Self-Regulatory Organizations; LCH SA; Notice of Filing of Application for Registration as a Clearing Agency and Request for Exemptive Relief, 68074-68078 [2016-23747]
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Federal Register / Vol. 81, No. 191 / Monday, October 3, 2016 / Notices
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 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–CBOE–
2016–069 and should be submitted on
or before October 24, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–23755 Filed 9–30–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78941; File No. 600–36]
Self-Regulatory Organizations; LCH
SA; Notice of Filing of Application for
Registration as a Clearing Agency and
Request for Exemptive Relief
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September 27, 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
(‘‘Act’’) and Rule 17Ab2–1 thereunder.2
Specifically, LCH SA is seeking to
provide central counterparty (‘‘CCP’’)
services for U.S. persons for securitybased swaps, in particular single-name
credit default swaps (‘‘CDS’’), through
its CDSClear business unit. LCH SA also
is seeking 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; (iii)
from Rules 17Ad–22(c)(2) and 17Ad–
19 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78q–1.
2 17 CFR 240.17Ab2–1(a).
3 15 U.S.C. 78e and 78f.
4 15 U.S.C. 78s(b).
5 17 CFR 240.19b–4.
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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 The Commission is
publishing this notice to solicit
comments from interested persons
regarding LCH SA’s Form CA–1 and
Request for Exemptive Relief.9 The
Commission will consider any
comments it receives in making its
determination of whether to grant LCH
SA’s application for registration as a
clearing agency and Request for
Exemptive Relief.
II. LCH SA Form CA–1 Application
LCH SA’s Form CA–1 application and
accompanying exhibits contain
information regarding LCH SA and its
CDSClear operations.10 Set forth below
is a summary of certain aspects of LCH
SA’s Form CA–1 application.
A. Overview of LCH SA
LCH SA maintains its principal office
in Paris, France and is a wholly-owned
subsidiary of LCH.Clearnet Group
Limited (‘‘LCH Group’’), a limited
company incorporated under the laws of
England and Wales.11 LCH Group is
majority owned by the London Stock
Exchange Group plc (‘‘LSEG’’). In its
home jurisdiction, LCH SA is the only
CCP in France and is regulated as a bank
and a CCP under French law by the
´
´
Autorite des Marches Financiers,
´
ˆ
Autorite de Controle Prudentiel et de
´
Resolution, and Banque de France.12 In
addition, LCH SA is a CCP authorized
to offer clearing services in the
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 Hemon, CEO, LCH
´
SA, to Brent J. Fields, Secretary, Securities and
Exchange Commission (August 9, 2016) (hereinafter
‘‘Request for Exemptive Relief’’).
9 The descriptions set forth in this notice
regarding the structure and operations of LCH SA
have been derived from information contained in
LCH SA’s Form CA–1 application. The application
and exhibits thereto for which LCH SA has not
requested confidential treatment are available on
the Commission’s Web site at www.sec.gov/rules/
other.shtml.
10 Schedule A to LCH SA’s Form CA–1 includes
a description of the risk management procedures
utilized by LCH SA. Exhibit A contains information
about the ownership and governance structure of
LCH SA. Exhibit B contains a list of LCH SA’s
officers and senior managers of LCH SA and the
CDSClear business unit. Exhibit C includes a
narrative and graphic descriptions of LCH SA’s
organizational structure. Exhibit E includes copies
of the CDS Clearing rulebook, procedures and
articles of association. Exhibit J provides a
description of CDSClear’s services and functions.
11 See LCH SA Form CA–1, Exhibit A at 1.
12 See generally, LCH SA Form CA–1, Exhibit J–
3 (LCH SA CDSClear Service Description) Section
2.3.
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European Union pursuant to the
European Market Infrastructure
Regulation (‘‘EMIR’’) and also is
registered with the CFTC as a
derivatives clearing organization
(‘‘DCO’’) to provide clearing services for
broad-based index CDS to U.S. members
and their customers.13
LCH SA offers clearing services for
derivatives, exchange-traded futures and
options, cash equities and fixed income
and energy instruments through three
lines of CCP services: EquityClear,
CommodityClear, and RepoClear.14
These 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.
LCH SA’s CDS clearing services are
located in the CDSClear business unit.
While all clearing services are provided
from within the same legal entity,
CDSClear is ‘‘ring-fenced’’ as it has its
own rulebook, policies and procedures,
risk management framework, risk
management personnel, default fund,
waterfall, default management process,
operations department, and certain
information technology resources.15
Registration with the Commission as a
clearing agency would permit LCH SA
to offer single-name CDS clearing
services to U.S. persons through its
CDSClear business unit. LCH SA
currently offers index CDS and singlename CDS clearing services to non-U.S.
persons in Europe and is authorized to
offer index CDS clearing services to U.S.
clearing members and their customers
under its DCO registration.
B. LCH SA Membership Standards and
Enforcement of Rules
1. Membership Standards
LCH SA has established requirements
concerning membership. These
requirements are used to accept, deny,
or condition any person’s participation
in LCH SA’s clearing services as a
member and include standards for
financial responsibility, operational
capacity, business experience, and
creditworthiness.16 Members must
comply with these requirements on an
ongoing basis.17
With respect to financial
responsibility, LCH SA’s rulebook
contains net capital requirements that,
among other things, establish minimum
net capital requirements for members
that may be scalable based on the risk
13 Id.
14 See
generally, LCH SA Form CA–1, Exhibit C.
generally, LCH SA Form CA–1, Exhibit C.
16 See generally, LCH SA Form CA–1, Exhibit E–
4 (LCH SA CDS Rule Book) Section 2.2.1.
17 See generally, LCH SA Form CA–1, Exhibit E–
4 (LCH SA CDS Rule Book) Section 2.2.2.
15 See
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the members introduce to LCH SA.
