Document ID: SEC-2021-1161-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: LCH SA
Posted Date: 2021-08-27T04:00Z

[Federal Register Volume 86, Number 164 (Friday, August 27, 2021)]
[Notices]
[Pages 48257-48259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-18459]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92723; File No. SR-LCH SA-2021-002]

Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to Eligible Collateral and Liquidity Risk 
Management

August 23, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 18, 2021, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change 
(``Proposed Rule Change'') described in Items I, II and III below, 
which Items have been primarily prepared primarily by LCH SA. The 
Commission is publishing this notice to solicit comments on the 
Proposed Rule Change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    (a) Banque Centrale de Compensation, which conducts business under 
the name LCH SA, is proposing to expand the non-cash collateral that a 
Clearing Member \3\ may post with LCH SA to meet the member's margin 
requirements (the ``Eligible Collateral'') to include certain 
additional non-Euro government bonds by (i) amending its CDS Clearing 
Rulebook (the ``Rule Book'') to clarify that such additional non-Euro 
government bonds are excluded from the Pledged Eligible Collateral, and 
(ii) publishing a new Clearing Notice, in accordance with Article 
4.2.6.1 of the CDS Clearing Rule Book, specifying the additional 
acceptable non-Euro government bonds. LCH SA is also proposing to 
expand the custodians at which Clearing Members may deposit Eligible 
Collateral by adding Clearstream Banking Luxembourg as a central 
securities depository for LCH SA in Section 3 of the CDS Clearing 
Procedures--Collateral, Variation Margin and Cash Payment. Finally, LCH 
SA is proposing to amend its Liquidity Risk Modelling Framework (the 
``Framework'') to take into account the expanded list of Eligible 
Collateral.
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    \3\ Capitalized terms used but not defined herein shall have the 
meaning specified in the Rule Book, the Clearing Supplement, the 
Procedures and the Clearing Regulations, as applicable.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, LCH SA included statements 
concerning the purpose of and basis for the Proposed Rule Change and 
discussed any comments it received on the Proposed Rule Change. The 
text of these statements may be examined at the places specified in 
Item IV below. LCH SA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The Proposed Rule Change is being adopted to expand the non-Euro 
government bonds that a Clearing Member may post with LCH SA in order 
to satisfy the clearing member's margin requirements. Currently, the 
only non-Euro Eligible Collateral are Gilts, issued by the United 
Kingdom, and Treasury Bills, issued by the United States. LCH SA is 
proposing to expand the list of Eligible Collateral in response to 
clearing member requests and in order to harmonize permitted Eligible 
Collateral with the Eligible Collateral permitted to satisfy clearing 
member margin requirements at LCH SA's affiliate LCH Limited.\4\
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    \4\ LCH Limited is a recognized central counterparty supervised 
in the United Kingdom by the Bank of England and a derivatives 
clearing organization registered with the Commodity Futures Trading 
Commission.
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    To effect this change, LCH SA is proposing to issue a new Clearing 
Notice identifying the additional non-Euro Eligible Collateral, defined 
as ``New Instruments'' in the Clearing Notice.\5\ LCH SA has determined 
that (i) each of the non-Euro jurisdictions whose bonds have been added 
have a high credit score, and (ii) each of the New Instruments has 
sufficient liquidity.\6\ However, because the European Central Bank 
will not convert the additional non-Euro Eligible Collateral to Euros 
and LCH SA currently does not otherwise have the operational capacity 
to convert the additional non-Euro Eligible Collateral to Euros, the 
Clearing Notice will also provide that non-Euro Eligible Collateral may 
satisfy no more than 15 percent (15%) of a Clearing Member's total 
margin requirements.
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    \5\ The additional non-Euro Eligible Collateral, identified as 
``New Instruments'' in the Clearing Notice, include: (i) Australian 
Treasury Bills and Government Bonds; (ii) Canadian Treasury Bills 
and Government Bonds; (iii) Danish Treasury Bills and Government 
Bonds; (iv) Japanese Treasury Bills, Treasury Discount Bills, and 
Government Bonds; (v) Norwegian Treasury Bills and Government Bonds; 
(vi) Swedish Treasury Bills and Government Bonds; and (vii) Swiss 
Treasury Bills and Government Bonds. The complete list of Eligible 
Collateral, together with all applicable haircuts, is also found on 
LCH SA's website as set out in Paragraph 3.9 of the Procedures.
    \6\ Only instruments with a minimum outstanding amount of 
[euro]500 million or greater will be eligible to be posted with LCH 
SA.
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    In addition, the Clearing Notice will provide that the New 
Instruments will not be eligible as ``Pledged Eligible Collateral'' 
and, therefore, may not be pledged in accordance with a pledge 
agreement entered into between LCH SA

