Self-Regulatory Organizations; LCH SA; Notice of Proposed Rule Change, as modified by Amendment No. 1 Thereto, To Add Rules Related to the Clearing of CDX.NA.HY CDS, 22699-22702 [2017-09935]
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Federal Register / Vol. 82, No. 94 / Wednesday, May 17, 2017 / Notices
no longer be available to any Members.
Further, their elimination will allow the
Exchange to explore other pricing
mechanisms in which it may enhance
market quality for all Members.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed change to fees related to
QCC Orders will impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. The Exchange’s
proposed functionality is open to all
market participants. The proposals to
provide a rebate for certain QCC Agency
Orders through the QCC Initiator Rebate
and to reduce fees for QCC Contra
Orders are competitive proposals
intended to incentivize the entry of
additional orders into QCC. Further, the
pricing is designed to be competitive
with pricing on other options exchanges
and QCC functionality is a competitive
offering by the Exchange. Further, the
Exchange does not believe that the
changes to eliminate pricing incentives
that have been ineffective, to modify fee
code descriptions or add fee codes will
impose any burden on competition. For
these reasons, the Exchange does not
believe that the proposed fee schedule
changes will impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act, and believes the
proposed change will enhance
competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any written
comments from members or other
interested parties.
nlaroche on DSK30NT082PROD with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 19 and paragraph (f) of Rule
19b–4 thereunder.20 At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
19 15
20 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
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investors, or otherwise in furtherance of
the purposes of the Act.
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:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BatsEDGX–2017–21 on the subject line.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–09928 Filed 5–16–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80666; File No. SR–LCH
SA–2017–005]
Self-Regulatory Organizations; LCH
SA; Notice of Proposed Rule Change,
as modified by Amendment No. 1
Thereto, To Add Rules Related to the
Clearing of CDX.NA.HY CDS
Paper Comments
May 11, 2017
• 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–BatsEDGX–2017–21. 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 Web site (https://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 Web site 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
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should
submit only information that you
wish to make available publicly. All
submissions should refer to File
Number SR–BatsEDGX–2017–21, and
should be submitted on or before June
7, 2017.
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 April 28,
2017, 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 described in
Items I, II, and III below, which Items
have been prepared primarily by LCH
SA. On May 5, 2017, LCH SA filed
Amendment No. 1 to the proposal.3 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
21 17
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I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
LCH SA is proposing to amend its (i)
CDS Margin Framework and (ii)
CDSClear Default Fund Methodology to
incorporate terms and make conforming
changes to provide for credit default
swaps (‘‘CDS’’) on the CDX.NA.HY
index to be cleared by LCH SA.
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,
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 LCH SA filed Amendment No. 1 to replace the
initial filing in its entirety for the purpose of
clarifying various changes to its CDS Margin
Framework.
2 17
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Federal Register / Vol. 82, No. 94 / Wednesday, May 17, 2017 / Notices
and C below, of the most significant
aspects of these statements.
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A. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
The purpose of the proposed rule
change is to modify LCH SA’s CDS
Margin Framework and CDSClear
Default Fund Methodology to allow
LCH SA to clear additional CDS
contracts on the CDX.NA.HY index
consisting of North America high-yield
reference entities. Specifically, LCH SA
proposes to amend Sections 3, 4, 5, 6,
8, 10, and 11 of its CDS Margin
Framework and Section 2 and 3 of the
CDSClear Default Fund Methodology.
Each of these changes is described in
further detail below.
With respect to the CDS Margin
Framework, the heading in Section 3
and the fourth column in the table in
Section 3.1.1 will be amended to clarify
that the summary of the margin
framework also applies to CDX HY
contracts.