Regarding operational capacity and
business experience requirements, a
member must be able to demonstrate
that it has sufficient expertise in
clearing activities, that its 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), and that it has
appropriate banking arrangements.18 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.19
LCH SA imposes several monitoring
and reporting obligations on its
members to ensure ongoing compliance
with its membership obligations. LCH
SA monitors on an ongoing basis certain
indicators of its members, including
CDS spreads, long-term credit ratings,
and equity returns. 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 clients, and any change to the
member’s systems or operations that
materially impact the member’s ability
to meet its obligations as a member.
Furthermore, members are required to
provide to LCH SA audited financial
statements on an annual basis, as well
as interim financial statements during
the course of the year.20
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2. Capacity To Enforce Rules and
Discipline Members
LCH SA has established rules to
monitor for members’ breaches of its
rules, enforce its rules, and discipline
members. Additionally, as noted above,
CDSClear 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.21 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
18 See generally, LCH SA Form CA–1, Exhibit E–
4 (LCH SA CDS Rule Book) Section 2.2.1.
19 See generally, LCH SA Form CA–1, Exhibit E–
4 (LCH SA CDS Rule Book) Section 2.2.4.1.
20 See generally, LCH SA Form CA–1, Schedule
A at 9; See also Exhibit E–4 (LCH SA CDS Rule
Book) Sections 2.3.1 and 2.3.2.
21 See generally LCH SA Form CA–1, Exhibit E–
4 (LCH SA CDS Clearing Rule Book) Section 2.3.3.
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fines or public censure.22 LCH SA also
may suspend or terminate the
membership in certain circumstances
such as upon a member’s material
breaches 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.23
LCH SA also has established predefined procedures for the disciplining
of members and for affording a member
or a person with respect to the CDSClear
services the opportunity to dispute a
decision by LCH SA to discipline the
member or to deny, prohibit, or limit the
person’s access to the CDSClear
services. These disciplinary proceedings
set forth procedures regarding
investigations of a member by LCH SA,
which require LCH SA to send a written
notice to the member regarding the
details of the investigation and an
opportunity for the member to object.
Following an investigation, LCH SA
must 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.24
C. Governance
LCH SA is governed by its board of
directors, 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 3 and 18
members, and must include a nonexecutive chair; executive directors;
independent non-executive members; at
least one director representing LSEG;
and a director nominated by a user of
LCH SA.25
LCH SA has an audit committee
tasked with determining whether LCH
22 See
generally, LCH SA Form CA–1, Exhibit E–
4 (LCH SA Rulebook) Section 2.4.1; and Exhibit E–
6.8 (LCH SA CDS Clearing Proceedings, Section 8:
Disciplinary Proceedings) Section 8.4.
23 See generally, LCH SA Form CA–1, Exhibit E–
4 (LCH SA Rulebook) Section 2.4.1.1.
24 See generally, LCH SA Form CA–1, Exhibit E–
6.8 (LCH SA CDS Clearing Procedures, Section 8:
Disciplinary Proceedings).
25 See generally, LCH SA Form CA–1, Exhibit A;
and Exhibit A.2 (LCH SA Terms of Reference of the
Board of Directors) Section 1.
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SA 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.26 LCH
SA also has established 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.27 Representatives of
members and customers are directly
represented on the Risk Committee.28
In addition to these internal
governance structures, LCH SA also has
a process for considering external views
regarding certain aspects of its CDSClear
service. Specifically, when considering
a material change to the CDSClear
service, LCH SA engages certain banks
(some of which are members), which
also bear part of the cost of developing
and operating CDSClear, in a
consultative process where such banks
may provide recommendations to LCH
SA. Ultimately, LCH SA maintains
authority for operating CDSClear, and
may choose to not implement any
recommendations.29
D. Safeguarding of Securities and Funds
1. Margin
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.30 Specifically,
LCH SA uses a Value at Risk (‘‘VaR’’)
model to calculate member margin
requirements sufficient to cover losses
under normal market conditions with a
99.7% confidence interval. The margin
model takes into account a variety of
risks, including changes to credit
spreads, recovery rates, and interest
rates. 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
26 See generally, LCH SA Form CA–1, Exhibit A–
5 (LCH SA Terms of Reference of the Audit
Committee of the Board of Directors) Section 1.
27 See generally, LCH SA Form CA–1, Exhibit A–
4 (LCH SA Terms of Reference of the Risk
Committee of the Board of Directors).
28 See generally, Exhibit A–2 (LCH SA Terms of
Reference of the Risk Committee of the Board of
Director) Section 1.1.
29 See generally, LCH SA Form CA–1, Exhibit A
30 See generally, LCH SA Form CA–1, Exhibit H–
1 (LCH SA Audited Financial Statements for the
Year Ended 31 December 2015) at 18.
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requirement.31 LCH SA performs an
independent model validation annually.
In addition to margin requirements
derived from its model, LCH SA
imposes margin requirements on
members to address position
concentrations, wrong way risk, and
illiquid positions. LCH SA also requires
additional margin from members with
lower credit standing.32
LCH SA requires each member to post
collateral to satisfy its margin
requirement to allow LCH SA to manage
its risk exposure. LCH SA limits the
collateral that is eligible to cash and
securities with low credit, liquidity, and
market risk, and applies haircuts to
collateral posted in the form of
securities.33
2. Default Fund
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Apart from its initial and variation
margin requirements, LCH SA has
established a mutualized default fund
exclusively for the CDSClear service and
keeps it separate from the default funds
for LCH SA’s other services.34 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 member. LCH SA sizes the
default fund to cover the theoretical
losses associated with the default of the
largest two members in extreme but
plausible market conditions plus an
additional buffer.35 Each clearing
member is required to contribute to the
default fund in an amount that is the
greater of the clearing member’s
proportionate share of the total default
fund based on the margin requirements
related to positions held in the
CDSClear service, or the minimum
contribution of Ö10 million.36 LCH SA
calibrates its default fund, and member
default fund requirements, on a monthly
31 See generally, LCH SA Form CA–1, Exhibit H–
1 (LCH SA Audited Financial Statements for the
Year Ended 31 December 2015) at 18; See also, LCH
SA Form CA–1, Exhibit E–4 (CDS Clearing Rule
Book) Section 4.2.5; and Exhibit E–6 (LCH.Clearnet
SA CDS Clearing Procedures, Section 2—Margin
and Price Alignment Interest).
