collateral to satisfy its margin requirement, which allows LCH SA to 
manage its risk exposure. LCH SA limits eligible collateral to cash and 
securities with low credit, liquidity, and market risk; as a further 
precaution, LCH SA applies haircuts to collateral posted in the form of 
securities.\48\ In addition to its initial margin requirements, to 
manage the risk of price fluctuations occurring in a member's open 
position, LCH SA and members are required to make cash payments to meet 
a variation margin requirement.\49\
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    \43\ See LCH SA Form CA-1, Exhibit H-1 (LCH SA Audited Financial 
Statements for the Year Ended 31 December 2015) at 22.
    \44\ Id.
    \45\ See LCH SA Form CA-1, Exhibit E-6.2 (CDSClear CDS Clearing 
Procedures, Section 2: Margin and Price Alignment Interest).
    \46\ Id.
    \47\ See id. at 20 and LCH SA Form CA-1, Exhibit J-3 (CDSClear 
Service Description), Section 9.1.
    \48\ See CDSClear Rulebook, Articles 4.2.6.3 and 4.2.6.4; see 
also LCH SA Form CA-1, Exhibit E-6.3 (CDSClear CDS Clearing 
Procedures Section 3: Collateral and Cash Payment), Section 3.9.
    \49\ See LCH SA Form CA-1, Exhibit H-1 (LCH SA Audited Financial 
Statements for the Year Ended 31 December 2015), 20; see also 
CDSClear Rulebook, Section 4.2.5 and LCH SA Form CA-1, Exhibit E-6.2 
(CDSClear CDS Clearing Procedures, Section 2: Margin and Price 
Alignment Interest).
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    To further augment its ability to address a default, LCH SA has 
established a mutualized default fund dedicated to the CDSClear 
service. This fund is maintained separately from the default funds for 
LCH SA's other services.\50\ The default fund is only available for use 
to cover losses as a result of, and following, an event of default with 
respect to a CDSClear member. LCH SA sizes the default fund to cover 
the theoretical losses associated with the default of the two CDSClear 
participant families to which LCH SA has the largest exposures in 
extreme but plausible market conditions, plus an additional buffer.\51\ 
Each CDSClear member is required to contribute to the default fund in 
an amount that is the greater of the CDSClear member's proportionate 
share of the total CDSClear default fund based on the margin 
requirements related to positions held in the CDSClear service, or the 
minimum contribution of [euro]10 million.\52\ LCH SA calibrates its 
CDSClear default fund, and CDSClear member default fund requirements, 
on a monthly basis.\53\ LCH SA's Risk Committee reviews results of 
stress testing related to the CDSClear default fund on at least a 
quarterly basis.\54\
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    \50\ See CDSClear Rulebook, Article 4.4.1.1.
    \51\ See id. at Articles 4.4.1.1 and 4.4.1.2.
    \52\ See id. at Article 4.4.1.3.
    \53\ See LCH SA Form CA-1, Exhibit J-3 (CDSClear Service 
Description), Section 11.1.
    \54\ See LCH SA Form CA-1, Exhibit A-4 (LCH SA Terms of 
Reference of the Risk Committee of the Board of Directors), Section 
9.1.
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ii. Collateral Policy and Investment of Collateral
    LCH SA restricts the types of collateral that may be provided by 
members to satisfy their margin and default fund requirements to cash 
(in Euros), foreign exchange (restricted to U.S. Dollars and Pound 
Sterling), liquid sovereign debt instruments issued by governments in 
Western Europe (specifically, France, Belgium, Portugal, the United 
Kingdom, Italy, Spain, Germany, and the Netherlands) and the United 
States, as well as equities that are part of the Euro Stoxx 50 Index, 
and applies haircuts to all collateral received from members except 
cash.\55\ LCH SA has established an investment risk policy to govern 
the management of cash collateral posted by members to satisfy their 
margin and default fund requirements. The investment risk policy 
provides that its objective is to ensure that cash collateral is 
invested securely by, among other things, requiring that investments be 
made with counterparties that meet certain minimum credit standards 
(based on LCH SA's internal credit assessment of the counterparty's 
financial condition

[[Page 1401]]

and operational capacity).\56\ Furthermore, LCH SA restricts the types 
of investments of collateral it is permitted to make by allowing cash 
deposits and purchases of securities, where such securities are not 
backed by certain governments, to be restricted to an overnight term 
only.\57\
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    \55\ See LCH SA Form CA-1, Exhibit E-6.3 (CDSClear CDS Clearing 
Procedures Section 3: Collateral and Cash Payment).
    \56\ See LCA SA Form CA-1, Exhibit H-1 (LCH SA Audited Financial 
Statements for the Year Ended 31 December 2015), 20.
    \57\ See LCH Group Risk Management Policy: Investment Risk.
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iii. Default Management, Loss Allocation, and Recovery
    To manage losses incurred in the event of a member default, LCH 
SA's default management process sets forth the steps LCH SA would take 
in the event of such an occurrence.\58\ Upon the declaration of an 
event of default, LCH SA's default management process begins to 
minimize losses and disruption by attempting (i) to hedge against 
market risk, (ii) to transfer customer positions to non-defaulting 
members, and (iii) to dispose of the defaulting member's portfolio 
through a competitive auction process--all within a five-business-day 
period.\59\ The only financial resources or recovery tools available to 
cover losses resulting from a CDSClear member's default are those 
specified in the CDSClear default waterfall.\60\
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    \58\ See CDSClear Rulebook, Appendix 1 ``CDS Default Management 
Process'').
    \59\ See LCH SA Form CA-1, Schedule A, 10-11; see also CDSClear 
Rulebook, Appendix 1, Section 2.1.
    \60\ See CDSClear Rulebook, Section 4.4.1.
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    Under the CDSClear default waterfall, the defaulting CDSClear 
member's initial margin, variation margin, and additional margins are 
first used to cover losses. If these resources are insufficient to 
cover the losses, the defaulting CDSClear member's default fund 
contribution is applied. To the extent that losses are still not 
covered, LCH SA would utilize its own capital (in the amount 
established in the CDSClear default waterfall pursuant to the CDSClear 
Rulebook) to cover remaining losses. If losses exceed the financial 
resources used up to this point, LCH SA may then access the CDSClear 
default fund contributions of non-defaulting CDSClear members and also 
may impose additional default fund contribution assessments against 
non-defaulting CDSClear members. If these pre-funded resources and 
assessments are insufficient to cover losses within a five business-day 
period, LCH SA may impose, on a pro rata basis, reductions in daily 
settlement payments owed to non-defaulting members (``Variation Margin 
Haircutting''), subject to certain limits. The entire default 
management process, including the use of Variation Margin Haircutting, 
is intended to be completed within five business days following the 
declaration of a default.\61\ At any time during the default management 
process, if LCH SA determines that it would not have sufficient 
resources to meet obligations arising from the default auction or 
auctions in accordance with the default waterfall, LCH SA must early 
terminate all open contracts and proceed to wind down the CDSClear 
service pursuant to the terms set forth in the CDSClear Rulebook.\62\
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    \61\ See LCH SA Form CA-1, Exhibit J-3 (CDSClear Service 
Description), Section 11.2; see also CDSClear Rulebook, Appendix 1.
    \62\ See CDSClear Rulebook, Appendix 1, Clauses 2.1.4 and 8.1.
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    To manage its liquidity needs resulting from a member's default, 
LCH SA monitors and measures its liquidity resources and requirements 
daily, at the entity level. In addition to cash collateral, LCH SA may 
use its own capital as an immediately available liquidity resource, and 
during liquidity stress events, LCH SA also can access central bank 
liquidity through the Banque de France, as well as other secured 
financing facilities that LCH SA maintains.\63\
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    \63\ See LCH SA Form CA-1, Exhibit H-1 (LCH SA Audited Financial 
Statements for the Year Ended 31 December 2015), 27-28.
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    LCH SA makes its default policies and procedures available to 
members by posting them to its public Web site, in addition to other 
key information such as default resources, margin methodology, daily 
settlement prices, and open interest and volume, among other 
things.\64\
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    \64\ See CDSClear Rulebook, Title IV, Chapters 3 and 4, and 
Appendix 1.
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E. Operational Risk Management

    LCH SA manages its operational risk pursuant to, among other 
policies and procedures, an operational risk policy applicable to each 
entity within LCH Group. The operational risk policy lists regulatory 
operational risk standards applicable to LCH SA; assigns roles and 
responsibilities to the business departments, Operational Risk 
Department, and Audit Department for the identification, assessment, 
and mitigation of operational risks; and establishes regularly 
scheduled reviews of the framework by management and applicable 
committees of the Board of Directors. The operational risk management 
policy requires ongoing self-assessment, monitoring, and reporting of 
risks (including to relevant Board of Directors and business control 
committees), as well as the development and implementation of risk 
mitigation plans when necessary. LCH SA's rules and procedures also 
provide for regular testing of its various systems as part of its 
operation risk management process.\65\
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    \65\ See LCH SA Form CA-1, Exhibit K (LCH SA Security Measures 
and Operational Safeguards).
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    LCH SA's policies and procedures establish governance processes to 
reinforce controls and procedures for operational risk management. For 
example, the operational risk management framework establishes 
monitoring and reporting obligations by the risk owners and Operational 
Risk Department to applicable Board committees. The Terms of Reference 
of the Audit Committee and Risk Committee, respectively, dictate the 
Committees' responsibilities to oversee various aspects of LCH SA's 
operational risk management. The Risk Committee, among other things, 
considers the risk controls related to new markets and contracts; 
reviews LCH SA's money settlement arrangements; and reviews LCH SA's 
Operational Risk Policy.\66\ The Audit Committee has responsibility for 
determining whether management has put in place adequate internal 
control systems that provide reasonable assurance that corporate 
objectives will be achieved and that LCH SA complies with applicable 
regulatory requirements.\67\
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    \66\ See LCH SA Form CA-1, Exhibit A-4 (LCH SA Terms of 
Reference of the Risk Committee of the Board of Directors).
    \67\ See LCH SA Form CA-1, Exhibit A-5 (LCH SA Terms of 
Reference of the Audit Committee of the Board of Directors).
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    LCH SA has established multiple policies, standards, procedures, 
and operational guidelines pertaining to system reliability, 
resiliency, and security. For example, LCH SA's business continuity and 
disaster recovery plans address threat assessments and monitoring, 
systems testing, and possible responses to potential threats, including 
the migration of main operational and data systems to back-up systems 
and sites.\68\ LCH SA maintains multiple systems and data centers in 
support of maintaining operational capacity and resilience. In 
addition, LCH SA's rules require its clearing members to participate in 
technical and operational tests organized by LCH SA to ensure the 
continuity and orderly functioning of the CDS Clearing Service.\69\ 
Moreover, LCH SA also maintains an ongoing self-assessment policy to 
continually

[[Page 1402]]

monitor and assess operational risk, such as security risk, and provide 
for the mitigation of such risks when they exceed applicable 
tolerances.\70\ Furthermore, LCH SA has established policies and 
procedures regarding information security that provide for requirements 
with respect to employee access and use of business and customer 
information, as well as the maintenance of confidentiality of sensitive 
information.\71\ Additionally, LCH SA is subject to group-wide policies 
and procedures that that govern personal trading of employees for their 
own account.\72\
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    \68\ See LCH SA Form CA-1, Exhibit K-2 (LCH Group Business 
Continuity Management Policy).
    \69\ See generally, CDSClear Rulebook, Section 2.2.8
    \70\ See, e.g., LCH SA Form CA-1, Ex. K-3 (LCH. Clearnet Group 
Information Security Strategy/Maturity Self-assessment tool); LCH 
Clearnet Group Operational Risk Policy--Operational Risk Management.
    \71\ See LCH SA Form CA-1, Exhibits K-1.1 (LSEG Employee 
Information Security Policy) and K-1.2 (Technical Information 
Security Policy).
    \72\ See LCH.Clearnet Group Confidentiality Policy; Group 
Personal Account Dealing Policy; and Group Market Abuse Policy.
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F. Fees, Dues, and Charges

    LCH SA charges transaction fees linked to products and annual 
membership fees, which are generally usage-based and apply equally to 
all members using LCH SA's CDSClear service. LCH SA also imposes annual 
account structure fees for individually segregated accounts and omnibus 
segregated accounts that are equally applicable to all members.\73\
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    \73\ See LCH SA Form CA-1, Exhibit Q (LCH SA Schedule of Prices, 
Rates or Fees Fixed by Registrant for Services Rendered by its 
Participants).
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III. Discussion