Section 4.1 of the CDS Margin
Framework, setting forth the short
charge component of LCH SA’s margin
methodology, will be amended to
describe the purpose of the short charge
component within LCH SA’s margin
methodology and to adjust the
calculation to account for CDX.NA.HY
index contracts. The purpose of the
short charge component is to address
the probability of a credit event
occurring during the period from the
default of a Clearing Member to
liquidation of the defaulting Clearing
Member’s portfolio, i.e., the so-called
‘‘jump to default’’ risk. Under the
proposed rule change, the short charge
component of the margin methodology
will take into account the risk of
clearing CDS contracts on high yield
indices. Currently, with respect to a
Clearing Member’s portfolio, the short
charge in the margin methodology
considers the greater of (x) a ‘‘Global
Short Charge,’’ derived from the
Clearing Member’s largest, or ‘‘top,’’ net
short exposure (in respect of any CDS
contracts) and its top net short exposure
amongst the three ‘‘riskiest’’ reference
entities (in respect of any entity type)
that are most probable to default in its
portfolio and (y) the top two net short
exposures in respect of CDS contracts
on senior financial entities. Because
high yield entities are riskier than senior
financial entities by nature and
historically defaults of high yield
entities appeared more clustered than
investment grade or European entities,
LCH SA proposes to introduce a ‘‘High
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15:18 May 16, 2017
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Yield Short Charge’’ to replace the top
two net short exposures in respect of
CDS on senior financial entities in the
short charge calculation. Based upon
historical data and the maximum
number of defaults that have been
observed in respect of reference entities
in all CDSClear eligible contracts within
a 5 business day period, LCH SA
believes that the ‘‘High Yield Short
Charge’’ should consider not only a
Clearing member’s top net short
exposure in respect of the high yield
CDS contracts in its portfolio but also
the top two net short exposures among
the three ‘‘riskiest’’ high yield reference
entities to reflect the possibility of
defaults of multiple, or clustered, high
yield entities. As a result, the new short
charge under the proposed rule change
will be the greater of (x) the ‘‘Global
Short Charge,’’ as described above and
(y) a ‘‘High Yield Short Charge,’’ derived
from a member’s top net short exposure
(in respect of high yield CDS) and its
top two net short exposures amongst the
three ‘‘riskiest’’ reference entities (in the
high yield category) in its portfolio.
Conforming changes will be made
throughout Section 4.1.1, which
describes the ‘‘net short exposure’’
calculation, to accommodate
CDX.NA.HY contracts and to clarify that
to obtain margin in Euros all USD
denominated variables are converted to
Euros utilizing the current USD/Euro
foreign exchange rate and calibrated
haircut based upon historical data.
Similarly, conforming changes will be
made in Section 4.1.2 of the CDS Margin
Framework, which describes the ‘‘top
exposure’’ component of the short
charge and Section 4.1.3 of the CDS
Margin Framework, which describes the
process by which LCH SA identifies the
‘‘riskiest’’ entities in determining the
short charge, to incorporate terms for
CDX.NA.HY index contracts and to
clarify the calculation as it applies to
high yield indices. Clarification changes
will be made in Section 4.1.4 of the CDS
Margin Framework to summarize the
calculation for the short charge amount.
Section 4.3 of the CDS Margin
Framework will be deleted in its
entirety because the substance of that
section will be contained in Section 4.1,
as described above.
In addition, LCH SA also proposes to
amend Section 5.1 of the CDS Margin
Framework, which sets forth the wrong
way risk (‘‘WWR’’) component of LCH
SA’s methodology. Currently, LCH SA
considers the correlation between the
default of a Clearing Member and the
default(s) of one or more other financial
institutions as part of its WWR
management. Specifically, the current
approach leverages on the Short Charge
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framework by calculating the top two
net short exposures of financial entities
in a Clearing Member’s portfolio
following the algorithm described above
for the Short Charge margin. LCH SA
then compares these top two net short
exposures of financial entities to the
short charge margin and imposes the
greater of those two as the adjusted
jump-to-default charge, to address the
WWR arising from the correlation
between a Clearing Member default and
the default(s) of one or more financial
entities in the Clearing Member’s
portfolio. The proposed rule change
does not substantively change this
approach but amends Section 5.1 of the
CDS Margin Framework to clarify that,
when the top two net short exposures in
respect of financial entities exceeds the
short charge margin, as described above,
LCH SA will impose a charge equal to
such excess to address the jump-todefault WWR.
Other conforming changes in the CDS
Margin Framework will be made in
Sections 5, 6, 8, 10, and 11 to clarify
that the those sections also apply to
high yield indices.