32 See generally, LCH SA Form CA–1, Exhibit H–
1 (LCH SA Audited Financial Statements for the
Year Ended 31 December 2015) at 18; and Exhibit
J–3 (CDSClear Service Description) Section 9.1.
33 See generally, LCH SA Form CA–1, Exhibit E–
4 (CDS Clearing Rule Book) Sections 4.2.6.3 and
4.2.6.4; See also, LCH SA Form CA–1, Exhibit E–
6.3 (LCH SA CDS Clearing Procedures Section 3—
Collateral and Cash Payment) Section 3.9.
34 See generally, LCH SA Form CA–1, Exhibit E–
4 (LCH SA CDS Clearing Rule Book) Article 4.4.1.1.
35 See generally, LCH SA Form CA–1, Exhibit E–
4 (LCH SA CDS Clearing Rule Book) Sections
4.4.1.1 and 4.4.1.2.
36 See generally, LCH SA Form CA–1, Exhibit E–
4 (LCH SA CDS Clearing Rule Book) Article 4.4.1.3.
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basis.37 LCH SA’s Risk Committee
reviews results of stress testing related
to the CDSClear default fund on at least
a quarterly basis.38
3. Investment and Liquidity Risk
Management
To appropriately manage cash
collateral posted by members to satisfy
margin and default fund requirements,
LCH SA has an investment risk policy
that is designed to ensure that collateral
is invested securely. LCH SA’s policies
require investments be made with
counterparties that meet certain
minimum credit standards (based on
LCH SA’s internal credit assessment).39
LCH SA monitors and measures
liquidity resources and requirements for
the entity as a whole, and calculates its
liquidity needs daily. In addition to the
cash collateral it holds and its capital as
immediate liquidity resources, during
liquidity stress events, LCH SA also can
access French central bank liquidity
through the Banque de France and also
maintains other secured financing
facilities.40
4. Default Management Process
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.41 Upon the
declaration of an event of default, LCH
SA’s default management process begins
to minimize losses and disruption by
attempting to hedge against market risk
and transfer client positions to nondefaulting members, and to dispose of
the defaulting member’s portfolio
through a competitive auction process
within the five-business-day default
management process period.42 Default
losses resulting from a CDSClear
member’s default can be covered only
by using the financial resources
collected for CDSClear pursuant to the
default waterfall.43
37 See generally, LCH SA Form CA–1, Exhibit J–
3 (LCH SA CDSClear Service Description) Section
11.1.
38 See generally, Exhibit A–4 (LCH SA Terms of
Reference of the Risk Committee of the Board of
Directors) Section 9.1.
39 See generally, LCA SA Form CA–1, Exhibit H–
1 (LCH SA Audited Financial Statements for the
Year Ended 31 December 2015) at 20.
40 See generally, LCH SA Form CA–1, Exhibit H–
1 (LCH SA Audited Financial Statements for the
Year Ended 31 December 2015) at 23–24.
41 See generally, LCH SA Form CA–1, Exhibit E–
4 (LCH SA CDS Clearing Rule Book, Appendix 1
‘‘CDS Default Management Process’’).
42 See generally, LCH SA Form CA–1, Schedule
A at 10–11; see also Exhibit E–4 (LCH SA CDS
Clearing Rule Book) Appendix 1, Section 2.1.
43 See generally, LCH SA Form CA–1, Exhibit E–
4 (LCH SA CDS Clearing Rule Book) Section 4.4.1.
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Under the default waterfall, the
defaulting 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 member’s default
fund contribution is applied. To the
extent that losses are still not covered,
LCH SA would use a portion of 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
default fund contributions of nondefaulting members and also may
impose additional default fund
contribution assessments against nondefaulting members. If 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.44
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 its 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 its Rulebook.45
E. Business Continuity
LCH SA maintains a business
continuity plan as a part of the LCH
Group’s business continuity model,
which is designed to recover core
clearing services within a two-hour
period following a point of failure and
to enable LCH SA to perform end-of-day
settlement of transactions on the same
business day. The business continuity
plan includes policies and procedures
regarding threat assessment and
monitoring, and anticipated responses
in the event that such threats
materialize, including the switching
over to alternative systems and
secondary sites.46
44 See generally, LCH SA Form CA–1, Exhibit J–
3 (CDSClear Service Description) Section 11.2.
45 See Generally, LCH SA Form CA–1, Exhibit E–
4 (LCH SA CDS Clearing Rule Book) Appendix 1,
Clause 2.1.4 and 8.1.
46 See generally, LCH SA Form CA–1, Exhibit K–
2 (Group Business Continuity Management Policy).
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F. Fee Structure
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.47
III. Requests for Exemptive Relief
A. Exemptive Relief From Sections 5
and 6 of the Act
LCH SA requests exemptive relief
from the requirements of Sections 5 and
6 of the Act with respect to its ‘‘forced
trade’’ mechanism that is used in the
calculation of mark-to-market prices for
open positions in cleared single-name
CDS and exemptive relief for each of its
CDSClear members from the
requirements of Section 5 of the Act
with respect to their participation in the
‘‘forced trade’’ mechanism.48 LCH SA
represents that, as part of its clearing
and risk management processes for
single-name CDS, it would compute the
end-of-day settlement price for each
contract in which any of its members
has a cleared position, based on offmarket prices submitted by its members
and use those prices to establish a daily
mark on which to base margin
calculations. To promote the integrity of
these price submissions, LCH SA would
employ a ‘‘forced trade’’ mechanism
pursuant to which its members would
be required to execute CDS trades based
on their price submissions.49
LCH SA states that, absent an
exemption, this activity would cause
LCH SA’s ‘‘forced trade’’ mechanism to
meet the criteria of Rule 3b–16 under
the Act 50 and, as a result, would require
it to either register with the Commission
as a national securities exchange under
Sections 5 and 6 of the Act or obtain an
exemption from registration.