[[Page 48258]]

and a clearing member having exercised its option to transfer Eligible 
Collateral to LCH SA through a Belgian law security interest. 
Accordingly, the definition of ``Pledged Eligible Collateral'' in 
Section 1.1.1 of the CDS Clearing Rule Book will be revised to provide 
that the term ``Pledged Eligible Collateral'' means ``Eligible 
Collateral as described in a Clearing Notice which is pledged in 
accordance with a Pledge Agreement.''
    Separately, LCH SA is proposing to revise Section 3 of its CDS 
Clearing Procedures--Collateral, Variation Margin and Cash Payment, in 
several places to add Clearstream Banking Luxembourg as a central 
securities depository for LCH SA.\7\ Finally, as noted above, LCH SA is 
also proposing to amend the Framework to take into account the expanded 
list of Eligible Collateral. The Framework is one of several policies 
and procedures that LCH SA maintains to manage its liquidity risk, 
i.e., the risk that LCH SA will not have enough cash available, in 
extreme but plausible circumstances, to settle margin payments or 
delivery obligations when they become due, in particular upon the 
default of a clearing member. The Framework describes the Liquidity 
Stress Testing framework by which the Collateral and Liquidity Risk 
Management department (``CaLRM'') of LCH Group Holdings Limited (``LCH 
Group'') assures that LCH SA has enough cash available to meet any 
financial obligations, both expected and unexpected, that may arise 
over the liquidation period for each of the clearing services that LCH 
SA offers.\8\
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    \7\ See, Paragraph 3.4(d)(i); Paragraph 3.10(a), (b) and (c); 
and Paragraph 3.12(b) of Section 3 of the CDS Clearing Procedures.
    \8\ In addition to its CDSClear service, LCH SA provides 
clearing services in connection with cash equities and derivatives 
listed for trading on Euronext (EquityClear), commodity derivatives 
listed for trading on Euronext (CommodityClear), and triparty and 
bilateral Repo transactions (EuroGC+ and RepoClear).
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    In particular, because the European Central Bank will not convert 
the additional non-Euro Eligible Collateral to Euros and LCH SA 
currently does not otherwise have the operational capacity to convert 
the additional non-Euro Eligible Collateral to Euros, LCH SA is 
proposing to amend Section 4.1.3 and Section 4.1.4 of the Framework to 
make clear that the additional non-Euro Eligible Collateral will be 
excluded from the calculation of LCH SA's liquidity resources.\9\
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    \9\ See, also, Section 5.2.1.1, Assumptions, footnotes 20 and 2; 
Section 5.3.5, LCR Calculation, footnote 26; and Section 5.4.3, CC&G 
LCR Calculation.
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    Unrelated to the expansion of non-Euro Eligible Collateral, LCH SA 
is also proposing to amend the Framework to clarify certain Sections 
and update certain tables and formula. In this regard:
     Section 4.1.1, Description of sources of liquidity, will 
be revised to clarify that, with limited exceptions,\10\ LCH SA 
generally receives Collateral on a full title transfer basis, which 
permits LCH SA to use such collateral, to offset it with all related 
claims and to consider such Collateral available for liquidity 
purposes.
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    \10\ The two exceptions are: (i) Collateral deposited under the 
regime of pledge; and (ii) Collateral deposited through a central 
bank guarantee.
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     Section 4.1.3, Assessment of assets' liquidity, will be 
revised to clarify that Collateral deposited under the pledge regime 
may be used for liquidity purposes only if the clearing member pledging 
such Collateral has defaulted.\11\
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    \11\ This clarification is repeated in Section 4.1.4, Synthesis.
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     Section 4.2.1.4, Update of the figures of the liquidity 
injected in the settlement system to smooth settlement activity. 
Figures are updated periodically in line with the flow observed on the 
CSD and ICSD.
     Section 5.1.1, Overview of the Monitoring liquidity, will 
be revised to clarify that LCH SA has a group policy that allows LCH SA 
to perform an extraordinary margin call if liquidity deteriorates.
     Section 5.3.1, Liquidity Coverage Ratio (LCR), Overview, 
will be revised to explain that the LCR is an internal ratio similar, 
but not equivalent, to the banking metric defined in the Basel III 
framework and is used to ensure compliance with EMIR.
     Section 5.3.1.1, Liquidity requirements Assumptions per 
clearing services RepoClear, will be revised to update the formula for 
calculating market risk in RepoClear transactions.
     Section 5.3.1.3, Cash Equity, will be revised to clarify 
the treatment of settlement risk to account for early exercise of 
American-style options.
     Sections 5.3.1.4, Listed derivatives, 5.3.1.5, Credit 
Default Swaps, and 5.3.4, Cover 2 selection, will be revised to clarify 
that the calculation of LCR liability components include spread shifts 
and implied volatility shifts.
     Section 5.3.4, Clarification that for cover 2 selection 
the calculation of stressed VM for Cash Equity and Listed Derivatives 
includes scenario based on price shifts and implied volatility shifts.
     Section 5.3.5, A note will be added to specify that the 
new non cash securities will be excluded from the LCR assets, in line 
with amendment in section 4.1.3.
     Section 5.4.3, A will be added to specify that in line 
with general Cover 2 LCR also for the CC&G LCR the new non euro 
securities will be excluded from the liquid assets, in line amendments 
in sections 4.1.3. and 5.3.5.
     Section 5.5, A duplicated sentence was deleted.
     Section 5.5.1, will be revised to clarify that Non Euro 
non cash collateral are not European Central Bank eligible assets and 
that when considering multiple defaults the clearing members with the 
worst credit quality are assumed defaulting first.
     Appendix 3 and 5 will be updated to add of the overdraft 
facility in place with Citibank that allows the CCP to source non Euro 
currencies in case of liquidity needs.
2. Statutory Basis
    LCH SA has determined that the Proposed Rule Change is consistent 
with the requirements of Section 17A of the Act \12\ and regulations 
thereunder applicable to it. Section 17A(b)(3)(F) of the Act requires, 
inter alia, that the rules of a clearing agency should be designed to 
``assure the safeguarding of securities and funds that are in its 
custody or control or for which it is responsible.'' \13\ In addition, 
Regulation 17Ad-22(e)(4)(ii) requires a central counterparty (``CCP'') 
that is involved in activities with a more complex risk profile, e.g., 
that provides CCP services for security-based swaps, to maintain and 
enforce written policies and procedures reasonably designed to 
effectively ``measure, monitor, and manage its credit exposures from 
its payment, clearing and settlement processes'' to assure that it 
maintains additional financial resources to enable it to cover a wide 
range of stress scenarios that include the default of two participant 
family clearing members that would potentially cause the largest 
aggregate liquidity exposure for the CCP in extreme but plausible 
market conditions.\14\ Further, Regulation 17Ad-22(e)(5) requires a CCP 
to limit the assets that it accepts as collateral ``to those with low 
credit, liquidity and market risks and enforce appropriately 
conservative haircuts and concentration limits''.\15\
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    \12\ 15 U.S.C. 78q-1.
    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \15\ 17 CFR 240.17Ad-22(e)(5).
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    The additional non-Euro Eligible Collateral that LCH SA is 
proposing to permit clearing members to post with