With respect to the CDSClear Default
Fund Methodology, Section 2.3 will be
amended to facilitate clearing of CDS
contracts on the CDX High Yield index
and to modify the existing stressed short
charge component of the CDSClear
Default Fund Methodology. Currently,
the stressed short charge covers the
greater of (x) the top net short exposure
plus the top two net short exposures
amongst the three entities most likely to
default in the Clearing Member’s
portfolio and (y) the top two net short
exposures which are senior financial
entities plus the top net short exposures
amongst the three senior financial
entities most likely to default in the
Clearing Member’s portfolio. The
proposed rule change will take the
default of high yield entities into
account and add a third prong to the
stressed short charge calculation, which
will take the greater of (x) and (y), each
as described above, and (z) the top two
net short exposure which are high yield
entities plus the top two net short
exposures amongst the three high yield
entities most likely to default in the
Clearing Member’s portfolio.
Finally, Section 3.8 of the CDSClear
Default Fund Methodology, which
describes the correlation between index
families and series, will be updated to
reflect additional data.
2. Statutory Basis
LCH SA believes that the proposed
rule change and the clearing of
CDX.NA.HY contracts is consistent with
the requirements of Section 17A of the
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Act 4 and the regulations thereunder,
including the standards under Rule
17Ad–22.5 Section 17(A)(b)(3)(F) of the
Act 6 requires, among other things, that
the rules of a clearing agency be
designed to promote the prompt and
accurate clearance and settlement of
securities transactions and derivative
agreements, contracts, and transactions
and to assure the safeguarding of
securities and funds which are in the
custody or control of the clearing agency
or for which it is responsible. As noted
above, the proposed rule change is
designed to provide for the clearing of
CDX.NA.HY contracts. CDX.NA.HY
contracts are similar to the contracts
currently cleared by LCH SA and will be
cleared in the same manner as other
index contracts, consistent with LCH
SA’s existing operational arrangements.
Clearing of the additional contracts will
allow market participants to manage
additional risk and ensure the
safeguarding of margin and assets
pursuant to LCH SA’s rules. Therefore,
LCH SA believes that the clearing of
CDX.NA.HY and the related changes
described herein are consistent with the
prompt and accurate clearance and
settlement of securities transactions and
derivative agreements, contracts and
transactions, in accordance with
17(A)(b)(3)(F) of the Act.7
In addition, the proposed
amendments to LCH SA’s CDS Margin
Framework and CDSClear Default Fund
Methodology also satisfy the relevant
requirements of Rule 17Ad–22,
including Rule 17Ad–22(b)(2), (b)(3),
(e)(4) and (e)(6).8 Rule 17Ad–22(b)(2)
requires a clearing agency to use margin
requirements to limit its credit
exposures to participants under normal
market conditions and use risk-based
models and parameters to set margin
requirements.9 Rule 17Ad–22(e)(4)(i)
requires a covered clearing agency to
maintain sufficient financial resources
to cover its credit exposure to each
participant fully with a high degree of
confidence,10 and Rule 17Ad–22(e)(6)(i)
requires a covered clearing agency that
provides central counterparty services
to cover its credit exposures to its
participants by establishing a risk-based
margin system that, at a minimum,
considers and produces margin levels
commensurate with the risks and
particular attributes of each relevant
4 15
U.S.C. 78q–1.
CFR 240.17Ad–22.
6 15 U.S.C. 78q–1(b)(3)(F).
7 15 U.S.C. 78q–1(b)(3)(F).
8 17 CFR 240.17Ad–22.
9 17 CFR 240.17Ad–22(b)(22).
10 17 CFR 240.17Ad–22(e)(4)(i).
15:18 May 16, 2017
B. Clearing Agency’s Statement on
Burden on Competition
Section 17A(b)(3)(I) of the Act
requires that the rules of a clearing
11 17
CFR 240.17Ad–22(e)(6)(i).
CFR 240.17Ad–22(b)(2), (e)(4)(i) and
(e)(6)(i).
13 17 CFR 240.17Ad–22(b)(3).
14 17 CFR 240.17Ad–22(e)(4)(ii).
15 17 CFR 240.17Ad–22(b)(3) and (e)(4)(ii).
16 17 CFR 240.17Ad–22(d)(4) and (e)(17).