Additionally, any member that is a
broker or dealer would not be permitted
to use any facility of an exchange or to
effect any transaction in a security, or to
report any such transaction, unless the
exchange were registered as a national
securities exchange or an exemption
were available.51
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B. Exemptive Relief From Section 19(b)
of the Act and Rule 19b–4 Thereunder
LCH SA requests exemptive relief
from the requirements of Section 19(b)
generally LCH SA Form CA–1, Exhibit Q.
Request for Exemptive Relief, at 2.
49 See Request for Exemptive Relief, at 3–4.
50 17 CFR 240.3b–16.
51 See Request for Exemptive Relief at 4.
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 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 such
services.52 LCH SA states that the rule
filing requirements under Section 19(b)
of the Act and Rule 19b–4 thereunder
do not adequately consider
circumstances in which a foreign
clearing agency that 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). Specifically,
such foreign clearing agencies may have
completely offshore businesses that
provide clearing services 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
under the Commodity Exchange Act).53
As a condition of this requested relief,
LCH SA has represented that it would
provide notice of its non-U.S. business
rule changes to Commission staff once
duly approved by its national competent
authorities in lieu of filing such changes
under Section 19(b) and Rule 19b–4.
C. Exemptive Relief From Rules 17Ad–
22(c)(2) and 17Ad–22(c)(2)(iii)
LCH SA requests exemptive relief
from the requirements of Rule 17Ad–
22(c)(2) and Rule 17Ad–22(c)(2)(iii)
with respect to its financial statements
for fiscal years 2014 and 2015.54 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.55 Given the
scope of LSEG’s business activities, LCH
SA represents that it is unlikely that
LSEG would be able 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 would ultimately
be published.56
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, under
French law, LCH SA states that it is
required to maintain two statutory
auditing firms that jointly sign the
annual audited accounts.57 LCH SA
represents that, because it would be
required upon being registered with the
Commission as a clearing agency to
have its 2014 and 2015 annual financial
statements audited in accordance with
Public Company Accounting Oversight
Board standards, its 2014 and 2015
financial records would need to be reanalyzed (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 as well as impose material
burdens on LCH SA, its staff and
auditors, to complete such work prior to
the end of this calendar year.58 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.59
D. Exemptive Relief From Rule 17a–22
LCH SA requests exemptive relief
from the requirements of Rule 17a–22 to
file with the Commission certain
materials made available to its
participants regarding LCH SA’s nonU.S. business units 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.60 Additionally, LCH SA
requests relief from the requirement of
Rule 17a–22 to file physical copies with
respect to materials primarily
concerning its CDSClear services. LCH
SA requests instead, that it be permitted
to provide the Commission with
electronic submissions for such
materials.61
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning LCH SA’s Form
CA–1 and Request for Exemptive Relief.
The Commission requests comment
47 See
52 See
57 See
48 See
53 See
58 Id.
VerDate Sep<11>2014
17:56 Sep 30, 2016
Jkt 241001
Request for Exemptive Relief at 2–3.
Request for Exemptive Relief at 5–12.
54 See Request for Exemptive Relief at 4.
55 See Request for Exemptive Relief at 15.
56 Id.
68077
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Sfmt 4703
Request for Exemptive Relief at 14.
59 Id.
60 See
Request for Exemptive Relief at 15–16.
61 Id.
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Federal Register / Vol. 81, No. 191 / Monday, October 3, 2016 / Notices
regarding whether granting the Request
for Exemptive Relief is appropriate,
whether the conditions required for
granting such relief, as set forth in the
Request for Exemptive Relief, are
appropriate, and whether any other
conditions should be required. In
particular, the Commission requests
comment concerning the
appropriateness of granting exemptive
relief under Section 19(b) and Rule 19b–
4 thereunder as described above, in
connection with LCH SA’s non-U.S.
business. 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
600–36 on the subject line.
sradovich on DSK3GMQ082PROD with NOTICES
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 600–36. 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 of submission. The
Commission will post all comments on
the Commission’s internet Web site
(https://www.sec.gov/rules/sro.shtml).
Copies of the Form CA–1 and the
Request for Exemptive Relief, all
subsequent amendments, all written
statements with respect to LCH SA’s
Form CA–1 and the Request for
Exemptive Relief that are filed with the
Commission, and all written
communications relating to the Form
CA–1and the Request for Exemptive
Relief 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.
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 600–36 and should be
submitted on or before November 2,
2016.
VerDate Sep<11>2014
17:56 Sep 30, 2016
Jkt 241001
By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–23747 Filed 9–30–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78949; File No. SR–
NYSEArca-2016–107]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Designation of a
Longer Period for Commission Action
on Proposed Rule Change, as Modified
by Amendment No. 1, Relating to
Listing and Trading of Shares of
Cumberland Municipal Bond ETF
Under NYSE Arca Equities Rule 8.600
September 27, 2016.
On July 26, 2016, NYSE Arca, Inc.
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 to list and trade shares of the
Cumberland Municipal Bond ETF
(‘‘Fund’’) under NYSE Arca Equities
Rule 8.600. The proposed rule change
was published for comment in the
Federal Register on August 15, 2016.3
On September 15, 2016, the Exchange
filed Amendment No. 1 to the proposed
rule change.4 The Commission has
received no comment letters on the
proposed rule change, as modified by
Amendment No. 1 thereto.
Section 19(b)(2) of the Act 5 provides
that, within 45 days of the publication
of notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or as to which the
self-regulatory organization consents,
the Commission shall either approve the
1 15
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 78523
(Aug. 9, 2016), 81 FR 54155.