[[Page 48259]]

LCH SA to satisfy the clearing member's margin requirements is limited 
to sovereign debt that is issued by jurisdictions that have a high 
credit score and subject to conservative haircuts. Further, LCH SA has 
determined that non-Euro Eligible Collateral may be taken into account 
to satisfy no more than 15 percent (15%) of a clearing member's total 
margin requirements and, importantly, will be excluded from the 
calculation of LCH SA's liquidity resources.\16\ As such, the 
amendments to Section 3 of the CDS Clearing Procedures and, in 
particular, the Framework continue to assure that LCH SA (i) maintains 
additional financial resources to enable it to cover a wide range of 
stress scenarios, and (ii) limits the assets that it accepts as 
collateral to those with low credit, liquidity and market risks and 
appropriately conservative haircuts and concentration limits. 
Therefore, the amendments are consistent with the requirements of 
Section 17A(b)(3)(F) of the Act and Regulation 17Ad-22(e)(4)(ii) and 
Regulation 17Ad-22(e)(5).
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    \16\ Because non-Euro Eligible Collateral may be taken into 
account to satisfy no more than 15 percent (15%) of a clearing 
member's total margin requirements, LCH SA has determined that 
specific concentration limits are unnecessary.
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    As noted above, Section 17A(b)(3)(F) of the Act requires, inter 
alia, that the rules of a clearing agency ``assure the safeguarding of 
securities and funds that are in its custody or control or for which it 
is responsible.'' \17\ The amendments to the Framework unrelated to the 
expansion of non-Euro Eligible Collateral clarify certain Sections and 
update certain tables and formula. As such, the clarifications set out 
in the amended Framework enhance LCH SA's ability to assure the 
safeguarding of securities and funds that are in its custody or control 
or for which it is responsible. For example, the amendments clarify 
that: (i) LCH SA generally receives Collateral on a full title transfer 
basis, which permits LCH SA to use such collateral, to offset it with 
all related claims and to consider such Collateral available for 
liquidity purposes; (ii) Collateral deposited under the pledge regime 
may be used for liquidity purposes only if the clearing member pledging 
such Collateral has defaulted; (iii) LCH SA is able to perform an 
extraordinary margin call if liquidity deteriorates; and (iv) the 
calculation of LCR liability components include spread shifts and 
implied volatility shifts. The amendments to the Framework, therefore, 
are consistent with the requirements of Section 17A(b)(3)(F) of the 
Act.
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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\18\ LCH SA does 
not believe the Proposed Rule Change would have any impact, or impose 
any burden, on competition. The Proposed Rule Change does not address 
any competitive issue or have any impact on the competition among 
central counterparties. LCH SA operates an open access model, and the 
Proposed Rule Change will have no effect on this model.
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    \18\ 15 U.S.C. 78q-1(b)(3)(I).
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C. Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the Proposed Rule Change have not been 
solicited or received. LCH SA will notify the Commission of any written 
comments received by LCH SA.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:
     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-LCH SA-2021-002 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-LCH SA-2021-002. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings will also be available for inspection 
and copying at the principal office of LCH SA and on LCH SA's website 
at https://www.lch.com/resources/rulebooks/proposed-rule-changes.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-LCH SA-2021-002 and should 
be submitted on or before September 17, 2021.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-18459 Filed 8-26-21; 8:45 am]
BILLING CODE 8011-01-P