    Section 17A(b)(1) of the Act requires a clearing agency to register 
with the Commission prior to performing the functions of a clearing 
agency.\74\ The Commission shall grant a clearing agency's registration 
if it finds that the requirements of the Act and the rules and 
regulations thereunder with respect to the clearing agency are met.\75\ 
Section 17A(b)(3) of the Act requires that the Commission make a number 
of determinations with respect to the clearing agency's organization, 
capacity, and rules,\76\ including, among other things, determining 
whether a clearing agency is ``so organized and [has] the capacity to 
be able to facilitate the prompt and accurate clearance and settlement 
of securities transactions and derivative agreements, contracts, and 
transactions for which it is responsible, to safeguard securities and 
funds in its custody or control or for which it is responsible, [and] 
to comply with the provisions of [the Act] and the rules and 
regulations thereunder.'' \77\ The Commission discusses below the 
applicable requirements under the Exchange Act and rules and 
regulations thereunder, and its findings regarding whether these 
requirements are met.
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    \74\ 15 U.S.C. 78q-1(b)(1).
    \75\ 15 U.S.C. 78s(a)(1); 15 U.S.C. 78q-1(b)(3). Among other 
requirements, registered clearing agencies are subject to Exchange 
Act Rule 17Ad-22. In 2012, the Commission adopted standards 
establishing minimum requirements regarding registered clearing 
agencies' risk management procedures and controls. See Securities 
Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 
2012). On September 28, 2016, the Commission adopted amendments to 
Rule 17Ad-22 establishing enhanced standards for the operation and 
governance of those clearing agencies registered with the Commission 
that meet the definition of covered clearing agency. See Securities 
Exchange Act Release No. 78961 (Sep. 28, 2016), 81 FR 70786 (Oct. 
13, 2016) (compliance date April 11, 2017). See also Definition of 
Covered Clearing Agency, Proposed Rule Amendments, Securities 
Exchange Act Release No. 78963 (Sept. 28, 2016), 81 FR 70744 (Oct. 
13, 2016).
    \76\ 15 U.S.C. 78q-1(b)(3).
    \77\ 15 U.S.C. 78q-1(b)(3)(A).
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A. Membership Standards

1. Exchange Act Requirements
    Section 17A(b)(3)(B) of the Act provides that the rules of a 
clearing agency must permit certain enumerated categories of persons to 
be eligible for membership: Registered brokers or dealers, registered 
clearing agencies, registered investment companies, banks, and 
insurance companies.\78\
---------------------------------------------------------------------------

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

    Section 17A(b)(4)(B) of the Act allows a registered clearing agency 
to deny, or condition participation of, any member or any category of 
members listed in Section 17A(b)(3)(B) of the Act if such persons do 
not meet the financial responsibility, operational capability, 
experience, and competence standards set forth by the clearing 
agency.\79\ In addition, Section 17A(b)(3)(F) of the Act requires that 
the rules of the clearing agency must not be designed to permit unfair 
discrimination in the admission of members or among members in the use 
of the clearing agency.\80\ Similarly, Section 17A(b)(3)(I) provides 
that the rules of a clearing agency may not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of section 17A.\81\
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    \79\ 15 U.S.C. 78q-1(b)(4)(B).
    \80\ 15 U.S.C. 78q-1(b)(3)(F).
    \81\ 15 U.S.C. 78q-1(b)(3)(I).
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    Rules 17Ad-22(b)(5) and (6) further require that a registered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures that do not limit membership to dealers and do 
not impose any specific portfolio size or transaction volume 
minimums.\82\ Rule 17Ad-22(b)(7) \83\ requires that a registered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures that provide a person who maintains net capital 
equal to or greater than $50 million with the ability to obtain 
membership at the clearing agency, so long as the net capital 
requirement is scalable to the risk posed by the participant's 
activities. In addition, Rule 17Ad-22(d)(2) requires that a registered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures to require participants to have sufficient 
financial resources and robust operational capacity to meet obligations 
arising from participation in the clearing agency; have procedures in 
place to monitor that participation requirements are met on an ongoing 
basis; and have participation requirements that are objective and 
publicly disclosed, and permit fair and open access.\84\
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    \82\ 17 CFR 240.17Ad-22(b)(5) and (6).
    \83\ 17 CFR 240.17Ad-22(b)(7).
    \84\ 17 CFR 240.17Ad-22(d)(2).
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2. Commission Findings
    The Commission finds that LCH SA's membership standards, as 
described in the application, are consistent with Exchange Act Section 
17A and the relevant provisions of Rule 17Ad-22.
i. Access to the Clearing Services
    With respect to providing access to CDSClear services, LCH SA has 
established a general membership category for non-EU persons \85\ that 
includes the categories of persons enumerated in Section 
17A(b)(3)(B).\86\ Therefore, as described in the application, LCH SA's 
rules are

[[Page 1403]]

consistent with Section 17A(b)(3)(B).\87\ In addition, LCH SA's rules 
do not tie CDSClear membership to providing any specific dealer 
service, maintaining a portfolio of any minimum size or maintaining any 
particular transaction volume. Therefore, LCH SA's rules, as described 
in the application, are consistent with Rules 17Ad-22(b)(5) and 
(6).\88\ Finally, LCH SA's rules contemplate a minimum net capital 
requirement of $50 million for U.S. FCM clearing members or [euro]37 
million for other clearing members of CDSClear.\89\ The rules 
specifically give LCH SA discretion to scale (a) a CDSClear member's 
net capital requirement in accordance with the level of risk it 
introduces to LCH SA, and (b) a CDSClear member's level of risk it 
introduces to LCH SA in accordance with its net capital 
requirement.\90\ Therefore, LCH SA's rules, as described in the 
application, provide that any net capital requirements are scalable so 
that they are proportional to the risk posed by the participant's 
activities to the clearing agency, consistent with Rule 17Ad-
22(b)(7).\91\
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    \85\ See CDSClear Rulebook, Section 2.1.1.2(v).
    \86\ 15 U.S.C. 78q-1(b)(3)(B). Article 2.1.1.2(v) of the 
CDSClear Rulebook refers to ``Credit Institutions'' and ``Investment 
Firms'' not having their head office in a ``Member State'' of the 
European Economic Area, as well as legal persons whose principal or 
sole object is the clearing of financial instruments.
    The terms ``Investment Firm'' and ``Credit Institution,'' as 
defined in relevant European directives, substantially overlap with 
the categories of persons enumerated in Section 17A(b)(3)(B), as 
defined in the Exchange Act and, where incorporated by reference in 
the Exchange Act, the Investment Company Act of 1940. Compare 
definitions of ``Investment Firm'' (Directive 2004/39/EC Article 
4(1)(1) and Annex I, Section A) and ``Credit Institution (Directive 
2006/48/EC, Article 4(1)(a)) with definitions of ``broker'' (15 
U.S.C. 78c(a)(4)), ``dealer'' (15 U.S.C. 78c(a)(5)), ``clearing 
agency'' (15 U.S.C. 78c(a)(23)), ``investment company'' (15 U.S.C. 
80a-3(a)(1)), ``insurance company'' (15 U.S.C. 80a-2(a)(17)) and 
``bank'' (15 U.S.C. 78c(a)(6)). Thus, CDSClear's general admission 
category for non-European persons would include persons who are 
seeking clearing membership and are brokers, dealers, clearing 
agencies, investment companies, banks, and insurance companies.
    \87\ 15 U.S.C. 78q-1(b)(3)(B).
    \88\ 17 CFR 240.17Ad-22(b)(5) and (6).
    \89\ See CDSClear Rulebook, Section 2.2.3.
    \90\ See id. at Section 2.2.3.
    \91\ 17 CFR 240.17Ad-22(b)(7).
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ii. Capacity To Perform Obligations to Clearing Agency
    With respect to clearing membership standards, the Commission finds 
that LCH SA's rules establish standards for CDSClear membership that 
are consistent with Sections 17A(b)(4)(B), 17A(b)(3)(F), and 
17A(b)(3)(I).\92\ Specifically, LCH SA's rules provide that an 
applicant for CDSClear membership must be able to pay amounts required 
by LCH SA, including margin and default fund contributions. An 
applicant must also satisfy a minimum internal credit score that is 
based on quantitative and qualitative data,\93\ have sufficient 
expertise in relation to clearing activities, and have systems and 
personnel required to support performance as a participant.\94\ 
Further, LCH SA has the authority under its rules to deny participation 
if a CDSClear applicant does not meet these standards.\95\ Although LCH 
SA's rules permit LCH SA to impose, amend or withdraw additional 
requirements in relation to its CDSClear membership standards, LCH SA 
may do so only if such additional requirements are non-discriminatory 
and their objective is to control the risk members pose to LCH SA.\96\ 
These rules, along with the others addressing a member's continuing 
obligations,\97\ provide standards for members' financial 
responsibility, operational capability, experience, and competence, 
consistent with Exchange Act Section 17A(b)(4)(B).\98\ In addition, the 
Commission finds that these rules are not designed to permit unfair 
discrimination in the admission of members or among members' use of the 
clearing agency, and any burden they impose on competition is necessary 
or appropriate in furtherance of the purposes of Section 17A; they 
therefore satisfy the requirements of Exchange Act Sections 
17A(b)(3)(F) and 17A(b)(3)(I).\99\
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    \92\ 15 U.S.C. 78q-1(b)(3)(B), (F) and (I).
    \93\ See CDSClear Rulebook, Section 2.2.4.
    \94\ See id. at Section 2.2.1.
    \95\ See id. at Article 2.2.0.1.
    \96\ Id. at Article 2.2.0.1.
    \97\ See id. at Article 2.2.2.1.
    \98\ 15 U.S.C. 78q-1(b)(4)(B).
    \99\ 15 U.S.C. 78q-1(b)(3)(F) and (I).
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    The Commission believes that LCH SA's rules with respect to the 
CDSClear service also satisfy the requirement in Rule 17Ad-22(d)(2) 
that a registered clearing agency establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to require 
participants to have sufficient financial resources and robust 
operational capacity to meet obligations arising from participation in 
the clearing agency, are objective and publicly disclosed, and permit 
fair and open access.\100\ As described above, LCH SA's rules prescribe 
standards with respect to members' financial responsibility, 
operational capability, experience, and competence designed to manage 
risks to the clearing agency. These standards require participants to 
have sufficient financial resources and robust operational capacity to 
meet their obligations because LCH SA can set and monitor financial 
requirements and operational capacity commensurate with LCH SA's 
business and risk management needs. Specifically, LCH SA can apply 
scalable capital requirements \101\ and assesses its members' credit 
risk; \102\ clearing members must pay amounts required by LCH SA, 
specifically margin and default fund requirements and cash payment 
obligations; \103\ clearing members must not be subject to insolvency 
proceedings; \104\ and clearing members must satisfy LCH SA that they 
have sufficient expertise in relation to clearing activities and that 
their systems and operations are operationally reliable and capable of 
supporting proper performance of its business as a clearing 
member.\105\ These standards apply equally to all applicants for 
CDSClear membership and existing CDSClear members and are publicly 
disclosed in the CDSClear Rulebook. Therefore, the Commission finds 
that LCH SA's CDSClear membership standards meet Rule 17Ad-22(d)(2)'s 
requirement that standards be reasonably designed to be objective, are 
publicly disclosed, and permit fair and open access.
---------------------------------------------------------------------------

    \100\ See 17 CFR 240.17Ad-22(d)(2).
    \101\ CDSClear Rulebook, Article 2.2.3.1.
    \102\ See id. at Article 2.2.4.1. CDS Clear assigns clearing 
members an internal credit score. This score is based on data 
including financial analysis, external market data and implicit or 
external support available to the clearing member. Id.
    \103\ See id. at Article 2.2.1.1(xiii).
    \104\ Id. at Article 2.2.1.1(vii).
    \105\ Id. at Article 2.2.1.1(x).
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    LCH SA requires its CDSClear members to maintain on-going 
compliance with the standards described above, subject to on-going 
monitoring by LCH SA.\106\ For example, LCH SA's rules require clearing 
participants to report significant events \107\ and file regularly 
certain financial information with LCH SA.\108\ In addition to 
monitoring various forward-looking indicators; \109\ LCH SA's rules 
require that participants agree to submit clearing activity to 
inspections reasonably requested by LCH SA,\110\ and participate in 
technical and operational tests.\111\ The Commission therefore finds 
that LCH SA meets the requirement in Rule 17Ad-22(d)(2) to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to have procedures in place to monitor that 
participation requirements are met on an ongoing basis.\112\
---------------------------------------------------------------------------

    \106\ Id. at Article 2.2.2.1.
    \107\ Id. at Article 2.3.1.1.
    \108\ Id. at Article 2.3.1.2.
    \109\ Id. at Section 2.3.2.
    \110\ Id. at Section 2.3.3.
    \111\ Id. at Article 2.2.8.1.
    \112\ 17 CFR 240.17Ad-22(d)(2).
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B. Capacity To Enforce Rules and Discipline Members in Accordance With 
Fair Procedures

1. Exchange Act Requirements
    Section 17A(b)(3)(A) of the Act provides that a clearing agency 
must be organized and have the capacity to enforce compliance by its 
members with the rules of the clearing agency.\113\ Section 
17A(b)(3)(G) of the Act requires that the rules of a clearing agency 
provide that its members shall be appropriately disciplined for 
violations of any provision of those rules by expulsion, suspension, a 
limitation of activities, functions, and operations, fine, censure, or 
any other fitting