4 In Amendment No. 1, which amended and
replaced the proposed rule change in its entirety,
the Exchange: (1) Described additional
diversification requirements that would apply to
the Fund’s holdings in municipal bonds; (2)
clarified the Fund’s holdings in non-exchangetraded investment company securities; and (3)
corrected certain references to the regular trading
session of the Exchange. Amendment No. 1 to the
proposed rule change is available at: https://
www.sec.gov/comments/sr-nysearca-2016–107/
nysearca2016107–1.pdf. Because Amendment No. 1
to the proposed rule change does not materially
alter the substance of the proposed rule change or
raise unique or novel regulatory issues, Amendment
No. 1 is not subject to notice and comment.
5 15 U.S.C. 78s(b)(2).
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day after
publication of the notice for this
proposed rule change is September 29,
2016. The Commission is extending this
45-day time period. The Commission
finds that it is appropriate to designate
a longer period within which to take
action on the proposed rule change so
that it has sufficient time to consider the
proposed rule change, as modified by
Amendment No. 1 thereto.
Accordingly, the Commission,
pursuant to Section 19(b)(2) of the Act,6
designates November 13, 2016, as the
date by which the Commission shall
either approve or disapprove or institute
proceedings to determine whether to
disapprove the proposed rule change
(File Number SR–NYSEArca–2016–
107), as modified by Amendment No. 1
thereto.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–23750 Filed 9–30–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–68, OMB Control No.
3235–0074]
Proposed Collection; Comment
Request
Upon Written Request Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE., Washington, DC
20549–2736
Extension:
Regulation C
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget for extension
and approval.
Regulation C (17 CFR 230.400 through
230.498) under the Securities Act of
1933 (15 U.S.C. 77a et seq.) provides
standard instructions for persons filing
registration statements under the
6 Id.
7 17
CFR 200.30–3(a)(31).
E:\FR\FM\03OCN1.SGM
03OCN1
]]>Agencies
[Federal Register Volume 81, Number 191 (Monday, October 3, 2016)]
[Notices]
[Pages 68074-68078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23747]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78941; File No. 600-36]
Self-Regulatory Organizations; LCH SA; Notice of Filing of
Application for Registration as a Clearing Agency and Request for
Exemptive Relief
September 27, 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\ (``Act'') and Rule 17Ab2-1 thereunder.\2\
Specifically, 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. LCH SA also is seeking 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; (iii) from Rules 17Ad-22(c)(2) and
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\
The Commission is publishing this notice to solicit comments from
interested persons regarding LCH SA's Form CA-1 and Request for
Exemptive Relief.\9\ The Commission will consider any comments it
receives in making its determination of whether to grant LCH SA's
application for registration as a clearing agency and Request for
Exemptive Relief.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78q-1.
\2\ 17 CFR 240.17Ab2-1(a).
\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\ The descriptions set forth in this notice regarding the
structure and operations of LCH SA have been derived from
information contained in LCH SA's Form CA-1 application. The
application and exhibits thereto for which LCH SA has not requested
confidential treatment are available on the Commission's Web site at
www.sec.gov/rules/other.shtml.
---------------------------------------------------------------------------
II. LCH SA Form CA-1 Application
LCH SA's Form CA-1 application and accompanying exhibits contain
information regarding LCH SA and its CDSClear operations.\10\ Set forth
below is a summary of certain aspects of LCH SA's Form CA-1
application.
---------------------------------------------------------------------------
\10\ Schedule A to LCH SA's Form CA-1 includes a description of
the risk management procedures utilized by LCH SA. Exhibit A
contains information about the ownership and governance structure of
LCH SA. Exhibit B contains a list of LCH SA's officers and senior
managers of LCH SA and the CDSClear business unit. Exhibit C
includes a narrative and graphic descriptions of LCH SA's
organizational structure. Exhibit E includes copies of the CDS
Clearing rulebook, procedures and articles of association. Exhibit J
provides a description of CDSClear's services and functions.
---------------------------------------------------------------------------
A. Overview of LCH SA
LCH SA maintains its principal office in Paris, France and is a
wholly-owned subsidiary of LCH.Clearnet Group Limited (``LCH Group''),
a limited company incorporated under the laws of England and Wales.\11\
LCH Group is majority owned by the London Stock Exchange Group plc
(``LSEG''). In its home jurisdiction, LCH SA is the only CCP in France
and is regulated as a bank and 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.\12\ 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 also is registered with the
CFTC as a derivatives clearing organization (``DCO'') to provide
clearing services for broad-based index CDS to U.S. members and their
customers.\13\
---------------------------------------------------------------------------
\11\ See LCH SA Form CA-1, Exhibit A at 1.
\12\ See generally, LCH SA Form CA-1, Exhibit J-3 (LCH SA
CDSClear Service Description) Section 2.3.
\13\ Id.
---------------------------------------------------------------------------
LCH SA offers clearing services for derivatives, exchange-traded
futures and options, cash equities and fixed income and energy
instruments through three lines of CCP services: EquityClear,
CommodityClear, and RepoClear.\14\ These 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. LCH SA's CDS clearing
services are located in the CDSClear business unit. While all clearing
services are provided from within the same legal entity, CDSClear is
``ring-fenced'' as it has its own rulebook, policies and procedures,
risk management framework, risk management personnel, default fund,
waterfall, default management process, operations department, and
certain information technology resources.\15\ Registration with the
Commission as a clearing agency would permit LCH SA to offer single-
name CDS clearing services to U.S. persons through its CDSClear
business unit. LCH SA currently offers index CDS and single-name CDS
clearing services to non-U.S. persons in Europe and is authorized to
offer index CDS clearing services to U.S. clearing members and their
customers under its DCO registration.
---------------------------------------------------------------------------
\14\ See generally, LCH SA Form CA-1, Exhibit C.
\15\ See generally, LCH SA Form CA-1, Exhibit C.