5 17
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product, portfolio, and market.11 The
proposed rule change to LCH SA’s CDS
Margin Framework will take into
account the risk particular to clearing
CDS on high yield entities as part of
LCH SA’s jump-to-default risk
management and wrong way risk
management and produce margin levels
commensurate with the risks and
attributes of CDS on high yield entities
and maintain margin sufficient to cover
its credit exposure to its participants
fully in normal market conditions,
consistent with requirements of Rule
17Ad–22(b)(2), (e)(4)(i) and (e)(6)(i).12
Moreover, Rule 17Ad–22(b)(3) requires
a clearing agency acting as a central
counterparty for security-based swaps to
establish 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 (the ‘‘cover
two standard’’).13 Similarly, Rule 17Ad–
22(e)(4)(ii) requires a covered clearing
agency that provides central
counterparty services for security-based
swaps to maintain financial resources
additional to margin to enable it to
cover a wide range of foreseeable stress
scenarios that include, but are not
limited to, meeting the cover two
standard.14 LCH SA believes that its
CDSClear Default Fund Methodology,
with the modifications described herein,
will provide a stress short charge
appropriately incorporating the risk of
clearing CDS on high yield entities,
which, together with its margin
methodology, will ensure that LCH SA
maintains sufficient financial resources
to meet the cover two standard, in
accordance with Rule 17Ad–22(b)(3)
and (e)(4)(ii).15 LCH SA also believes
that the clearing of CDX.NA.HY
contracts is consistent with Rule 17Ad–
22(d)(4) and (e)(17),16 in that clearing
the additional contracts will be
substantially the same from an
operational perspective as clearing
existing contracts and LCH SA believes
that its existing systems are adequately
scalable to facilitate the clearing of
additional contracts
12 17
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22701
agency not impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act.17 LCH SA does not
believe that its clearing of CDX.NA.HY
contracts will adversely affect the
trading market for those contracts or
CDS generally. By allowing LCH SA to
clear CDX.NA.HY contracts, market
participants will have additional
choices on where to clear CDX.NA.HY
contracts, which, in turn, will promote
competition and further the
development of CDX.NA.HY contracts
for risk management. Further, LCH SA
will apply its existing fair and open
access criteria to the clearing of
CDX.NA.HY contracts. Accordingly
LCH SA does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
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:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
17 15
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U.S.C. 78q–1(b)(3)(I).
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Federal Register / Vol. 82, No. 94 / Wednesday, May 17, 2017 / Notices
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
LCH SA–2017–005 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–2017–005. 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 Web site (https://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 Web site 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 the
filing also will be available for
inspection and copying at the principal
office of LCH SA and on LCH SA’s Web
site at https://www.lch.com/assetclasses/cdsclear.
All comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–LCH SA–2017–005 and
should be submitted on or before June
7, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Brent J. Fields,
Secretary.
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[FR Doc. 2017–09935 Filed 5–16–17; 8:45 am]
BILLING CODE 8011–01–P
18 17
CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80657; File No. SR–
NYSEArca–2017–09]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of
Amendment No. 2 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 2, Regarding
Investments of the Janus Short
Duration Income ETF Listed Under
NYSE Arca Equities Rule 8.600
May 11, 2017.
I. Introduction
On January 30, 2017, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change regarding investments of the
Janus Short Duration Income ETF
(‘‘Fund’’), which is currently listed and
traded on the Exchange under NYSE
Arca Equities Rule 8.600. The proposed
rule change was published for comment
in the Federal Register on February 17,
2017.3 On March 13, 2017, the Exchange
filed Amendment No. 1 to the proposed
rule change, which replaced and
superseded the proposed rule change as
originally filed. On March 30, 2017, the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.4 On April 10,
2017, the Exchange filed Amendment
No. 2 to the proposed rule change,
which replaced and superseded the
proposed rule change as modified by
Amendment No. 1.5 The Commission
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 80028
(February 13, 2017), 82 FR 11089.