[[Page 1404]]

sanction.\114\ Section 17A(b)(3)(H) of the Act requires that the rules 
of the clearing agency be in accordance with the provisions of Section 
17A(b)(5), and, in general, provide a fair procedure with respect to 
the disciplining of members, the denial of membership, and the 
prohibition or limitation by the clearing agency of any person with 
respect access to the services offered by the clearing agency.\115\ 
Section 17A(b)(5) generally requires a clearing agency to bring 
specific charges, notify a disciplined participant of them, give a 
disciplined participant an opportunity to defend against such charges, 
and keep a record in determining whether a participant should be 
disciplined.\116\
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    \113\ 15 U.S.C. 78q-1(b)(3)(A).
    \114\ 15 U.S.C. 78q-1(b)(3)(G).
    \115\ 15 U.S.C. 78q-1(b)(3)(H).
    \116\ 15 U.S.C. 78q-1(b)(5).
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2. Commission Findings
    The Commission finds that LCH SA meets the above-described 
requirements with respect to its CDSClear service. As part of the CDS 
Admission Agreement, CDSClear members must abide by relevant LCH SA 
rules and procedures.\117\ Pursuant to these rules and procedures, LCH 
SA has the ability to (i) notify members that it believes they may have 
violated LCH SA's rules, (ii) conduct an investigation of alleged 
breaches, (iii) communicate its investigation results with the members, 
(iv) form a disciplinary committee, (v) grant an opportunity for 
members to contest the allegations, and (vi) impose disciplinary 
measures accompanied by details of the grounds supporting the decision 
and sanctions imposed, if any.\118\ Moreover, LCH SA's rules and 
procedures confer on it the discretion to tailor its disciplinary 
measures to the nature and severity of the infraction at issue: In 
accordance with its rules and procedures, LCH SA may choose to suspend 
or terminate any member of CDSClear, convey a public or private 
reprimand, impose sanctions, or impose fines.\119\ The breadth of 
disciplinary measures available to LCH SA and the flexibility to tailor 
these measures to the nature and severity of any infractions of its 
rules, coupled with the procedural safeguards--described more fully 
below--conferred on members accused of violations, taken together, 
enable LCH SA to ``appropriately'' discipline members for violations of 
its rules. Therefore, the Commission finds that LCH SA's rules provide 
for appropriate disciplinary measures and sanctions of its members for 
violations of LCH SA's rules.
---------------------------------------------------------------------------

    \117\ See LCH SA Form CA-1, Exhibit P-2 (LCH SA CDS Admission 
Agreement).
    \118\ See CDSClear Rulebook, Sections 2.3 and 2.4 and Exhibit E-
6.8 (CDSClear CDS Clearing Proceedings, Section 8: Disciplinary 
Proceedings).
    \119\ See id.
---------------------------------------------------------------------------

    With their significant procedural protections described in Section 
II.B, LCH SA's rules also satisfy applicable fairness requirements. 
Among other things, members have the right to notice of any alleged 
violation, the right to respond, the right to a hearing, and the right 
to an explanation of the grounds supporting the discipline 
imposed.\120\ In addition, LCH SA's rules are designed to avoid 
conflicts of interest by permitting members to object to personnel 
selected by LCH SA to lead an investigation of the member on the basis 
of the existence of a conflict of interest and by allowing members to 
refuse access to their offices by LCH SA's personnel when a 
substantiated conflict of interest exists.\121\ If disciplinary 
measures are imposed, a member has the right to contest them by 
arbitration or litigation pursuant to LCH SA's procedures.\122\ 
Similarly, if LCH SA denies membership to an applicant, LCH SA will 
provide the reasons for the denial of access.\123\ Members are 
permitted to dispute the decision and imposition of sanctions, and to 
submit such dispute to arbitration or litigation, as applicable.\124\ 
Taken together, the procedural protections in LCH SA's rules ensure, at 
a minimum, that targets of discipline are informed of the charges 
pending against them, have the ability to contest those charges, will 
receive an explanation of the discipline imposed, if any, and will have 
the opportunity to appeal any adverse decision.
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    \120\ See LCH SA Form CA-1, Exhibit E-6.8 (CDSClear CDS Clearing 
Procedures, Section 8: Disciplinary Proceedings).
    \121\ See id. at Section 8.2(a)(iii) and (v).
    \122\ See LCH SA Form CA-1, Exhibit E-6.8 (CDSClear CDS Clearing 
Procedures, Section 8: Disciplinary Proceedings).
    \123\ See LCH SA Form CA-1, Exhibit E-6.1 (CDSClear CDS Clearing 
Procedures, Section 1: Membership).
    \124\ See LCH SA Form CA-1, Exhibit E-6.8 (CDSClear CDS Clearing 
Procedures, Section 8: Disciplinary Proceedings).
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    Therefore, the Commission finds that LCH SA's rules, policies, and 
procedures, as described in the application, meet the requirements 
under Exchange Act Section 17A(b)(3)(A) (regarding the capacity to 
enforce compliance by its members with the rules of the clearing 
agency), Section 17A(b)(3)(H) (regarding providing a fair procedure 
with respect to the disciplining of members, the denial of membership, 
and the prohibition or limitation with respect to access to the 
services offered by the clearing agency), and Section 17A(b)(5) 
(regarding bringing charges against members, disciplinary notification, 
affording members with an opportunity to defend against charges, and 
recordkeeping relating to disciplinary determinations).

C. Governance--Fair Representation and Operational and Risk 
Transparency

1. Exchange Act Requirements
    Section 17A(b)(3)(C) of the Act requires that the rules of a 
clearing agency assure fair representation of the clearing agency's 
shareholders (or members) and participants in the selection of the 
clearing agency's directors and in the administration of the clearing 
agency's affairs.\125\ In addition, Rule 17Ad-22(d)(8) requires that a 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to, as applicable, have 
governance arrangements that are clear and transparent to fulfil the 
public interest requirements in Section 17A of the Act applicable to 
clearing agencies, to support the objectives of owners and 
participants, and to promote the effectiveness of the clearing agency's 
risk management procedures.\126\ Rule 17Ad-22(d)(9) provides that a 
clearing agency must establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide market 
participants with sufficient information for them to identify and 
evaluate the risks and costs associated with using the clearing 
agency's services.\127\
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    \125\ 15 U.S.C. 78q-1(b)(3)(C).
    \126\ 17 CFR 240.17Ad-22(d)(8).
    \127\ 17 CFR 240.17Ad-22(d)(9).
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2. Commission Findings
    The Commission finds that LCH SA's rules meet the above-described 
requirements under the Exchange Act. With respect to the selection of 
directors, the Terms of Reference of the LCH SA Board provide that the 
Board is composed of three through eighteen directors in the categories 
of a non-executive Chairman, independent non-executive directors, 
executive directors, venue directors, user directors, and one director 
representing LSEG.\128\ Currently, LCH SA's Board consists of fourteen 
directors, three of whom are affiliated with clearing participants. 
Although LCH SA's rules do not specify the number of directors in each 
category, the Board's Terms of Reference specify that these categories 
and numbers of directors within each category are subject to change to 
comply with any applicable legal or regulatory

[[Page 1405]]

requirements from time to time (including the appointment of additional 
directors as may be required from time to time).\129\ Therefore, LCH 
SA's rules are designed to ensure that the numbers of the directors in 
each category, including user directors, satisfy the fair 
representation requirements in the Exchange Act and enable LCH SA to 
adapt the composition of its Board to any evolving regulatory 
requirements. The Commission finds that users have the opportunity to 
provide meaningful input in the nomination for appointment of user 
directors.\130\ Taken together, LCH SA's rules meet the requirement to 
assure fair representation of its shareholders and participants in the 
selection of its directors under Section 17A(b)(3)(C) of the Act.\131\
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    \128\ See LCH SA Form CA-1, Exhibit A-2 (LCH SA Terms of 
Reference of the Board of Directors), Article 3.
    \129\ Id. The Board's proposal for appointment of each director 
at a shareholders' meeting must be based on recommendations made by 
the Nomination Committee, which is required to recommend two user 
directors out of an aggregate of ten directors that the Nomination 
Committee is required to recommend to the Board for appointment as 
directors. See LCH.Clearnet Group Limited Terms of Reference of the 
Nomination Committee of the Board of Directors, Article 2.4, 
available at http://www.lch.com/documents/731485/762675/qccp-status-lch-9+feb-2015.pdf/fa48a090-d90c-4193-91d8-52f8068a4c56. Therefore, 
users will be represented by at least two directors on the Board.
    \130\ In formulating its recommendation for user director 
nominees, the user member sitting on the Nomination Committee must 
be present to satisfy a quorum, and the rules further allow the 
seventeen largest user shareholders of LCH Group who are not 
connected with an existing director to submit names to the 
Nomination Committee for consideration as a user director. See 
LCH.Clearnet Group Limited Terms of Reference of the Nomination 
Committee of the Board of Directors, Appendix, available at http://www.lch.com/documents/731485/762675/qccp-status-lch-9+feb-2015.pdf/fa48a090-d90c-4193-91d8-52f8068a4c56. Therefore, users will have the 
opportunity to provide meaningful input in the nomination of user 
directors.
    \131\ 15 U.S.C. 78q-1(b)(3)(C).
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    With respect to the administration of its affairs, LCH SA's rules 
establish a consultative process for considering clearing member views 
regarding material changes to LCH SA's rules that apply to clearing 
members, as described in Section II.C above. Additionally, as described 
in Section II.C and discussed further below, the Audit and Risk 
Committees have substantial roles in risk management oversight and 
informing the full Board on risk management activities. Because there 
are roles for clearing members and customers on the Risk Committee and 
for the user director on the Audit Committee, the Commission believes 
LCH SA assures that participants have fair representation in the 
administration of LCH SA's affairs, as required by Section 17A(b)(3)(C) 
of the Act.\132\
---------------------------------------------------------------------------

    \132\ Id.
---------------------------------------------------------------------------

    In particular, LCH SA's Board has established an Audit Committee 
and a Risk Committee, which are tasked with engagement in and oversight 
of various aspects of LCH SA's financial and operational risk 
management. For example, as described in Section II.C, the Audit 
Committee oversees internal control systems and assists the Board in 
reviewing LCH SA's audited financial statements, regulatory compliance, 
risk governance framework, internal control environment, and 
information security and business continuity plans.\133\ Among other 
things, the Audit Committee also monitors the quality and effectiveness 
of the internal Audit Department,\134\ reviews the process for annual 
validations of LCH SA's risk management models,\135\ commissions and 
reviews audit reports relating to the risk management of LCH SA,\136\ 
and establishes and annually reviews LCH SA's operational risk 
policy.\137\ The Audit Committee must also ensure that the Board is 
regularly informed of the adequacy of key control systems in the 
financial, operational and compliance-related areas.\138\
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    \133\ See LCH SA Form CA-1, Exhibit A-5 (LCH SA Terms of 
Reference of the Audit Committee of the Board of Directors), Section 
1.
    \134\ Id. at Section 3.3.3(c).
    \135\ Id. at Section 3.3.5(a).
    \136\ Id. at Section 3.3.5(c).
    \137\ Id. at Section 3.3.9(a).
    \138\ Id. at Section 5.4.
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    Additionally, LCH SA's Board has established a Risk Committee,\139\ 
which includes members and customer representatives.\140\ The Risk 
Committee considers LCH SA's risk appetite, tolerance, and strategy. 
Among other things, the Risk Committee also reviews initial and ongoing 
membership requirements and decisions on membership applications,\141\ 
the decision to clear a new product or contract,\142\ margin 
methodology adequacy and changes,\143\ and default fund adequacy and 
changes to stress testing scenarios.\144\
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    \139\ See LCH SA Form CA-1, Exhibit A-4 (LCH SA Terms of 
Reference of the Risk Committee of the Board of Directors).
    \140\ Id. at Section 1.1.
    \141\ Id. at Section 6.
    \142\ Id. at Section 7.
    \143\ Id. at Section 8.
    \144\ Id. at Section 9.
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    To ensure that LCH SA's governance structure and important 
decisions are clear and transparent to the public, the Risk Committee 
is also tasked with ensuring publication on LCH SA's Web site summaries 
of significant decisions arising from its operations that implicate the 
public interest, including decisions relating to open access, 
membership and the determination to accept a new product for 
clearing.\145\ Therefore, the Commission believes that LCH SA has 
governance arrangements that are clear and transparent to fulfil the 
public interest requirements in Section 17A of the Act applicable to 
clearing agencies, to support the objectives of owners and 
participants, and to promote the effectiveness of the clearing agency's 
risk management procedures, as required by Rule 17Ad-22(d)(8).\146\
---------------------------------------------------------------------------