---------------------------------------------------------------------------
B. LCH SA Membership Standards and Enforcement of Rules
1. Membership Standards
LCH SA has established requirements concerning membership. These
requirements are used to accept, deny, or condition any person's
participation in LCH SA's clearing services as a member and include
standards for financial responsibility, operational capacity, business
experience, and creditworthiness.\16\ Members must comply with these
requirements on an ongoing basis.\17\
---------------------------------------------------------------------------
\16\ See generally, LCH SA Form CA-1, Exhibit E-4 (LCH SA CDS
Rule Book) Section 2.2.1.
\17\ See generally, LCH SA Form CA-1, Exhibit E-4 (LCH SA CDS
Rule Book) Section 2.2.2.
---------------------------------------------------------------------------
With respect to financial responsibility, LCH SA's rulebook
contains net capital requirements that, among other things, establish
minimum net capital requirements for members that may be scalable based
on the risk
[[Page 68075]]
the members introduce to LCH SA. Regarding operational capacity and
business experience requirements, a member must be able to demonstrate
that it has sufficient expertise in clearing activities, that its
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), and that it has appropriate banking
arrangements.\18\ 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.\19\
---------------------------------------------------------------------------
\18\ See generally, LCH SA Form CA-1, Exhibit E-4 (LCH SA CDS
Rule Book) Section 2.2.1.
\19\ See generally, LCH SA Form CA-1, Exhibit E-4 (LCH SA CDS
Rule Book) Section 2.2.4.1.
---------------------------------------------------------------------------
LCH SA imposes several monitoring and reporting obligations on its
members to ensure ongoing compliance with its membership obligations.
LCH SA monitors on an ongoing basis certain indicators of its members,
including CDS spreads, long-term credit ratings, and equity returns.
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 clients, and any change to the member's systems or operations
that materially impact the member's ability to meet its obligations as
a member. Furthermore, members are required to provide to LCH SA
audited financial statements on an annual basis, as well as interim
financial statements during the course of the year.\20\
---------------------------------------------------------------------------
\20\ See generally, LCH SA Form CA-1, Schedule A at 9; See also
Exhibit E-4 (LCH SA CDS Rule Book) Sections 2.3.1 and 2.3.2.
---------------------------------------------------------------------------
2. Capacity To Enforce Rules and Discipline Members
LCH SA has established rules to monitor for members' breaches of
its rules, enforce its rules, and discipline members. Additionally, as
noted above, CDSClear 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.\21\ 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.\22\ LCH SA also may suspend
or terminate the membership in certain circumstances such as upon a
member's material breaches 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.\23\
---------------------------------------------------------------------------
\21\ See generally LCH SA Form CA-1, Exhibit E-4 (LCH SA CDS
Clearing Rule Book) Section 2.3.3.
\22\ See generally, LCH SA Form CA-1, Exhibit E-4 (LCH SA
Rulebook) Section 2.4.1; and Exhibit E-6.8 (LCH SA CDS Clearing
Proceedings, Section 8: Disciplinary Proceedings) Section 8.4.
\23\ See generally, LCH SA Form CA-1, Exhibit E-4 (LCH SA
Rulebook) Section 2.4.1.1.
---------------------------------------------------------------------------
LCH SA also has established pre-defined procedures for the
disciplining of members and for affording a member or a person with
respect to the CDSClear services the opportunity to dispute a decision
by LCH SA to discipline the member or to deny, prohibit, or limit the
person's access to the CDSClear services. These disciplinary
proceedings set forth procedures regarding investigations of a member
by LCH SA, which require LCH SA to send a written notice to the member
regarding the details of the investigation and an opportunity for the
member to object. Following an investigation, LCH SA must 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.\24\
---------------------------------------------------------------------------
\24\ See generally, LCH SA Form CA-1, Exhibit E-6.8 (LCH SA CDS
Clearing Procedures, Section 8: Disciplinary Proceedings).
---------------------------------------------------------------------------
C. Governance
LCH SA is governed by its board of directors, 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 3 and 18 members, and must
include a non-executive chair; executive directors; independent non-
executive members; at least one director representing LSEG; and a
director nominated by a user of LCH SA.\25\
---------------------------------------------------------------------------
\25\ See generally, LCH SA Form CA-1, Exhibit A; and Exhibit A.2
(LCH SA Terms of Reference of the Board of Directors) Section 1.
---------------------------------------------------------------------------
LCH SA has an audit committee tasked with determining whether LCH
SA 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.\26\
LCH SA also has established 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.\27\
Representatives of members and customers are directly represented on
the Risk Committee.\28\
---------------------------------------------------------------------------
\26\ See generally, LCH SA Form CA-1, Exhibit A-5 (LCH SA Terms
of Reference of the Audit Committee of the Board of Directors)
Section 1.
\27\ See generally, LCH SA Form CA-1, Exhibit A-4 (LCH SA Terms
of Reference of the Risk Committee of the Board of Directors).
\28\ See generally, Exhibit A-2 (LCH SA Terms of Reference of
the Risk Committee of the Board of Director) Section 1.1.
---------------------------------------------------------------------------
In addition to these internal governance structures, LCH SA also
has a process for considering external views regarding certain aspects
of its CDSClear service. Specifically, when considering a material
change to the CDSClear service, LCH SA engages certain banks (some of
which are members), which also bear part of the cost of developing and
operating CDSClear, in a consultative process where such banks may
provide recommendations to LCH SA. Ultimately, LCH SA maintains
authority for operating CDSClear, and may choose to not implement any
recommendations.\29\
---------------------------------------------------------------------------
\29\ See generally, LCH SA Form CA-1, Exhibit A
---------------------------------------------------------------------------
D. Safeguarding of Securities and Funds
1. Margin
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.\30\ Specifically, LCH SA uses a Value
at Risk (``VaR'') model to calculate member margin requirements
sufficient to cover losses under normal market conditions with a 99.7%
confidence interval. The margin model takes into account a variety of
risks, including changes to credit spreads, recovery rates, and
interest rates. 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
[[Page 68076]]
requirement.\31\ LCH SA performs an independent model validation
annually. In addition to margin requirements derived from its model,
LCH SA imposes margin requirements on members to address position
concentrations, wrong way risk, and illiquid positions. LCH SA also
requires additional margin from members with lower credit standing.\32\
---------------------------------------------------------------------------
\30\ See generally, LCH SA Form CA-1, Exhibit H-1 (LCH SA
Audited Financial Statements for the Year Ended 31 December 2015) at
18.