4 See Securities Exchange Act Release No. 80346,
82 FR 16643 (April 5, 2017).
5 In Amendment No. 2, the Exchange: (1)
Proposes to revise the limit on the Fund’s
investments in over-the-counter (‘‘OTC’’)
derivatives that are used for hedging purposes, from
unlimited in the original proposal to up to 50% of
the Fund’s assets (calculated as the aggregate gross
notional value); (2) clarifies how certain Fund
holdings will be valued for purposes of the net asset
value (‘‘NAV’’) and Portfolio Indicative Value
(‘‘PIV’’) calculations; (3) supplements the
description of the quantitative information available
on the Fund’s Web site; (4) supplements the
description of the surveillance procedures for the
shares of the Fund (‘‘Shares’’); and (5) makes other
conforming, clarifying, and technical changes.
Amendment No. 2 is available at: https://
www.sec.gov/comments/sr-nysearca-2017-09/
nysearca201709.htm.
2 17
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received no comments on the proposed
rule change. The Commission is
publishing this notice to solicit
comments on Amendment No. 2 from
interested persons, and is approving the
proposed rule change, as modified by
Amendment No. 2, on an accelerated
basis.
II. The Exchange’s Description of the
Proposed Rule Change, as Modified by
Amendment No. 2 6
The Shares of the Fund are currently
listed and traded on the Exchange under
Commentary .01 to NYSE Arca Equities
Rule 8.600, which provides generic
listing standards for Managed Fund
Shares.7 The Shares are offered by Janus
Detroit Street Trust (‘‘Trust’’), which is
registered with the Commission as an
open-end management investment
company.8 Janus Capital Management
LLC (‘‘Adviser’’) is the Fund’s
investment adviser.9 ALPS Distributors,
Inc. is the principal underwriter and
distributor of the Fund’s Shares. State
Street Bank and Trust Company serves
as the custodian, administrator, and
transfer agent for the Fund.
Principal and Other Investments
According to the Exchange, the Fund
seeks to provide a steady income stream
6 The Commission notes that additional
information regarding the Trust (as defined below),
the Fund, its investments, and the Shares, including
investment strategies, risks, creation and
redemption procedures, fees, portfolio holdings
disclosure policies, calculation of NAV,
distributions, and taxes, among other things, can be
found in Amendment No. 2 and the Registration
Statement (as defined below), as applicable. See
Amendment No. 2, supra note 5, and Registration
Statement, infra note 8.
7 Shares of the Fund commenced trading on the
Exchange on November 17, 2016 pursuant to
Commentary .01 to NYSE Arca Equities Rule 8.600.
8 The Trust is registered under the Investment
Company Act of 1940 (‘‘1940 Act’’). On November
16, 2016, the Trust filed with the Commission its
registration statement on Form N–1A under the
Securities Act of 1933 and under the 1940 Act
relating to the Fund (File Nos. 333–207814 and
811–23112) (‘‘Registration Statement’’). In addition,
the Exchange states that the Commission has issued
an order granting certain exemptive relief to the
Trust under the 1940 Act. See Investment Company
Act Release No. 31540 (March 30, 2015) (File No.
812–13819).
9 The Adviser is not registered as a broker-dealer
but the Adviser is affiliated with a broker-dealer
and has implemented and will maintain a ‘‘fire
wall’’ with respect to such broker-dealer regarding
access to information concerning the composition
of and/or changes to the Fund’s portfolio. In the
event (a) the Adviser becomes registered as a
broker-dealer or newly affiliated with a brokerdealer, or (b) any new adviser or sub-adviser is a
registered broker-dealer or becomes affiliated with
a broker-dealer, it will implement and maintain a
fire wall with respect to its relevant personnel or
broker-dealer affiliate regarding access to
information concerning the composition of and/or
changes to the portfolio, and will be subject to
procedures designed to prevent the use and
dissemination of material non-public information
regarding such portfolio.
E:\FR\FM\17MYN1.SGM
17MYN1
]]>Agencies
[Federal Register Volume 82, Number 94 (Wednesday, May 17, 2017)]
[Notices]
[Pages 22699-22702]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09935]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80666; File No. SR-LCH SA-2017-005]
Self-Regulatory Organizations; LCH SA; Notice of Proposed Rule
Change, as modified by Amendment No. 1 Thereto, To Add Rules Related to
the Clearing of CDX.NA.HY CDS
May 11, 2017
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 April 28, 2017, 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
described in Items I, II, and III below, which Items have been prepared
primarily by LCH SA. On May 5, 2017, LCH SA filed Amendment No. 1 to
the proposal.\3\ 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.