    \145\ Id. at Section 14.
    \146\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    Similarly, the Commission further believes that LCH SA provides 
sufficient transparency to market participants with respect to the 
costs and risks associated with using CDSClear. LCH SA achieves this 
transparency by making available to members and the public information 
regarding the fees and costs associated with using CDSClear (including 
disclosure of product specific fees for self and customer clearing, and 
account structures fees), as well as the CDSClear Rulebook (which 
includes key default management provisions).\147\ LCH SA also publishes 
information regarding daily settlement prices, volume and open 
interest.\148\ This information provides current and potential members 
with the opportunity to assess costs and risks associated with 
membership, allowing for informed decision making with respect to 
continuing or commencing membership in the CDSClear service. 
Furthermore, based on the public disclosure of significant decisions 
described above, as well as publication of the clearing procedures, and 
governance arrangements, the Commission finds that, as described in the 
application, LCH SA meets the requirement to provide market 
participants with sufficient information for them to identify and 
evaluate the risks and costs associated with using the clearing 
agency's services, as required by Rule 17Ad-22(d)(9).\149\
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    \147\ See http://www.lch.com/asset-classes/otc-credit-default-swaps/fees and http://www.lch.com/rules-regulations/rulebooks/sa.
    \148\ See http://www.lch.com/asset-classes/cdsclear.
    \149\ 17 CFR 240.17Ad-22(d)(9).
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D. Safeguarding of Securities and Funds and Financial Resources

1. Exchange Act Requirements
    Sections 17A(b)(3)(A) and (F) of the Act, in part, require that a 
clearing agency be duly organized and not only have the capacity to 
safeguard securities

[[Page 1406]]

and funds over which it has custody and control, or for which it is 
responsible, but also implement rules designed to do so.\150\ In 
addition, under Section 17A(b)(3)(F), a clearing agency's rules must be 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions and, in general, to protect investors and the 
public interest.\151\ Moreover, rule 17Ad-22 requires a clearing agency 
to establish, implement, maintain, and enforce reasonably designed 
policies and procedures pertaining to the maintenance of sufficient 
financial resources, the investment of cash collateral, liquidity risk 
management, and default management.
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    \150\ 15 U.S.C. 78q-1(b)(3)(A) and (F).
    \151\ 15 U.S.C. 78q-1(b)(3)(F).
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i. Financial Resources
    Rule 17Ad-22(b)(2) requires a registered cleared agency that 
performs CCP services to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to use margin 
requirements to limit its credit exposures to participants under normal 
market conditions, use risk-based models and parameters to set margin 
requirements, and review such margin requirements and the related risk-
based models and parameters at least monthly.\152\ Rule 17Ad-22(b)(3) 
requires a registered clearing agency acting as a CCP for security-
based swaps to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to maintain sufficient 
financial resources to withstand, at a minimum, a default by the two 
participant families to which it has the largest exposures in extreme 
but plausible market conditions, in its capacity as a CCP for security-
based swaps.\153\ Rule 17Ad-22(b)(4) requires registered clearing 
agencies to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to provide for an annual 
model validation consisting of evaluating the performance of the 
clearing agency's margin models and the related parameters and 
assumptions associated with such models by a qualified person who is 
free from influence from the persons responsible for the development or 
operation of the models being validated.\154\
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    \152\ 17 CFR 240.17Ad-22(b)(2).
    \153\ 17 CFR 240.17Ad-22(b)(3).
    \154\ 17 CFR 240.17Ad-22(b)(4).
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ii. Collateral Policy and Investment of Cash Collateral
    Rule 17Ad-22(d)(3) requires registered clearing agencies to have 
policies and procedures reasonably designed to ensure that the clearing 
agency (i) holds assets in a manner that minimizes the risk of loss or 
of delay in their access, and (ii) invests assets in instruments with 
minimal credit, market and liquidity risks.\155\
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    \155\ 17 CFR 240.17Ad-22(d)(3).
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iii. Default Management, Loss Allocation, and Recovery
    With respect to managing a member default, Section 17A(b)(3)(F) of 
the Act requires a registered clearing agency to assure the 
safeguarding of securities and funds, promote the prompt and accurate 
settlement of securities transactions, and, in general, protect 
investors and the public interest.\156\ In addition, Rule 17Ad-
22(d)(11) provides that such clearing agency must have policies and 
procedures to make key aspects of its default procedures publicly 
available and establish default procedures that ensure that the 
clearing agency can take timely action to contain losses and liquidity 
pressures and to continue meeting its obligations in the event of a 
participant default.\157\
---------------------------------------------------------------------------

    \156\ 15 U.S.C. 78q-1(b)(3)(F).
    \157\ 17 CFR 240.17Ad-22(d)(11).
---------------------------------------------------------------------------

2. Commission Findings
i. Financial Resources
    As described in Section II.D.i above, LCH SA has policies and 
procedures that provide for the use of a VaR model to calculate margin 
requirements for members and for the review of the model on a monthly 
basis. These policies and procedures provide that the CDSClear model 
take into consideration a variety of risks relevant to clearing 
security-based swaps, including, but not limited to, changes in credit 
spreads, recovery rates, and interest rates, in order to appropriately 
measure LCH SA's exposures to CDSClear members under normal market 
conditions.\158\ In addition to the margin requirements calculated 
using the model, LCH SA also imposes additional margin charges on 
members to address concentration risk, wrong way risk, and liquidity 
risk, which exist under normal market conditions, and imposes 
additional margin on members with lower credit ratings. LCH SA's 
policies and procedures require CDSClear members to post collateral to 
meet these margin requirements, and to also post variation margin. 
Additionally, the CDSClear rules establish a mutualized default fund 
that, together with the margin requirements, is sized to maintain 
sufficient financial resources sufficient to withstand, at a minimum, 
the default by the two CDSClear member families to which LCH SA has the 
largest exposures in extreme but plausible market conditions (the 
``cover-two standard''). In addition, LCH SA also has policies and 
procedures that establish monthly back testing to evaluate the 
performance of the CDSClear margin methodology and stress testing to 
ensure maintenance of sufficient financial resources to meet the cover-
two standard. Finally, as noted above, LCH SA has policies and 
procedures that require an annual validation of its margin model by 
independent personnel that are qualified to perform such a validation. 
This validation must include a review of the parameters and assumptions 
underlying the model, as well as the reporting of the results of such 
model validation to risk management personnel.
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    \158\ See LCH SA Form CA-1, Exhibit H-1 (LCH SA Audited 
Financial Statements for the Year Ended 31 December 2015), 18; see 
also CDSClear Rulebook, Section 4.2.5 and Exhibit E-6.2 (CDSClear 
CDS Clearing Procedures, Section 2: Margin and Price Alignment 
Interest).
---------------------------------------------------------------------------

    Based on the above, the Commission finds that, as described in the 
application, LCH SA has both the capacity to ensure that LCH SA 
maintains the required financial resources, and policies and procedures 
reasonably designed to do so, as required by Exchange Act sections 
17A(b)(3)(A) and 17A(b)(3)(F), as well as Rules 17Ad-22(b)(2), (b)(3), 
and (b)(4) thereunder.\159\
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    \159\ 15 U.S.C. 78q-1(b)(3)(A) and (F); 17 CFR 240.17Ad-
22(b)(2), (3), and (4).
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ii. Collateral Policy and Investment of Cash Collateral
    As described in Section II.D.ii above, LCH SA maintains a 
collateral policy that requires it to accept cash (in Euros), foreign 
currency, and highly liquid debt and equity securities as collateral, 
with all collateral except Euros subject to a haircut to minimize LCH 
SA's exposure to market risk. With respect to cash collateral, LCH SA 
has in place an investment policy that requires LCH SA to invest or 
deposit assets received as collateral only with counterparties that 
meet certain minimum credit standards. LCH SA monitors its 
counterparties, in furtherance of ensuring that such counterparties 
will be able to meet their obligations to LCH SA with respect to such 
assets, and that LCH SA will have access to such assets when needed. In 
addition, LCH SA has policies and procedures that require it to invest 
its assets in highly liquid instruments backed by creditworthy issuers. 
The term of investment permitted may depend on the type of asset and 
creditworthiness of the issuer. For

[[Page 1407]]

example, cash deposits and securities of issuers not explicitly 
guaranteed by the US, UK, or a European government are restricted to an 
overnight term. For these reasons, the Commission finds that LCH SA's 
policies and procedures, as described in the application, are 
reasonably designed to ensure that LCH SA holds assets in a manner that 
minimizes the risk of loss or of delay in their access, and invests in 
instruments with minimal credit, market and liquidity risks, as 
required by Exchange Act Sections 17A(b)(3)(A) and 17A(b)(3)(F), as 
well as Rule 17Ad-22(d)(3).\160\
---------------------------------------------------------------------------

    \160\ 15 U.S.C. 78q-1(b)(3)(A) and (F); 17 CFR 240.17Ad-
22(d)(3).
---------------------------------------------------------------------------

iii. Default Management, Loss Allocation, and Recovery
    As described in Section II.D.iii. above, LCH SA has rules, 
policies, and procedures regarding the management of losses resulting 
from a CDSClear member default. Specifically, LCH SA's rules, policies 
and procedures require LCH SA, upon the declaration of a CDSClear 
member's default, (i) to take action to hedge against market risk of 
the defaulting member's portfolio, (ii) to transfer customer positions 
to non-defaulting members, if the applicable provisions of LCH SA's 
rules are met, and (iii) to dispose of the defaulting member's 
portfolio through a competitive auction process. The Commission finds 
that LCH SA's rules allowing for the porting of customer positions are 
designed to safeguard securities and funds and protect investors, 
consistent with Section 17A(b)(3)(F) of the Act.\161\ The hedging and 
disposition of the defaulting member's positions through default 
auction procedures further safeguards LCH SA's securities and funds by 
allowing LCH SA to limit the amount of losses that either LCH SA or its 
non-defaulting clearing members must bear as a result of the member's 
default.
---------------------------------------------------------------------------

    \161\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    This entire default management process must be completed within 
five business days. These policies and procedures provide for the use 
of financial resources in accordance with the CDSClear default 
waterfall, to cover losses associated with the member's default while 
LCH SA conducts the competitive auction process in order to dispose of 
the defaulting member's portfolio. The only financial resources or 
recovery tools available to cover losses resulting from a CDSClear 
member's default are those specified in the CDSClear default waterfall. 
Furthermore, to manage liquidity pressures associated with a member's 
default, LCH SA monitors and measures its liquidity resources and 
requirements daily. To continue meeting its obligations, LCH SA may use 
cash collateral, other collateral it is able to liquidate in a timely 
manner, or its own capital as an immediately available liquidity 
resource. LCH SA may also access central bank liquidity through the 
Banque de France, as well as other secured financing facilities that 
LCH SA maintains. The Commission finds that, taken together, these 
tools allow LCH SA to contain losses within the CDSClear service and 
manage liquidity pressures associated with a member's default, while 
continuing to meet its obligations, thereby allowing LCH SA to 
safeguard securities and funds and to continue to facilitate prompt and 
accurate clearance and settlement, in accordance with Section 
17A(b)(3)(F) of the Act.\162\ The Commission finds that these tools are 
designed to mitigate the risk of financial loss contagion and therefore 
are consistent with the public interest requirement under Section 
17A(b)(3)(F).
---------------------------------------------------------------------------

    \162\ Id.
---------------------------------------------------------------------------

    Finally, the Commission notes that LCH SA's policies and procedures 
regarding its CDSClear default management process are available on its 
public Web site and can be reviewed by members and the general public 
alike. Based on the above, the Commission finds that LCH SA has 
established default procedures reasonably designed to ensure that it 
can take timely action to contain losses and liquidity pressures and to 
continue meeting its obligations in the event of a participant default, 
and to make key aspects of its default procedures publicly available, 
in accordance with the requirements of Rule 17Ad-22(d)(11), as well as 
the applicable requirements of Section 17A(b)(3)(F) of the Act.\163\
---------------------------------------------------------------------------

    \163\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(d)(11).
---------------------------------------------------------------------------

E. Operational Risk Management

1. Exchange Act Requirements
    Section 17A(b)(3)(A) of the Act provides that a clearing agency 
shall not be registered unless the Commission determines that such 
clearing agency has the capacity to be able to facilitate prompt and 
accurate clearance and settlement and the safeguarding of securities 
and funds. In this regard, Rule 17Ad-22(d)(4) requires a registered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, as applicable, identify 
sources of operational risk and minimize them through the development 
of appropriate systems, controls, and procedures; implement systems 
that are reliable, resilient and secure, and have adequate, scalable 
capacity; and have business continuity plans that allow for timely 
recovery of operations and fulfillment of a clearing agency's 
obligations.\164\
---------------------------------------------------------------------------

    \164\ 17 CFR 240.17Ad-22(d)(4).
---------------------------------------------------------------------------

2. Commission Findings
    As described in Section II.E above, LCH SA has established written 
policies and procedures that address the self-assessment, monitoring, 
measuring, reporting, and mitigation of operational risks to LCH SA. 
LCH SA's operational risk framework assigns roles and responsibilities 
to the business departments, Operational Risk Department, and Audit 
Department for the identification, monitoring, reporting, mitigation, 
and oversight of operational risks. The Audit Committee and Risk 
Committee are assigned oversight responsibilities for specific aspects 
of LCH SA's internal controls and the implementation of LCH SA's 
operational risk management processes. Thus, LCH SA's policies and 
procedures provide for multiple lines of defense and layers of 
oversight over operational risk management.
    In addition, LCH SA maintains written policies and procedures 
reasonably designed to ensure that LCH SA's systems are reliable, 
resilient and secure; and have business continuity plans that allow for 
timely recovery of operations and fulfillment of its operations. For 
example, LCH SA's business continuity policies provide for, among other 
things, regular threat assessments, operational and business continuity 
testing involving member participation, multiple systems and data 
centers at geographically dispersed locations, and the migration of 
data and functionality in the event of various types of business 
disruption.\165\ The Commission believes that the business continuity 
management policies, along with the maintenance and use of redundant 
systems at multiple back-up sites, will provide LCH SA with the 
capacity to timely recover its operations and fulfill its obligations 
in the event of a disruption. Moreover, as described above, LCH SA also 
maintains an ongoing self-assessment policy to continually monitor and 
assess operational risk, such as security risk, and provide for the 
mitigation of such risk when it exceeds applicable