\31\ See generally, LCH SA Form CA-1, Exhibit H-1 (LCH SA
Audited Financial Statements for the Year Ended 31 December 2015) at
18; See also, LCH SA Form CA-1, Exhibit E-4 (CDS Clearing Rule Book)
Section 4.2.5; and Exhibit E-6 (LCH.Clearnet SA CDS Clearing
Procedures, Section 2--Margin and Price Alignment Interest).
\32\ See generally, LCH SA Form CA-1, Exhibit H-1 (LCH SA
Audited Financial Statements for the Year Ended 31 December 2015) at
18; and Exhibit J-3 (CDSClear Service Description) Section 9.1.
---------------------------------------------------------------------------
LCH SA requires each member to post collateral to satisfy its
margin requirement to allow LCH SA to manage its risk exposure. LCH SA
limits the collateral that is eligible to cash and securities with low
credit, liquidity, and market risk, and applies haircuts to collateral
posted in the form of securities.\33\
---------------------------------------------------------------------------
\33\ See generally, LCH SA Form CA-1, Exhibit E-4 (CDS Clearing
Rule Book) Sections 4.2.6.3 and 4.2.6.4; See also, LCH SA Form CA-1,
Exhibit E-6.3 (LCH SA CDS Clearing Procedures Section 3--Collateral
and Cash Payment) Section 3.9.
---------------------------------------------------------------------------
2. Default Fund
Apart from its initial and variation margin requirements, LCH SA
has established a mutualized default fund exclusively for the CDSClear
service and keeps it separate from the default funds for LCH SA's other
services.\34\ 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 member. LCH SA sizes the default fund to cover the theoretical
losses associated with the default of the largest two members in
extreme but plausible market conditions plus an additional buffer.\35\
Each clearing member is required to contribute to the default fund in
an amount that is the greater of the clearing member's proportionate
share of the total default fund based on the margin requirements
related to positions held in the CDSClear service, or the minimum
contribution of [euro]10 million.\36\ LCH SA calibrates its default
fund, and member default fund requirements, on a monthly basis.\37\ LCH
SA's Risk Committee reviews results of stress testing related to the
CDSClear default fund on at least a quarterly basis.\38\
---------------------------------------------------------------------------
\34\ See generally, LCH SA Form CA-1, Exhibit E-4 (LCH SA CDS
Clearing Rule Book) Article 4.4.1.1.
\35\ See generally, LCH SA Form CA-1, Exhibit E-4 (LCH SA CDS
Clearing Rule Book) Sections 4.4.1.1 and 4.4.1.2.
\36\ See generally, LCH SA Form CA-1, Exhibit E-4 (LCH SA CDS
Clearing Rule Book) Article 4.4.1.3.
\37\ See generally, LCH SA Form CA-1, Exhibit J-3 (LCH SA
CDSClear Service Description) Section 11.1.
\38\ See generally, Exhibit A-4 (LCH SA Terms of Reference of
the Risk Committee of the Board of Directors) Section 9.1.
---------------------------------------------------------------------------
3. Investment and Liquidity Risk Management
To appropriately manage cash collateral posted by members to
satisfy margin and default fund requirements, LCH SA has an investment
risk policy that is designed to ensure that collateral is invested
securely. LCH SA's policies require investments be made with
counterparties that meet certain minimum credit standards (based on LCH
SA's internal credit assessment).\39\
---------------------------------------------------------------------------
\39\ See generally, LCA SA Form CA-1, Exhibit H-1 (LCH SA
Audited Financial Statements for the Year Ended 31 December 2015) at
20.
---------------------------------------------------------------------------
LCH SA monitors and measures liquidity resources and requirements
for the entity as a whole, and calculates its liquidity needs daily. In
addition to the cash collateral it holds and its capital as immediate
liquidity resources, during liquidity stress events, LCH SA also can
access French central bank liquidity through the Banque de France and
also maintains other secured financing facilities.\40\
---------------------------------------------------------------------------
\40\ See generally, LCH SA Form CA-1, Exhibit H-1 (LCH SA
Audited Financial Statements for the Year Ended 31 December 2015) at
23-24.
---------------------------------------------------------------------------
4. Default Management Process
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.\41\ Upon the declaration of an
event of default, LCH SA's default management process begins to
minimize losses and disruption by attempting to hedge against market
risk and transfer client positions to non-defaulting members, and to
dispose of the defaulting member's portfolio through a competitive
auction process within the five-business-day default management process
period.\42\ Default losses resulting from a CDSClear member's default
can be covered only by using the financial resources collected for
CDSClear pursuant to the default waterfall.\43\
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\41\ See generally, LCH SA Form CA-1, Exhibit E-4 (LCH SA CDS
Clearing Rule Book, Appendix 1 ``CDS Default Management Process'').
\42\ See generally, LCH SA Form CA-1, Schedule A at 10-11; see
also Exhibit E-4 (LCH SA CDS Clearing Rule Book) Appendix 1, Section
2.1.
\43\ See generally, LCH SA Form CA-1, Exhibit E-4 (LCH SA CDS
Clearing Rule Book) Section 4.4.1.
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Under the default waterfall, the defaulting 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 member's default fund contribution is applied. To the extent
that losses are still not covered, LCH SA would use a portion of 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 default fund contributions of non-defaulting
members and also may impose additional default fund contribution
assessments against non-defaulting members. If 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.\44\ 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 its 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 its Rulebook.\45\
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\44\ See generally, LCH SA Form CA-1, Exhibit J-3 (CDSClear
Service Description) Section 11.2.