\3\ LCH SA filed Amendment No. 1 to replace the initial filing
in its entirety for the purpose of clarifying various changes to its
CDS Margin Framework.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
LCH SA is proposing to amend its (i) CDS Margin Framework and (ii)
CDSClear Default Fund Methodology to incorporate terms and make
conforming changes to provide for credit default swaps (``CDS'') on the
CDX.NA.HY index to be cleared by LCH SA.
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,
[[Page 22700]]
and C below, of the most significant aspects of these statements.
A. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to modify LCH SA's CDS
Margin Framework and CDSClear Default Fund Methodology to allow LCH SA
to clear additional CDS contracts on the CDX.NA.HY index consisting of
North America high-yield reference entities. Specifically, LCH SA
proposes to amend Sections 3, 4, 5, 6, 8, 10, and 11 of its CDS Margin
Framework and Section 2 and 3 of the CDSClear Default Fund Methodology.
Each of these changes is described in further detail below.
With respect to the CDS Margin Framework, the heading in Section 3
and the fourth column in the table in Section 3.1.1 will be amended to
clarify that the summary of the margin framework also applies to CDX HY
contracts.
Section 4.1 of the CDS Margin Framework, setting forth the short
charge component of LCH SA's margin methodology, will be amended to
describe the purpose of the short charge component within LCH SA's
margin methodology and to adjust the calculation to account for
CDX.NA.HY index contracts. The purpose of the short charge component is
to address the probability of a credit event occurring during the
period from the default of a Clearing Member to liquidation of the
defaulting Clearing Member's portfolio, i.e., the so-called ``jump to
default'' risk. Under the proposed rule change, the short charge
component of the margin methodology will take into account the risk of
clearing CDS contracts on high yield indices. Currently, with respect
to a Clearing Member's portfolio, the short charge in the margin
methodology considers the greater of (x) a ``Global Short Charge,''
derived from the Clearing Member's largest, or ``top,'' net short
exposure (in respect of any CDS contracts) and its top net short
exposure amongst the three ``riskiest'' reference entities (in respect
of any entity type) that are most probable to default in its portfolio
and (y) the top two net short exposures in respect of CDS contracts on
senior financial entities. Because high yield entities are riskier than
senior financial entities by nature and historically defaults of high
yield entities appeared more clustered than investment grade or
European entities, LCH SA proposes to introduce a ``High Yield Short
Charge'' to replace the top two net short exposures in respect of CDS
on senior financial entities in the short charge calculation. Based
upon historical data and the maximum number of defaults that have been
observed in respect of reference entities in all CDSClear eligible
contracts within a 5 business day period, LCH SA believes that the
``High Yield Short Charge'' should consider not only a Clearing
member's top net short exposure in respect of the high yield CDS
contracts in its portfolio but also the top two net short exposures
among the three ``riskiest'' high yield reference entities to reflect
the possibility of defaults of multiple, or clustered, high yield
entities. As a result, the new short charge under the proposed rule
change will be the greater of (x) the ``Global Short Charge,'' as
described above and (y) a ``High Yield Short Charge,'' derived from a
member's top net short exposure (in respect of high yield CDS) and its
top two net short exposures amongst the three ``riskiest'' reference
entities (in the high yield category) in its portfolio.
Conforming changes will be made throughout Section 4.1.1, which
describes the ``net short exposure'' calculation, to accommodate
CDX.NA.HY contracts and to clarify that to obtain margin in Euros all
USD denominated variables are converted to Euros utilizing the current
USD/Euro foreign exchange rate and calibrated haircut based upon
historical data. Similarly, conforming changes will be made in Section
4.1.2 of the CDS Margin Framework, which describes the ``top exposure''
component of the short charge and Section 4.1.3 of the CDS Margin
Framework, which describes the process by which LCH SA identifies the
``riskiest'' entities in determining the short charge, to incorporate
terms for CDX.NA.HY index contracts and to clarify the calculation as
it applies to high yield indices. Clarification changes will be made in
Section 4.1.4 of the CDS Margin Framework to summarize the calculation
for the short charge amount.