[[Page 1408]]

tolerances.\166\ The Commission believes that the operational risk and 
business continuity testing required under LCH SA's rules, policies, 
and procedures will further assist LCH SA in identifying and minimizing 
sources of operational risk, as well as gain facility in responding to 
business disruption or disaster recovery scenarios. Additionally, as 
described above, the Commission believes that the information security 
policies and procedures adopted by LCH SA will assist LCH SA in 
ensuring that sensitive information is appropriately protected and that 
confidentiality of such information is maintained, that only authorized 
employees and other select entities are able to access and use such 
information, and that no such employees trade on this information for 
their personal accounts. Given the above, the Commission finds that LCH 
SA has established, implemented, and maintained operational risk 
management and business continuity policies that are reasonably 
designed to identify sources of operational risk and minimize them 
through appropriate systems, controls, and procedures; implement 
systems that are reliable, resilient and secure, and have adequate, 
scalable capacity; and allow for timely recovery of operations and 
fulfillment of LCH SA's obligations.
---------------------------------------------------------------------------

    \165\ See LCH SA Form CA-1, Exhibit K-2 (LCH Group Business 
Continuity Management Policy); LCH SA Form CA-1, Exhibit E-6.7 
(CDSClear CDS Clearing Procedures, Section 7: Business Continuity).
    \166\ See, e.g., LCH SA Form CA-1, Ex. K-3 (LCH. Clearnet Group 
Information Security Strategy/Maturity Self-assessment tool); LCH 
Clearnet Group Operational Risk Policy--Operational Risk Management.
---------------------------------------------------------------------------

    For the reasons above, the Commission finds that LCH SA's 
governance and operational risk policies and procedures are designed to 
meet the requirements of Section 17A(b)(3)(A) concerning the capacity 
to facilitate the prompt and accurate clearance and settlement of 
securities transactions and the safeguarding of securities and funds, 
as well as the operational risk requirements under Rule 17Ad-22(d)(4).

F. Fees, Dues, and Charges

1. Exchange Act Requirements
    Sections 17A(b)(3)(D) and (E) of the Act require a clearing 
agency's rules to provide for the equitable allocation of reasonable 
dues, fees and other charges among its participants and prohibit the 
rules of a clearing agency from imposing any schedule of prices, or 
fixing rates or other fees for services rendered by its 
participants.\167\ Section 17A(b)(3)(I) provides that the rules of a 
clearing agency may not impose any burden on competition not necessary 
or appropriate in furtherance of the purposes of Section 17A.\168\
---------------------------------------------------------------------------

    \167\ 15 U.S.C. 78q-1(b)(3)(D) and (E).
    \168\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

2. Commission Findings
    In connection with its CDSClear service, LCH SA charges transaction 
fees linked to products, which are generally usage-based, as well as 
annual membership fees, which apply equally to all CDSClear members. 
LCH SA also imposes annual account structure fees for individually 
segregated accounts and omnibus segregated accounts that are equally 
applicable to all CDSClear members based on usage.\169\ The Commission 
finds that these fees apply equally to all members, that LCH SA does 
not impose any schedule of fees for services rendered by its 
participants and that these fees are not imposed in an attempt to 
burden competition. Accordingly, the Commission finds that LCH SA's 
CDSClear rules governing fees, dues, and charges are consistent with 
the requirements of Sections 17A(D), (E), and (I) of the Act.\170\
---------------------------------------------------------------------------

    \169\ See LCH SA Form CA-1, Exhibit Q (LCH SA Schedule of 
Prices, Rates or Fees Fixed by Registrant for Services Rendered by 
its Participants).
    \170\ 15 U.S.C. 78q-1(b)(3)(D), (E), and (I).
---------------------------------------------------------------------------

G. Prompt and Accurate Clearance and Settlement

1. Exchange Act Requirements
    Section 17A(b)(3)(A) of the Act \171\ provides that a clearing 
agency shall not be registered unless the Commission finds that the 
clearing agency is so organized and has the capacity to facilitate the 
prompt and accurate clearance and settlement of securities transactions 
and derivative agreements, contracts, and transactions for which it is 
responsible. Similarly, Exchange Act Section 17A(b)(3)(F) requires a 
clearing agency to have rules designed to promote these same 
goals.\172\
---------------------------------------------------------------------------

    \171\ 15 U.S.C. 78q-1(b)(3)(A).
    \172\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

2. Commission Findings
    The Commission finds that, based on LCH SA's rules, policies, and 
procedures described above pertaining to its CDSClear membership 
standards; capacity to enforce rules and discipline CDSClear members; 
governance, particularly in connection with financial and operational 
risk management responsibilities of the Audit and Risk Committees; 
financial resources; investment of cash collateral and liquidity risk 
management; and CDSClear default management loss allocation and 
recovery, taken together, LCH SA is so organized and has the capacity 
to facilitate the prompt and accurate clearance and settlement and has 
rules designed to promote these same goals, in accordance with Sections 
17A(b)(3)(A) and 17A(b)(3)(F) of the Act.\173\
---------------------------------------------------------------------------

    \173\ 15 U.S.C. 78q-1(b)(3)(A) and (F).
---------------------------------------------------------------------------

    As a first line of defense, LCH SA's CDSClear membership standards 
seek to ensure that applicants will not be accepted if they lack the 
ability to meet obligations to LCH SA for operational or financial 
reasons. Similarly, LCH SA's policies and procedures that establish its 
authority to enforce its rules and discipline members are designed to 
minimize risks from existing members to LCH SA's ability to facilitate 
prompt and accurate clearance and settlement. LCH SA's governance 
structure, which creates multiple lines of oversight over specific 
responsibilities of--and interactions among--its business departments, 
control departments, Board-level committees, and ultimately Board of 
Directors, is designed to identify, minimize, mitigate, and oversee the 
management of operational and financial risks both external to and 
inherent in LCH SA. If a financial risk emerges in the form of a member 
default, for example, LCH SA's rules, policies, and procedures, as 
described in the application, contemplate the ability to cover losses 
consistent with the cover two standard using pre-funded resources. To 
the extent CDSClear pre-funded resources are insufficient, LCH SA may 
draw on assessment powers and loss allocation and recovery tools 
established in accordance with its rules, policies, and procedures, to 
continue meeting clearance and settlement obligations. In addition, LCH 
SA's CDSClear rules are designed to ensure that, during the default 
management process, which may last no longer than five business days, 
LCH SA may continue to offer CDSClear services only if its financial 
resources, including assessment powers and Variation Margin 
Haircutting, are sufficient to support a successful disposition of the 
defaulting member's portfolio through auction and meet LCH SA's daily 
settlement obligations.
    Based on the foregoing, the Commission believes that LCH SA's 
rules, policies and procedures meet the requirements of Sections 
17A(b)(3)(A) and 17A(b)(3)(F) of the Exchange Act.\174\
---------------------------------------------------------------------------

    \174\ Id.
---------------------------------------------------------------------------

IV. Request for Exemptive Relief

    In connection with its application for registration as a clearing 
agency, as described above, LCH SA has submitted a Request for 
Exemptive Relief from certain requirements of the Exchange

[[Page 1409]]

Act and the rules thereunder.\175\ Section 36 of the Act authorizes the 
Commission to conditionally or unconditionally exempt any person, 
security, or transaction, or any class or classes of persons, 
securities, or transactions, from certain provisions of the Exchange 
Act or certain rules or regulations thereunder, to the extent that such 
exemption is necessary or appropriate in the public interest, and is 
consistent with the protection of investors.\176\ After careful 
consideration, as further discussed below, the Commission concludes 
that the conditional exemptive relief requested by LCH SA is necessary 
or appropriate in the public interest, and is consistent with the 
protection of investors.
---------------------------------------------------------------------------

    \175\ See supra note 8 and accompanying text.
    \176\ 15 U.S.C. 78mm.
---------------------------------------------------------------------------

A. Exemptive Relief from Sections 5 and 6 of the Act

1. Background
    Section 5 of the Act prohibits any broker, dealer, or exchange from 
using any facility of an exchange to effect any transaction in a 
security, or to report any such transaction, unless such exchange is 
registered as a national securities exchange.\177\ Section 6 of the Act 
sets out the terms and conditions for registration of an exchange.\178\ 
LCH SA has requested exemptive relief (i) from the requirements of 
Sections 5 and 6 of the Act with respect to its ``forced trade'' 
mechanism used in the calculation of settlement prices for open 
positions in cleared CDS; and (ii) for each of its CDSClear members 
that are brokers or dealers, from Section 5 of the Act with respect to 
their participation in the forced trade mechanism.\179\ LCH SA 
represents that, as part of its clearing and risk management processes 
for cleared CDS transactions in its CDSClear services, including 
single-name CDS cleared by LCH SA (``Single-Name CDS''), it computes 
the end-of-day settlement price for each contract in which any of its 
members has a cleared position, based on off-market prices submitted by 
its clearing members, and uses those prices to establish a daily mark 
on which to base margin calculations. To promote the integrity of these 
price submissions, LCH SA employs a forced trade mechanism pursuant to 
which its members are required at certain times to execute CDS trades 
based on their price submissions.\180\
---------------------------------------------------------------------------

    \177\ 15 U.S.C. 78e et seq.
    \178\ 15 U.S.C. 78f et seq.
    \179\ See Request for Exemptive Relief at 2.
    \180\ See id. at 3-4.
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2. LCH SA's Representations
    LCH SA acknowledges that, absent an exemption, LCH SA's forced 
trade mechanism would cause LCH SA to meet the criteria of Rule 3b-16 
under the Act \181\ and, as a result, would require LCH SA to register 
with the Commission as a national securities exchange under Sections 5 
and 6 of the Act or obtain an appropriate an exemption therefrom. 
Additionally, any clearing member that is a broker or dealer would not 
be permitted to utilize LCH SA to effect any transaction in a security, 
or to report any such transaction, unless LCH SA were registered as a 
national securities exchange or had obtained an appropriate exemption.
---------------------------------------------------------------------------

    \181\ 17 CFR 240.3b-16.
---------------------------------------------------------------------------

3. Commission Findings
    The Commission notes that it previously has granted the temporary, 
conditional exemptive relief that LCH SA has requested under Sections 5 
and 6 of the Act to CDS clearing agencies ICE Clear Credit, ICE Clear 
Europe, and CME.\182\ The Commission notes that LCH SA's procedures for 
calculating end-of-day settlement prices and LCH SA's forced trade 
mechanism are substantially similar to the other CDS clearing agencies 
and does not believe that any differences between LCH SA's forced trade 
mechanism and those of the other CDS clearing agencies warrant 
different treatment in the consideration of LCH SA's requested relief 
from the requirements of Sections 5 and 6 of the Act. In light of the 
risk management benefits of the forced trade mechanism in maintaining 
the integrity of the pricing process, the Commission finds it necessary 
or appropriate in the public interest and consistent with the 
protection of investors to grant a temporary conditional exemption to 
LCH SA from the requirements of Sections 5 and 6 of the Act, and to its 
CDSClear clearing members from the requirements of Section 5 of the 
Act, subject to the conditions described below. These exemptions are 
solely with respect to the forced trade mechanism used in connection 
with the calculation of settlement prices for cleared CDS. As with the 
exemptions granted to other CDS clearing agencies in the Commission's 
Temporary Exemptions Release, the exemptions from Section 5 and 6 
applicable to LCH SA and to its clearing members that are brokers or 
dealers will remain in effect until the earliest compliance date set 
forth in any of the final rules regarding the registration of security-
based swap execution facilities and will be subject to the following 
conditions: \183\
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    \182\ See Order Granting Temporary Exemptions under the 
Securities Exchange Act of 1934 in Connection with the Pending 
Revision of the Definition of ``Security'' to Encompass Security-
Based Swaps, and Request for Comment, Securities Exchange Act Rel. 
No. 34-64795 (Jul. 1, 2011), 76 FR 39927, 39934 (Jul. 7, 2011) 
(``Temporary Exemptions Release'').
    \183\ See id. at 39934.
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    First, LCH SA shall report to the Commission the following 
information with respect to its calculation of settlement prices for 
Single-Name CDS within thirty (30) calendar days of the end of each 
quarter, and to electronically preserve such reports for a period of 
ten (10) years: (a) The total dollar volume of transactions executed 
during the quarter, broken down by reference entity; and (b) the total 
unit volume and/or notional amount executed during the quarter, broken 
down by reference entity. Reporting of this information will assist the 
Commission in carrying out its responsibility to supervise and regulate 
the securities markets.
    Second, LCH SA shall establish and maintain adequate safeguards and 
procedures to protect clearing members' confidential trading 
information, including: (a) Limiting access to the confidential trading 
information of clearing members to those employees of LCH SA who are 
operating the systems or are responsible for their compliance with this 
exemption or any other applicable rules; and (b) establishing and 
maintaining standards controlling LCH SA employees who trade for their 
own accounts.\184\ LCH SA shall establish and maintain adequate 
oversight procedures to ensure that the safeguards and procedures 
established pursuant to this condition are followed. This condition is 
designed to prevent any misuse of trading information that may be 
available to LCH SA in connection with the forced trade mechanism. This 
condition is expected to strengthen confidence in LCH SA's protections 
of confidential trading information, thus promoting participation.
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    \184\ See supra notes 70 and 71. As discussed above LCH SA 
currently has policies and procedures in place that control access 
to confidential information, including confidential information 
relating to LCH SA clearing members, and that control the personal 
trading of LCH SA employees.
---------------------------------------------------------------------------

    Third, LCH SA shall directly or indirectly make available to the 
public on terms that are fair and reasonable and not unreasonably 
discriminatory: (a) All end-of-day settlement prices and any other 
prices with respect to Single-Name CDS that it may establish to 
calculate mark-to-market margin requirements for its clearing members;

[[Page 1410]]

and (b) any other pricing or valuation information with respect to 
Single-Name CDS as is published or distributed by LCH SA. This 
condition is designed to make relevant pricing data available to the 
public on terms that are fair and reasonable and not unreasonably 
discriminatory.
    Finally, LCH SA shall implement policies and procedures designed to 
ensure compliance with these terms and conditions relating to the 
requested exemptive relief from Sections 5 and 6 of the Act, and shall 
conduct periodic internal reviews related to its compliance program.