\45\ See Generally, LCH SA Form CA-1, Exhibit E-4 (LCH SA CDS
Clearing Rule Book) Appendix 1, Clause 2.1.4 and 8.1.
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E. Business Continuity
LCH SA maintains a business continuity plan as a part of the LCH
Group's business continuity model, which is designed to recover core
clearing services within a two-hour period following a point of failure
and to enable LCH SA to perform end-of-day settlement of transactions
on the same business day. The business continuity plan includes
policies and procedures regarding threat assessment and monitoring, and
anticipated responses in the event that such threats materialize,
including the switching over to alternative systems and secondary
sites.\46\
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\46\ See generally, LCH SA Form CA-1, Exhibit K-2 (Group
Business Continuity Management Policy).
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[[Page 68077]]
F. Fee Structure
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.\47\
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\47\ See generally LCH SA Form CA-1, Exhibit Q.
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III. Requests for Exemptive Relief
A. Exemptive Relief From Sections 5 and 6 of the Act
LCH SA requests exemptive relief from the requirements of Sections
5 and 6 of the Act with respect to its ``forced trade'' mechanism that
is used in the calculation of mark-to-market prices for open positions
in cleared single-name CDS and exemptive relief for each of its
CDSClear members from the requirements of Section 5 of the Act with
respect to their participation in the ``forced trade'' mechanism.\48\
LCH SA represents that, as part of its clearing and risk management
processes for single-name CDS, it would compute 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 members
and use those prices to establish a daily mark on which to base margin
calculations. To promote the integrity of these price submissions, LCH
SA would employ a ``forced trade'' mechanism pursuant to which its
members would be required to execute CDS trades based on their price
submissions.\49\
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\48\ See Request for Exemptive Relief, at 2.
\49\ See Request for Exemptive Relief, at 3-4.
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LCH SA states that, absent an exemption, this activity would cause
LCH SA's ``forced trade'' mechanism to meet the criteria of Rule 3b-16
under the Act \50\ and, as a result, would require it to either
register with the Commission as a national securities exchange under
Sections 5 and 6 of the Act or obtain an exemption from registration.
Additionally, any member that is a broker or dealer would not be
permitted to use any facility of an exchange or to effect any
transaction in a security, or to report any such transaction, unless
the exchange were registered as a national securities exchange or an
exemption were available.\51\
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\50\ 17 CFR 240.3b-16.
\51\ See Request for Exemptive Relief at 4.
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B. Exemptive Relief From Section 19(b) of the Act and Rule 19b-4
Thereunder
LCH SA requests 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 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 such services.\52\ LCH SA states that the rule filing
requirements under Section 19(b) of the Act and Rule 19b-4 thereunder
do not adequately consider circumstances in which a foreign clearing
agency that 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).
Specifically, such foreign clearing agencies may have completely
offshore businesses that provide clearing services 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 under the Commodity Exchange Act).\53\ As a condition of this
requested relief, LCH SA has represented that it would provide notice
of its non-U.S. business rule changes to Commission staff once duly
approved by its national competent authorities in lieu of filing such
changes under Section 19(b) and Rule 19b-4.
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\52\ See Request for Exemptive Relief at 2-3.
\53\ See Request for Exemptive Relief at 5-12.
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C. Exemptive Relief From Rules 17Ad-22(c)(2) and 17Ad-22(c)(2)(iii)
LCH SA requests exemptive relief from the requirements of Rule
17Ad-22(c)(2) and Rule 17Ad-22(c)(2)(iii) with respect to its financial
statements for fiscal years 2014 and 2015.\54\ 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.\55\
Given the scope of LSEG's business activities, LCH SA represents that
it is unlikely that LSEG would be able 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 would ultimately be
published.\56\
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\54\ See Request for Exemptive Relief at 4.
\55\ See Request for Exemptive Relief at 15.
\56\ Id.
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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, under French law, LCH SA states that it is required to
maintain two statutory auditing firms that jointly sign the annual
audited accounts.\57\ LCH SA represents that, because it would be
required upon being registered with the Commission as a clearing agency
to have its 2014 and 2015 annual financial statements audited in
accordance with Public Company Accounting Oversight Board standards,
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 as well as impose material
burdens on LCH SA, its staff and auditors, to complete such work prior
to the end of this calendar year.\58\ 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.\59\
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\57\ See Request for Exemptive Relief at 14.
\58\ Id.
\59\ Id.
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D. Exemptive Relief From Rule 17a-22
LCH SA requests exemptive relief from the requirements of Rule 17a-
22 to file with the Commission certain materials made available to its
participants regarding LCH SA's non-U.S. business units 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.\60\ Additionally, LCH SA requests relief from the requirement
of Rule 17a-22 to file physical copies with respect to materials
primarily concerning its CDSClear services. LCH SA requests instead,
that it be permitted to provide the Commission with electronic
submissions for such materials.\61\
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\60\ See Request for Exemptive Relief at 15-16.
\61\ Id.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning LCH SA's Form CA-1 and Request for Exemptive
Relief. The Commission requests comment
[[Page 68078]]
regarding whether granting the Request for Exemptive Relief is
appropriate, whether the conditions required for granting such relief,
as set forth in the Request for Exemptive Relief, are appropriate, and
whether any other conditions should be required. In particular, the
Commission requests comment concerning the appropriateness of granting
exemptive relief under Section 19(b) and Rule 19b-4 thereunder as
described above, in connection with LCH SA's non-U.S. business.
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 600-36 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 600-36. 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 of submission. The Commission will post all
comments on the Commission's internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the Form CA-1 and the Request for Exemptive
Relief, all subsequent amendments, all written statements with respect
to LCH SA's Form CA-1 and the Request for Exemptive Relief that are
filed with the Commission, and all written communications relating to
the Form CA-1and the Request for Exemptive Relief 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.
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 600-36 and should
be submitted on or before November 2, 2016.
By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-23747 Filed 9-30-16; 8:45 am]
BILLING CODE 8011-01-P