Section 4.3 of the CDS Margin Framework will be deleted in its
entirety because the substance of that section will be contained in
Section 4.1, as described above.
In addition, LCH SA also proposes to amend Section 5.1 of the CDS
Margin Framework, which sets forth the wrong way risk (``WWR'')
component of LCH SA's methodology. Currently, LCH SA considers the
correlation between the default of a Clearing Member and the default(s)
of one or more other financial institutions as part of its WWR
management. Specifically, the current approach leverages on the Short
Charge framework by calculating the top two net short exposures of
financial entities in a Clearing Member's portfolio following the
algorithm described above for the Short Charge margin. LCH SA then
compares these top two net short exposures of financial entities to the
short charge margin and imposes the greater of those two as the
adjusted jump-to-default charge, to address the WWR arising from the
correlation between a Clearing Member default and the default(s) of one
or more financial entities in the Clearing Member's portfolio. The
proposed rule change does not substantively change this approach but
amends Section 5.1 of the CDS Margin Framework to clarify that, when
the top two net short exposures in respect of financial entities
exceeds the short charge margin, as described above, LCH SA will impose
a charge equal to such excess to address the jump-to-default WWR.
Other conforming changes in the CDS Margin Framework will be made
in Sections 5, 6, 8, 10, and 11 to clarify that the those sections also
apply to high yield indices.
With respect to the CDSClear Default Fund Methodology, Section 2.3
will be amended to facilitate clearing of CDS contracts on the CDX High
Yield index and to modify the existing stressed short charge component
of the CDSClear Default Fund Methodology. Currently, the stressed short
charge covers the greater of (x) the top net short exposure plus the
top two net short exposures amongst the three entities most likely to
default in the Clearing Member's portfolio and (y) the top two net
short exposures which are senior financial entities plus the top net
short exposures amongst the three senior financial entities most likely
to default in the Clearing Member's portfolio. The proposed rule change
will take the default of high yield entities into account and add a
third prong to the stressed short charge calculation, which will take
the greater of (x) and (y), each as described above, and (z) the top
two net short exposure which are high yield entities plus the top two
net short exposures amongst the three high yield entities most likely
to default in the Clearing Member's portfolio.
Finally, Section 3.8 of the CDSClear Default Fund Methodology,
which describes the correlation between index families and series, will
be updated to reflect additional data.
2. Statutory Basis
LCH SA believes that the proposed rule change and the clearing of
CDX.NA.HY contracts is consistent with the requirements of Section 17A
of the
[[Page 22701]]
Act \4\ and the regulations thereunder, including the standards under
Rule 17Ad-22.\5\ Section 17(A)(b)(3)(F) of the Act \6\ requires, among
other things, that the rules of a clearing agency be designed to
promote the prompt and accurate clearance and settlement of securities
transactions and derivative agreements, contracts, and transactions and
to assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible. As noted above, the proposed rule change is designed to
provide for the clearing of CDX.NA.HY contracts. CDX.NA.HY contracts
are similar to the contracts currently cleared by LCH SA and will be
cleared in the same manner as other index contracts, consistent with
LCH SA's existing operational arrangements. Clearing of the additional
contracts will allow market participants to manage additional risk and
ensure the safeguarding of margin and assets pursuant to LCH SA's
rules. Therefore, LCH SA believes that the clearing of CDX.NA.HY and
the related changes described herein are consistent with the prompt and
accurate clearance and settlement of securities transactions and
derivative agreements, contracts and transactions, in accordance with
17(A)(b)(3)(F) of the Act.\7\
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\4\ 15 U.S.C. 78q-1.
\5\ 17 CFR 240.17Ad-22.
\6\ 15 U.S.C. 78q-1(b)(3)(F).
\7\ 15 U.S.C. 78q-1(b)(3)(F).