B. Exemptive Relief from Section 19(b) of the Act and Rule 19b-4 
Thereunder

1. Background
    Pursuant to Section 19(b)(1) of the Exchange Act, self-regulatory 
organizations (``SROs''), including registered clearing agencies, are 
required to file with the Commission copies of any proposed rule,\185\ 
or any addition to or deletion from their existing rules (a ``proposed 
rule change'').\186\ LCH SA has requested exemptive relief from the 
requirements of Section 19(b) of the Act and Rule 19b-4 thereunder with 
respect to filing certain proposed rule changes that (i) primarily 
affect its clearing operations with respect to its Non-U.S. Business, 
and (ii) do not significantly affect any CDSClear operations or any 
rights or obligations of LCH SA with respect to the CDSClear services 
or persons using such services (``Non-U.S. Business Rule 
Changes'').\187\ As a condition of the requested relief, LCH SA has 
proposed to provide notice of its Non-U.S. Business Rule Changes to 
Commission staff in lieu of filing such changes under Section 19(b) and 
Rule 19b-4 once such changes are duly approved by its national 
competent authorities.
---------------------------------------------------------------------------

    \185\ See 15 U.S.C. 78c(a)(27) (defining ``rules of a clearing 
agency'') and (28) (defining ``rules of a self-regulatory 
organization'').
    \186\ See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4(a)(4) 
(defining ``proposed rule change'').
    \187\ See Request for Exemptive Relief at 2-3.
---------------------------------------------------------------------------

    As described above, LCH SA represents that its Non-U.S. Business is 
comprised of clearing services offered completely offshore entirely to 
non-U.S. persons outside of the United States that would not otherwise 
implicate the Commission's registration requirements under the Act, nor 
those of the CFTC.\188\
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    \188\ See Request for Exemptive Relief at 5-12. As noted above, 
LCH SA currently provides clearing services for equities, exchange-
traded futures and options, as well as fixed income instruments and 
commodity products traded on European exchanges and multilateral 
trading facilities in which no U.S. persons participate as clearing 
members, i.e. its Non-U.S. Businesses.
    Specifically, LCH SA's Non-U.S. Business currently includes: (i) 
``EquityClear'', which refers to clearing services in respect of 
equities, debt instruments and futures contracts traded on the 
Euronext, Equiduct, and Bourse de Luxembourg trading platforms; (ii) 
``CommodityClear'', which refers to clearing services in respect of 
futures and options for agricultural and energy products on 
Euronext; and (iii) ``RepoClear'', which refers to clearing services 
in respect of repo transactions on French, Italian and Spanish 
government debt as well as corporate debt, and also includes the 
Euro GC+ clearing service. LCH SA may expand its Non-U.S. Business 
to include other new services. At all times, the Non-U.S. Business 
does not and will not have any U.S. clearing members or extend 
membership to any U.S. persons. See LCH SA Form CA-1, Exhibit C; 
Request for Exemptive Relief at 6-8 & n.22.
---------------------------------------------------------------------------

    LCH SA also represents that its CDSClear service, from which it 
intends to offer clearing services for Single-Name CDS to U.S. persons, 
will be maintained separate and apart from its Non-U.S. Business. 
Specifically, LCH SA's Non-U.S. Business has: (1) Separate rules, 
including policies and procedures; (2) distinct financial safeguards 
and default arrangements; and (3) significant numbers of exclusively 
dedicated personnel and information technology services. LCH SA 
maintains that such separation will ensure that the rights and 
obligations of a U.S. person participating in the CDSClear services 
would not be affected by a member default or operational risk occurring 
in the Non-U.S. Business. In other words, LCH SA represents that 
``there is no possibility of risk contagion or mutualization . . . [to 
U.S. persons participating in CDSClear] in the event of a member 
default in the other services provided by the Non-U.S. Business.'' 
\189\
---------------------------------------------------------------------------

    \189\ Request for Exemptive Relief at 11.
---------------------------------------------------------------------------

    LCH SA nonetheless acknowledges that CDSClear is not totally 
separated from the rest of its business. Among other things, LCH SA's 
overall governance framework applies equally to CDSClear and the other 
services provided by the Non-U.S. Business.\190\ Similarly, LCH SA's 
risk management framework requires certain functions to be shared 
across all of its various business lines in order for risks to be 
adequately managed while maintaining an appropriate segregation of 
duties. LCH SA represents that CDSClear and the Non-U.S. Business 
jointly rely on certain resources (collectively, ``Shared Support 
Functions''), which include second-line risk management, treasury/
liquidity management, legal and compliance, systems safeguards/
security/business continuity, internal audit, finance and human 
resources.
---------------------------------------------------------------------------

    \190\ LCH SA's Board of Directors maintains overall 
responsibility for risk management of all clearing services; 
subcommittees of the Board, including the Audit Committee, Risk 
Committee and Remuneration Committee, exercise their functions 
across all clearing services. In addition, LCH SA maintains an 
executive committee, known as the ``Local Management Committee'', 
which has overall responsibility for LCH SA's risk function. The LCH 
Group has also established certain risk committees with joint 
oversight responsibility across LCH SA, LCH Limited and LCH LLC, 
including the Executive Risk Committee, Market Risk Management 
Committee, and Credit Risk Management Committee.
---------------------------------------------------------------------------

    In recognition of CDSClear's relationship to its Non-U.S. Business, 
LCH SA does not seek an exemption from filing all rule changes 
pertaining to its Non-U.S. Business. Specifically, LCH SA does not seek 
exemption from filing rule changes which significantly affect any 
CDSClear operations or any rights or obligations of LCH SA with respect 
to the CDSClear services or persons using such services. Thus, even if 
LCH SA's request for exemptive relief were granted, LCH SA would 
nonetheless be required to file, pursuant to Section 19(b) and Rule 
19b-4, rule changes that do not explicitly pertain to the CDSClear 
services, but have a significant impact on the CDSClear operations, 
such as proposed rule changes relating to Shared Support Functions.
2. LCH SA's Representations
    LCH SA contends that the exemptive relief it has proposed is 
consistent with Section 36 of the Act because such relief is necessary 
or appropriate in the public interest, and is consistent with the 
protection of investors. In particular, LCH SA argues that relief is 
necessary or appropriate in the public interest because applying rule 
filing requirements under Section 19(b) of the Act and Rule 19b-4 
thereunder would not advance the Commission's regulatory interests, as 
applied to its Non-U.S. Business Rule Changes. Additionally, in light 
of the separation between CDSClear and its Non-U.S. Business, LCH SA 
maintains that this exemption is consistent with the protection of 
investors because it would not compromise the Commission's oversight 
responsibility with respect to LCH SA as a whole.
    LCH SA believes that the existing rule filing framework, as applied 
to its Non-U.S. Business Rule Changes, is both burdensome and would not 
advance the Commission's regulatory interests. In particular, LCH SA 
asserts that it is registered with the CFTC for the purposes of 
clearing index CDS (which are swaps) and with the Commission for the 
purpose of clearing single-name CDS (which are security-based swaps). 
LCH SA notes that clearing agencies that are also registered with the 
CFTC as a DCO (``Dually-Registered Clearing Agencies'') are permitted 
to rely on Rule 19b-

[[Page 1411]]

4(f)(4)(ii) to file certain proposed rule changes under Section 
19(b)(3)(A) of the Act.\191\ That rule is designed to eliminate 
unnecessary delays that could arise from the differences between the 
Commission's rule filing process and the CFTC's self-certification 
process for rule changes primarily affecting clearing with respect to 
swaps, futures, options on futures and forwards regulated by the CFTC 
that also do not significantly affect any securities clearing 
operations or the rights or obligations of the clearing agency with 
respect to securities clearing or persons using the securities-clearing 
service.\192\
---------------------------------------------------------------------------

    \191\ 17 CFR 240.19b-4(f)(4)(ii).
    \192\ Amendment to Rule Filing Requirements for Dually-
Registered Clearing Agencies, 78 FR 21046, 21048 (April 9, 2013), 
hereinafter referred to as ``Dually Registered Clearing Agency 
Release'').
---------------------------------------------------------------------------

    Nonetheless, LCH SA maintains that this framework does not 
adequately consider its status as a foreign clearing agency registered 
with--and subject to supervision by--its own national competent 
authority. In light of the significant separation it maintains between 
CDSClear and its Non-U.S. Business, LCH SA seeks an exemption from 
filing its Non-U.S. Business Rule Changes. LCH SA asserts that its Non-
U.S. Business would not otherwise require it to register with the 
Commission as a clearing agency but for the fact that LCH SA intends to 
expand its CDSClear business to offer clearing services for Single-Name 
CDS to U.S. persons.\193\ Thus, LCH SA argues that because CDSClear 
participants are ring-fenced from risks associated with its Non-U.S. 
Business and the Commission would not regulate its Non-U.S. Business 
standing alone, requiring the filing of Non-U.S. Business Rule Changes 
``would not serve the SEC's regulatory interest.'' \194\
---------------------------------------------------------------------------

    \193\ Request for Exemptive Relief at 6 & n.21.
    \194\ Request for Exemptive Relief at 11-12.
---------------------------------------------------------------------------

    In addition, LCH SA maintains that it has tailored its exemption 
request to ensure that the Commission's regulatory interests in 
overseeing LCH SA on an entity-wide basis are not compromised. As 
described above, LCH SA notes that rule changes to its Non-U.S. 
Business clearing which significantly affect any CDSClear operations or 
any rights or obligations of LCH SA with respect to the CDSClear 
services or persons using such services will nonetheless be filed with 
the Commission pursuant to Section 19(b) of the Exchange Act and Rule 
19b-4. In addition, as a condition of the exemptive relief it seeks, 
LCH SA will provide Commission staff notice of and copies of all Non-
U.S. Business Rule Changes once such changes are duly approved by its 
national competent authorities in lieu of filing such changes under 
Section 19(b) and Rule 19b-4. Taken as whole, LCH SA maintains that its 
exemptive request does not compromise the Commission's historical 
approach of overseeing clearing agencies on an entity-wide basis. 
Accordingly, LCH SA maintains that an exemption from filing its Non-
U.S. Business Rule Changes with the Commission is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.
3. Commission Findings
    The Commission notes that its oversight responsibility over 
registered clearing agencies extends to the clearing agency as a whole 
and is entity-based, rather than product-based. \195\ Therefore, absent 
exemptive or other relief, a registered clearing agency is required to 
comply with all applicable requirements under the Exchange Act, 
including filing all proposed rule changes with the Commission. The 
Commission has previously explained that a clearing agency's failure to 
submit proposed rule changes would prevent the Commission from 
discharging its statutory responsibilities.\196\ After careful 
consideration of the specific facts and circumstances of LCH's request 
for exemptive relief, and as further described below, the Commission 
concludes that granting to LCH SA a conditional exemption from Section 
19(b) of the Act and Rule 19b-4 thereunder in connection with LCH SA's 
Non-U.S. Business Rule Changes is necessary or appropriate in the 
public interest, and is consistent with the protection of investors, 
subject to the condition that LCH SA will provide notice of such Non-
U.S. Business Rule Changes to the Commission staff within three 
business days of being duly approved by LCH SA's national competent 
authorities.
---------------------------------------------------------------------------

    \195\ The Commission has explained that its oversight 
responsibility over registered clearing agencies ``extends to the 
clearing agency as a whole and is entity based, rather than product-
based.'' Dually Registered Clearing Agency Release, 78 FR at 21050 & 
n.52.
    \196\ See id.
---------------------------------------------------------------------------