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In addition, the proposed amendments to LCH SA's CDS Margin
Framework and CDSClear Default Fund Methodology also satisfy the
relevant requirements of Rule 17Ad-22, including Rule 17Ad-22(b)(2),
(b)(3), (e)(4) and (e)(6).\8\ Rule 17Ad-22(b)(2) requires a clearing
agency to use margin requirements to limit its credit exposures to
participants under normal market conditions and use risk-based models
and parameters to set margin requirements.\9\ Rule 17Ad-22(e)(4)(i)
requires a covered clearing agency to maintain sufficient financial
resources to cover its credit exposure to each participant fully with a
high degree of confidence,\10\ and Rule 17Ad-22(e)(6)(i) requires a
covered clearing agency that provides central counterparty services to
cover its credit exposures to its participants by establishing a risk-
based margin system that, at a minimum, considers and produces margin
levels commensurate with the risks and particular attributes of each
relevant product, portfolio, and market.\11\ The proposed rule change
to LCH SA's CDS Margin Framework will take into account the risk
particular to clearing CDS on high yield entities as part of LCH SA's
jump-to-default risk management and wrong way risk management and
produce margin levels commensurate with the risks and attributes of CDS
on high yield entities and maintain margin sufficient to cover its
credit exposure to its participants fully in normal market conditions,
consistent with requirements of Rule 17Ad-22(b)(2), (e)(4)(i) and
(e)(6)(i).\12\ Moreover, Rule 17Ad-22(b)(3) requires a clearing agency
acting as a central counterparty for security-based swaps to establish
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 (the ``cover two standard'').\13\
Similarly, Rule 17Ad-22(e)(4)(ii) requires a covered clearing agency
that provides central counterparty services for security-based swaps to
maintain financial resources additional to margin to enable it to cover
a wide range of foreseeable stress scenarios that include, but are not
limited to, meeting the cover two standard.\14\ LCH SA believes that
its CDSClear Default Fund Methodology, with the modifications described
herein, will provide a stress short charge appropriately incorporating
the risk of clearing CDS on high yield entities, which, together with
its margin methodology, will ensure that LCH SA maintains sufficient
financial resources to meet the cover two standard, in accordance with
Rule 17Ad-22(b)(3) and (e)(4)(ii).\15\ LCH SA also believes that the
clearing of CDX.NA.HY contracts is consistent with Rule 17Ad-22(d)(4)
and (e)(17),\16\ in that clearing the additional contracts will be
substantially the same from an operational perspective as clearing
existing contracts and LCH SA believes that its existing systems are
adequately scalable to facilitate the clearing of additional contracts
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\8\ 17 CFR 240.17Ad-22.
\9\ 17 CFR 240.17Ad-22(b)(22).
\10\ 17 CFR 240.17Ad-22(e)(4)(i).
\11\ 17 CFR 240.17Ad-22(e)(6)(i).
\12\ 17 CFR 240.17Ad-22(b)(2), (e)(4)(i) and (e)(6)(i).
\13\ 17 CFR 240.17Ad-22(b)(3).
\14\ 17 CFR 240.17Ad-22(e)(4)(ii).
\15\ 17 CFR 240.17Ad-22(b)(3) and (e)(4)(ii).
\16\ 17 CFR 240.17Ad-22(d)(4) and (e)(17).
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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.\17\ LCH SA does
not believe that its clearing of CDX.NA.HY contracts will adversely
affect the trading market for those contracts or CDS generally. By
allowing LCH SA to clear CDX.NA.HY contracts, market participants will
have additional choices on where to clear CDX.NA.HY contracts, which,
in turn, will promote competition and further the development of
CDX.NA.HY contracts for risk management. Further, LCH SA will apply its
existing fair and open access criteria to the clearing of CDX.NA.HY
contracts. Accordingly LCH SA does not believe that the proposed rule
change will impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
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\17\ 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:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
[[Page 22702]]
Send an email to rule-comments@sec.gov. Please include
File Number SR-LCH SA-2017-005 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-2017-005. 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 Web site (https://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 Web site 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 the filing also will be available
for inspection and copying at the principal office of LCH SA and on LCH
SA's Web site at https://www.lch.com/asset-classes/cdsclear.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-LCH SA-2017-
005 and should be submitted on or before June 7, 2017.
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\18\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
Brent J. Fields,
Secretary.
[FR Doc. 2017-09935 Filed 5-16-17; 8:45 am]
BILLING CODE 8011-01-P