    First, the Commission finds that requiring LCH SA to file Non-U.S. 
Business Rule Changes would not advance the Commission's regulatory 
interest in overseeing registered clearing agencies. In the Dually 
Registered Clearing Agency Release, the Commission explained that a 
proposed rule change ``primarily affects'' a clearing agency's clearing 
operation with respect to products that are not securities ``when it is 
targeted to matters related only to the clearing of those products.'' 
\197\ Therefore, for a proposed rule change to primarily affect LCH 
SA's clearing operations with respect to its Non-U.S. Business, it must 
be targeted to matters related only to the clearing of the products 
offered by the services provided in the Non-U.S. Business. As such, the 
Non-U.S. Business Rule Changes would be targeted to matters concerning 
LCH SA's offshore business in which U.S. persons do not participate. 
Further, LCH SA has represented that its Non-U.S. Business will not 
extend membership to any U.S. persons.\198\ In addition, as described 
above, LCH has represented that it has a structure that essentially 
ring-fences its CDSClear business in which U.S. persons will 
participate from its Non-U.S. Businesses.\199\ Therefore, U.S. persons 
participating in CDSClear will not be exposed to risks resulting from 
LCH SA's Non-U.S. Business Rule Changes. Taken together, the Commission 
concludes that reviewing LCH SA's Non-U.S. Business Rule Changes for 
purposes of approval or disapproval would not materially advance its 
regulatory interests. \200\
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    \197\ See id.
    \198\ Request for Exemptive Relief at 6, n.22.
    \199\ Id. at 11 & n.34. LCH SA acknowledges that U.S. persons 
remain at risk from a default in treasury management, and for that 
reason rule changes involving that function, along with other Shared 
Support Functions, are not subject to the exemption. Id.
    \200\ See Securities Exchange Act Release Nos. 34-43775 (Dec. 
28, 2000), 66 FR 819 (Jan. 4, 2001) (order exempting Euroclear Bank 
from clearing agency registration) and 34-39643 (Feb. 18, 1998), 63 
FR 8232 (Feb. 18, 1998) (order exempting Euroclear Bank's 
predecessor, Morgan Guaranty Trust Company, as operator of the 
Euroclear system, from clearing agency registration); Securities 
Exchange Act Release No. 34-38328 (Feb. 24, 1997), 62 FR 9225 (Feb. 
28, 1997) (order exempting Clearstream Bank, formerly Cedel Bank, 
from clearing agency registration); and Exemption of Certain Foreign 
Brokers or Dealers, Proposed Rule, 73 FR 39182, 39198 (July 8, 
2008).
---------------------------------------------------------------------------

    Second, the Commission finds that allowing LCH not to file these 
rule changes would not compromise the Commission's oversight 
responsibilities over registered clearing agencies on an entity basis. 
\201\ As stated in the Dually Registered Clearing Agency Release, the 
Commission would not consider rules of general applicability that would 
apply equally to CDSClear operations and Non-U.S. Business to be 
``primarily affecting'' LCH SA's clearing operations with respect to 
the Non-U.S. Business.\202\ Therefore, this exemptive relief would not 
relieve LCH SA from the obligation of filing rules of general

[[Page 1412]]

applicability in accordance with Section 19(b). For example, to the 
extent a proposed rule change regarding the Shared Support Functions 
constitutes a rule of general applicability that would apply equally to 
CDSClear operations and the Non-U.S. Business, it would not be 
considered to primarily affect LCH SA's Non-U.S. Business, and LCH SA 
would be required to file such proposed rule change for the 
Commission's review in accordance with Section 19(b).\203\
---------------------------------------------------------------------------

    \201\ See, e.g., Dually Registered Clearing Agency Release at 
21050. (``The Commission's oversight responsibility over [registered 
clearing agencies] extends to the clearing agency as a whole and is 
entity-based, rather than product based'').
    \202\ See id.
    \203\ This is consistent with the Commission's approach taken in 
the Dually Registered Clearing Agency Release, where the Commission 
stated that ``rules of general applicability that would apply 
equally to securities clearing operations, including security-based 
swaps, would not be considered to primarily affect a Registered 
Clearing Agency's non-securities clearing operations.'' See id.
---------------------------------------------------------------------------

    Similarly, consistent with the Dually Registered Clearing Agency 
Release, changes to general provisions in the constitution, articles, 
or bylaws of LCH SA that address the operations of the entire clearing 
agency would also affect CDSClear.\204\ Therefore, LCH SA would be 
required to file any proposed rule changes to its constitution, 
articles, bylaws, or other rule changes that address its operations on 
an entity-wide basis, with the Commission in accordance with Section 
19(b) and Rule 19b-4.
---------------------------------------------------------------------------

    \204\ Id.
---------------------------------------------------------------------------

    Furthermore, Non-U.S. Business Rule Changes would not include 
proposed rule changes that would ``significantly affect'' LCH SA's 
CDSClear Services. As the Commission stated in the Dually Registered 
Clearing Agency Release, a proposed rule change may significantly 
affect securities clearing operations, ``even in circumstances when 
such effects may be indirect.'' \205\ Therefore, LCH SA would be 
required to file a proposed rule change that significantly affects its 
CDSClear operations with the Commission, even in circumstances where 
the effects of such proposed rule change on the CDSClear operations are 
indirect.
---------------------------------------------------------------------------

    \205\ Id.; see also id. at n.50.
---------------------------------------------------------------------------

    Based on the above, the Commission believes that granting LCH SA 
exemptive relief from the rule filing requirement with respect to the 
Non-U.S. Business Rule Changes is necessary or appropriate in the 
public interest, and consistent with the protection of investors, 
because doing so would preserve the Commission's regulatory interest in 
protecting the rights and obligations of U.S. persons participating in 
the CDSClear services and facilitate LCH SA's operational, risk 
management, and other changes pertaining to the Non-U.S. Business as 
effected by Non-U.S. Business Rule Changes, without compromising the 
Commission's oversight of LCH SA on an entity basis.
    To monitor LCH SA's implementation of the exemptive relief, a 
condition of the exemptive relief is that LCH SA provide notice to 
Commission staff of its Non-U.S. Business Rule Changes within three 
business days once duly approved by LCH SA's national competent 
authorities. This requirement will provide the Commission with the 
ability to review LCH SA's determination of what constitutes Non-U.S. 
Business Rule Changes and to ensure that such determination is 
consistent with the scope of this exemptive relief such that the 
exemptive relief does not undermine the Commission's oversight over LCH 
SA under the Exchange Act.

C. Exemptive Relief From Rules 17Ad-22(c)(2) and 17Ad-22(c)(2)(iii)

    LCH SA requests exemptive relief from the requirements of the 
introductory paragraph of Rule 17Ad-22(c)(2) and from Rule 17Ad-
22(c)(2)(iii) with respect to its financial statements for fiscal years 
2014 and 2015.\206\ The introductory paragraph of Rule 17Ad-22(c)(2) 
requires that, within 60 days after the end of a clearing agency's 
fiscal year, the clearing agency must post its annual audited financial 
statements to its Web site.\207\ Rule 17Ad-22(c)(2)(iii) also requires 
that financial statements for the past two years be audited in 
accordance with the standards of the Public Company Accounting 
Oversight Board (``PCAOB'') by a registered public accounting firm that 
is qualified and independent in accordance with 17 CFR 210.2-01 (the 
``PCAOB Standards'').\208\
---------------------------------------------------------------------------

    \206\ See Request for Exemptive Relief at 4.
    \207\ 17 CFR 240.17Ad-22(c)(2).
    \208\ 17 CFR 240.17Ad-22(c)(2)(iii).
---------------------------------------------------------------------------

1. Background
    As a factual matter, LCH SA represents that pursuant to the listing 
rules to which its indirect parent company LSEG is subject, LCH SA is 
not permitted to publish its own financial statements prior to the 
publication of LSEG's financial statements.\209\ Given the scope of 
LSEG's business activities, LCH SA represents that it is ``not 
possible'' for LSEG to publish its financial statements within 60 days 
of the end of its fiscal year, nor would LCH SA have control over when 
such financial statements ultimately would be published.\210\ LCH SA 
has requested instead that it post such annual audited financial 
statements no later than the first quarter following its fiscal year-
end.
---------------------------------------------------------------------------

    \209\ See Request for Exemptive Relief at 15.
    \210\ Id.
---------------------------------------------------------------------------

    In addition, LCH SA represents that it currently prepares its 
financial statements in accordance with International Financial 
Reporting Standards (``IFRS''), and its financial statements are 
audited in accordance with International Standards on Auditing 
(``ISA''). Additionally, LCH SA states that, under French law, it is 
required to maintain two statutory auditing firms that jointly sign the 
annual audited accounts.\211\ LCH SA represents that it has made 
arrangements to ensure that, beginning in 2016, its annual financial 
statements will be audited in accordance with Public Company Accounting 
Oversight Board (``PCAOB'') standards and will be signed by auditors 
who meet the relevant PCAOB qualifications.\212\
---------------------------------------------------------------------------

    \211\ See Request for Exemptive Relief at 14.
    \212\ Id. at 13.
---------------------------------------------------------------------------

    However, absent exemptive relief, upon registration with the 
Commission in 2016, LCH SA would be required to have its 2014 and 2015 
annual financial statements audited in accordance with PCAOB standards. 
LCH SA represents that its 2014 and 2015 financial records would need 
to be re-analyzed (including reviewing past judgments regarding 
accounting figures), and that re-opening its audit files in such a 
manner would present practical and potentially legal challenges. In 
addition, compliance with Rule 17Ad-22(c)(2)(iii) prior to the end of 
the calendar year would impose material burdens on LCH SA, its staff 
and auditors.\213\ LCH SA states that such challenges would be further 
exacerbated if the relief requested were to be granted only with 
respect to LCH SA's 2014 financial statements, as auditing its 2015 
financial statements in isolation would cause auditors to use unaudited 
2014 figures in their auditing report for the 2015 financial 
statements.\214\
---------------------------------------------------------------------------

    \213\ Id. at 14.
    \214\ Id.
---------------------------------------------------------------------------

2. LCH SA's Representations
    LCH SA argues that its requests for relief from Rules 17Ad-22(c)(2) 
and 17Ad-22(c)(2)(iii) are necessary or appropriate in the public 
interest, and consistent with the protection of investors in accordance 
with Section 36 of the Act.\215\ LCH SA maintains that it cannot comply 
with the requirement of Rule 17Ad-22(c)(2) \216\ that audited financial 
statements be published within 60 days of its fiscal year-end because 
UK Listing Rules forbid publication of LCH SA's annual

[[Page 1413]]

financial statements before those of its indirect parent, LSEG, over 
which LCH SA has limited control. Moreover, LCH SA contends that not 
only does it have limited control over when LSEG publishes its audited 
annual financial statements, LSEG is not able to publish its annual 
audited financial statements within the timeframe required under Rule 
17Ad-22(c).\217\ Thus, absent exemptive relief, LCH SA could not comply 
with this requirement.
---------------------------------------------------------------------------

    \215\ 17 CFR 240.17Ad-22(c)(2) and 17 CFR 240.17Ad-
22(c)(2)(iii); 15 U.S.C. 78mm.
    \216\ 17 CFR 240.17Ad-22(c)(2).
    \217\ Id.
---------------------------------------------------------------------------

    With respect to Rule 17Ad-22(c)(2)(iii),\218\ LCH SA argues that 
temporary exemptive relief is warranted as LCH SA has already committed 
to comply with Rule 17Ad-22(c)(2)(iii) on a prospective basis and it 
asserts that retroactive compliance with this provision raises 
significant practical--and potentially legal--challenges stemming from 
reanalyzing prior financial records and reopening the work of prior 
auditors. Moreover, LCH SA maintains that a PCAOB-compliant audit for 
2016 necessitates de facto compliance for 2015 to ensure that the 2016 
audit begins with an accurate 2015 closing balance.
---------------------------------------------------------------------------

    \218\ 17 CFR 240.17Ad-22(c)(2)(iii).
---------------------------------------------------------------------------

3. Commission Findings
    The Commission concludes that LCH SA's requests for exemptions from 
Rule 17Ad-22(c) and Rule 17Ad-22(c)(2)(iii) \219\ are necessary or 
appropriate in the public interest and consistent with the protection 
of investors.
---------------------------------------------------------------------------

    \219\ 17 CFR 240.17Ad-22(c)(2) and 17 CFR 240.17Ad-
22(c)(2)(iii).
---------------------------------------------------------------------------

    With respect to LCH SA's request for an exemption from Rule 17Ad-
22(c)(2),\220\ the Commission recognizes the legal and practical 
necessity that LSEG, as the ultimate parent company, publish its 
financial statements prior to LCH SA, and the inability of LCH SA as a 
subsidiary to change when LSEG can publish its financial statements. 
Thus, LCH SA would not be able to comply with the requirements of Rule 
17Ad-22(c)(2),\221\ and would not be able to register as a clearing 
agency with the Commission, absent the requested exemptive relief. The 
Commission believes that a delay of 31 days in the publication of the 
LCH SA's annual audited financial statements, were LCH SA to post its 
annual audited financial statements no later than the end of the first 
quarter following its year-end, would not have a material or meaningful 
impact on investor protection. Accordingly, the Commission finds it 
necessary or appropriate, and consistent with the protection of 
investors, to grant LCH SA exemptive relief from the requirement in 
Rule 17Ad-22(c)(2) \222\ that a clearing agency post its annual audited 
financial statements within sixty days following the end of its fiscal 
year, so long as LCH SA publishes such audited financial statements 
within one quarter of the end of its fiscal year.
---------------------------------------------------------------------------

    \220\ 17 CFR 240.17Ad-22(c)(2).
    \221\ 17 CFR 240.17Ad-22(c)(2).
    \222\ Id.
---------------------------------------------------------------------------

    Similarly, with respect to LCH SA's request for relief from Rule 
17Ad-22(c)(2)(iii),\223\ the Commission notes that the financial 
statements for which LCH SA requests relief from the PCAOB audit 
standards cover 2014 and 2015, years that do not overlap with any time 
during which LCH SA would be registered with the Commission. During 
2014, and 2015, LCH SA performed no clearing services for U.S. clearing 
members. The Commission also notes that these financial statements were 
audited, albeit under an alternative, internationally recognized 
auditing standard. Moreover, from 2016 onwards, the timeframe that 
would overlap with LCH SA's registration as a clearing agency, LCH SA's 
financial statements would be audited in accordance with PCAOB 
standards as required under Rule 17Ad-22(c)(2)(iii).\224\ Since LCH SA 
does not anticipate onboarding U.S. Clearing Members to CDSClear until 
2017, those members would have a reasonably clear view of LCH SA's 
finances at the time they become members of LCH SA. Based on the above 
and on LCH SA's representation that its annual audited financial 
statements from fiscal year 2016 onward will be audited in accordance 
with the requirements of 17Ad-22(c)(2)(iii),\225\ the Commission finds 
that it is necessary or appropriate in the public interest, and is 
consistent with the protection of investors, to grant LCH SA's 
requested relief from the requirements of Rule 17Ad-22(c)(2)(iii) \226\ 
to have annual financial statements for the past two years posted on 
its Web site that are audited in accordance with PCAOB standards, with 
respect to LCH SA's 2014 and 2015 annual audited financial statements.
---------------------------------------------------------------------------

    \223\ 17 CFR 240.17Ad-22(c)(2)(iii).
    \224\ Id.
    \225\ Id.
    \226\ Id.
---------------------------------------------------------------------------

D. Exemptive Relief From Rule 17a-22

    LCH SA also has requested exemptive relief from Exchange Act Rule 
17a-22,\227\ which provides, in relevant part, that within ten days 
after making available certain materials such as manuals, notices, 
circulars, and bulletins to its participants or other entities with 
whom it has a significant relationship, such as transfer agents (``Rule 
17a-22 Materials''), a registered clearing agency shall file three 
copies of such materials with the Commission. LCH SA requests exemptive 
relief from the requirement to file Rule 17a-22 materials where such 
materials (i) primarily affect LCH SA's clearing operations with 
respect to the Non-U.S. Business lines, and (ii) do not significantly 
affect any CDSClear operations or any rights or obligations of LCH SA 
with respect to its CDSClear services or persons using the CDSClear 
services.\228\ Additionally, LCH SA requests relief from the 
requirement of Rule 17a-22 to file physical copies of Rule 17a-22 
Materials primarily concerning its CDSClear services.\229\ LCH SA 
requests instead that it be permitted to provide the Commission with 
electronic submissions for Rule 17a-22 Materials with respect to 
CDSClear services.\230\
---------------------------------------------------------------------------

    \227\ 17 CFR 240.17a-22.
    \228\ See Request for Exemptive Relief at 15-16.
    \229\ 17 CFR 240.17a-22.
    \230\ Id.
---------------------------------------------------------------------------

1. LCH SA's Representations
    LCH SA states that its rationale for requesting exemptive relief 
from Rule 17a-22 is essentially the same as the rationale used to 
support its request for exemptive relief from Section 19(b) of the 
Exchange Act and Rule 19b-4 thereunder, as described above.\231\ 
Specifically, LCH SA believes that filing physical copies of Rule 17a-
22 materials with the Commission would not advance the Commission's 
regulatory interests as applied to any 17a-22 Materials related to its 
Non-U.S. Business, and that in light of the separation between CDSClear 
and its Non-U.S. Business such an exemption is consistent with the 
protection of investors because it would not compromise the 
Commission's oversight responsibility with respect to LCH SA as a 
whole.\232\
---------------------------------------------------------------------------

    \231\ See Request for Exemptive Relief at 15.
    \232\ See Request for Exemptive Relief at 8-13; see also supra 
Section IV.B.2.
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2. Commission Findings
    Consistent with the Commission's rationale above granting LCH SA's 
request for relief from Section 19(b) of the Act and Rule 19b-4 
thereunder with respect to LCH SA's Non-U.S. Business Rule 
Changes,\233\ the Commission finds it is necessary or appropriate in 
the public interest, and consistent with protection of investors, to 
grant LCH

[[Page 1414]]

SA's request for relief from Rule 17a-22 \234\ with respect to filing 
with the Commission Rule 17a-22 Materials pertaining to LCH SA's Non-
U.S. Business. The Commission also believes that granting LCH SA's 
request for exemptive relief from filing physical copies of Rule 17a-22 
Materials pertaining to the CDSClear business is necessary or 
appropriate in the public interest and consistent with the protection 
of investors. As a condition to such relief, LCH SA would file Rule 
17a-22 Materials pertaining to the CDSClear business via email rather 
than in hard copy.
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    \233\ See supra Section IV.B.3.
    \234\ 17 CFR 240.17a-22.
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    Allowing LCH SA to satisfy its applicable filing obligations under 
Rule 17a-22 in this manner will expedite the filing process and allow 
LCH SA to minimize costs arising from international mail delivery 
service. The Commission also believes the exemptive relief should have 
no impact on the Commission's ability to examine or otherwise supervise 
CDSClear operations because LCH SA's obligation to file materials 
relating to CDSClear operations or activities not falling within the 
definition of Non-U.S. Business would still apply.

V. Conclusion

    For the reasons discussed above, the Commission finds that LCH SA 
meets the requirements for registration as a clearing agency, including 
those standards set forth under Section 17A of the Act and the rules 
and regulations thereunder.
    Further, for the reasons discussed above, the Commission finds that 
the exemptions provided in this Order are necessary or appropriate in 
the public interest, and are consistent with the protection of 
investors.
    It is hereby ordered that the application for registration as a 
clearing agency filed by LCH SA (File No. 600-36) pursuant to Sections 
17A(b) and 19(a)(1) of the Act be, and hereby is, APPROVED.
    It is further ordered, pursuant to Section 36 of the Act, based on 
the representations and facts presented in LCH SA's Request for 
Exemptive Relief, that LCH SA is exempt from the requirements of 
Sections 5 and 6 of the Act, and LCH SA's CDSClear clearing members 
that are brokers or dealers are exempt from the requirements of Section 
5, solely with respect to the ``forced trade'' mechanism used in 
connection with the calculation of settlement prices for Single-Name 
CDS, and until the earliest compliance date set forth in any final 
rules regarding the registration of security-based swap execution 
facilities, subject to the following conditions:
    (a) LCH SA shall report to the Commission the following information 
with respect to its calculation of settlement prices for Single-Name 
CDS within thirty (30) calendar days of the end of each calendar 
quarter and electronically preserve such reports during a period of ten 
(10) years:
    (1) The total volume of transactions executed during the quarter, 
broken down by reference entity, presented in Euros, and converted into 
US Dollars;
    (2) The total unit volume and/or notional amount executed during 
the quarter, broken down by reference entity;
    (b) LCH SA shall establish and maintain adequate safeguards and 
procedures to protect its BD-FCM Clearing Members' confidential trading 
information, including:
    (1) limiting access to the confidential trading information of 
members to LCH SA employees who operate the system or who are 
responsible for its compliance with this exemptive relief and any other 
applicable rules;
    (2) establishing and maintaining standards controlling LCH SA 
employees that trade for their own account;
    (c) LCH SA shall establish and maintain adequate oversight 
procedures to ensure that the safeguards and procedures established 
pursuant to (b) are followed;
    (d) LCH SA shall directly or indirectly make available to the 
public on terms that are fair and reasonable and not unreasonably 
discriminatory:
    (1) All end-of-day settlement prices and any other prices with 
respect to Single-Name CDS that it may establish to calculate mark-to-
market margin requirements for its clearing members; and
    (2) any other pricing or valuation information with respect to 
Single-Name CDS as is published or distributed by LCH SA.
    (e) LCH SA shall implement policies and procedures designed to 
ensure compliance with these terms and conditions, and to conduct 
periodic internal reviews related to its compliance program.
    It is further ordered, pursuant to Section 36 of the Act, that LCH 
SA, based on the representations and facts presented in its Request for 
Exemptive Relief, is exempt from the requirements of Section 19(b) of 
the Act and Rule 19b-4 thereunder to file proposed rule changes with 
respect to its Non-U.S. Business, i.e. proposed rule changes that (i) 
primarily affect LCH SA's clearing operations with respect to the Non-
U.S. Business and (ii) do not significantly affect any CDSClear 
operations or any rights or obligations of LCH SA with respect to the 
CDSClear services or persons using the CDSClear services, subject to 
the following conditions:
    (a) LCH SA shall provide notice to Commission staff of its Non-U.S. 
Business Rule Changes within three business days of their being duly 
approved by the national competent authorities.
    It is further ordered, pursuant to Section 36 of the Act, that LCH 
SA, based on the representations and facts presented in its Request for 
Exemptive Relief, is exempt from the requirement of Rule 17Ad-22(c)(2) 
that a clearing agency, within 60 days after the end of its fiscal 
year, must post its annual audited financial statements for the past 
two years to its Web site, subject to the following condition:
    (a) LCH SA shall post its annual audited financial statements for 
the past two years to its Web site no later than the end of the first 
quarter following LCH SA's fiscal year-end.
    It is further ordered, pursuant to Section 36 of the Act, that LCH 
SA, based on the representations and facts presented in its Request for 
Exemptive Relief, is exempt from the requirement of Rules 17Ad-
22(c)(2)(iii) that a clearing agency's annual audited financial 
statements must be audited in accordance with the standards of the 
PCAOB by a registered public accounting firm that is qualified and 
independent in accordance with 17 CFR 201.1-01 with respect to its 
annual audited financial statements for its fiscal years 2014 and 2015, 
subject to the following conditions:
    (a) For the calendar years 2014 and 2015, LCH SA's annual audited 
financial statements shall be prepared in accordance with IFRS and 
audited in compliance with ISA rather than the PCAOB requirement set 
out in Rule 17Ad-22(c), with the exception that the closing balance of 
LCH SA's 2015 financial statements shall be audited in accordance with 
PCAOB standards; and
    (b) For calendar year 2016 and onwards, LCH SA's annual financial 
statements shall be prepared in accordance with IFRS and audited in 
accordance with PCAOB standards and shall be signed by auditors that 
meet the relevant PCAOB qualifications.
    It is further ordered, pursuant to Section 36 of the Act, that LCH 
SA, based on the representations and facts presented in its Request for 
Exemptive Relief, is exempt from the requirements of Rule 17a-22 under 
the Act, to file certain materials such as manuals,

[[Page 1415]]

notices, circulars, and bulletins, as more fully described in Rule 17a-
22, in connection with its Non-U.S. Business, that (i) primarily affect 
LCH SA's clearing operations with respect to the Non-U.S. Business and 
(ii) do not significantly affect any CDSClear operations or any rights 
or obligations of LCH SA with respect to the CDSClear services or 
persons using the CDSClear services.
    It is further ordered, pursuant to Section 36 of the Act, that LCH 
SA, based on the representations and facts presented in its Request for 
Exemptive Relief, is exempt from the requirements of Rule 17a-22 under 
the Act, to file with the Commission three copies of materials such as 
manuals, notices, circulars, and bulletins, as more fully described in 
Rule 17a-22, within ten days of making such materials available to its 
participants or other persons as more fully described in Rule 17a-22, 
subject to the following conditions:
    (a) LCH SA shall file such materials in electronic format with the 
Commission within ten (10) calendar days after issuing or making such 
materials available to its participants or to other entities with whom 
it has a significant relationship as applicable, except for materials 
that (i) primarily affect LCH SA's clearing operations with respect to 
the Non-U.S. Business and (ii) do not significantly affect any CDSClear 
operations or any rights or obligations of LCH SA with respect to the 
CDSClear services or persons using the CDSClear services, which 
materials as ordered above shall be exempt from the filing requirements 
of Rule 17a-22.
    This exemptive relief is subject to modification or revocation at 
any time the Commission determines that such action is necessary or 
appropriate in furtherance of the purposes of the Exchange Act. This 
exemption is based on the facts presented and the representations made 
in the Request for Exemptive Relief. Any different facts or 
representations may require a different response.

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31940 Filed 1-4-17; 8:45 am]
BILLING CODE 8011-01-P