Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Recovery Risk Margin, 26728-26729 [2017-11864]

Download as PDF 26728 Federal Register / Vol. 82, No. 109 / Thursday, June 8, 2017 / Notices designates the proposal operative upon filing.18 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 investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule change should be approved or 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: asabaliauskas on DSKBBXCHB2PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– MIAX–2017–25 on the subject line. Paper Comments • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–MIAX–2017–25. 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 (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for 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–MIAX– 2017–25 and should be submitted on or before June 29, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–11869 Filed 6–7–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80848; File No. SR–LCH SA–2017–003] Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to Recovery Risk Margin June 2, 2017. I. Introduction On April 4, 2017, Banque Centrale de Compensation, which conducts business under the name LCH SA (‘‘LCH SA’’), 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 (SR–LCH SA– 2017–003) to revise its margin methodology with respect to credit default swaps (‘‘CDS’’) in the Reference Guide: CDS Margin Framework (‘‘Reference Guide’’). The proposed rule change was published for comment in the Federal Register on April 19, 2017.3 The Commission received no comment letters regarding the proposed change. For the reasons discussed below, the Commission is approving the proposed rule change. II. Description of the Proposed Rule Change The proposed rule change seeks to amend the Reference Guide by 19 17 18 For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). VerDate Sep<11>2014 17:24 Jun 07, 2017 Jkt 241001 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Securities Exchange Act Release No. 34–80450 (April 13, 2017), 82 FR 18488 (April 19, 2017) (SR– LCH SA–2017–003) (the ‘‘Notice’’). 1 15 PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 eliminating the recovery rate risk charge as a component of the margin methodology, as it applies to index CDS. LCH SA, however, does not propose to alter the recovery rate risk charge as a component of the margin methodology, as it applies to single name CDS. The proposed rule change also seeks to make minor updates and clarifications to the Reference Guide.4 With respect to the portion of the proposed rule change that eliminates the recovery rate risk charge as a margin component for index CDS positions, LCH SA believes that recovery rate risk is irrelevant to index CDS in normal market conditions and it therefore should not need to charge margin to address it. In support, LCH SA represents that ‘‘[the] market convention is to assume a pre-defined recovery rate for pricing an index CDS, such as a CDS on iTraxx indices.’’ 5 Therefore, according to LCH SA, there is no need to charge margin for an adverse recovery rate movement for an index CDS position because, pursuant to market convention for pricing an index CDS in normal market conditions, the rate will not move. Moreover, LCH SA characterizes any drop in the recovery rate for index CDS as a stress loss, and states that applying a margin charge to address this risk ‘‘would be trying to capture a stress loss incurred in a Clearing Member’s portfolio should the pre-defined recovery rate for these index CDS change, which is not consistent with market convention in normal market conditions.’’ 6 Furthermore, while LCH SA does expect deviations from this market convention in extreme market conditions, LCH SA believes that these deviations—and any resultant recovery rate risk on the affected index CDS positions—should not be addressed through its margin framework but rather ‘‘would be captured by LCH SA’s stress scenarios used to size the Default Fund.’’ 7 Therefore, LCH SA maintains that elimination of recovery rate risk charge from its margin framework is appropriate and consistent with applicable provisions of the Exchange Act and Commission Rules promulgated thereunder. 4 LCH SA has proposed changes to the Reference Guide to (i) correct a hyperlink and (ii) add a cross reference and hyperlink to the general inputs considered by LCH SA in constructing the CDS pricing for European and U.S. dollar denominated contracts. See Notice, 82 FR at 18489. 5 Id. 6 Id. 7 Id. E:\FR\FM\08JNN1.SGM 08JNN1 asabaliauskas on DSKBBXCHB2PROD with NOTICES Federal Register / Vol. 82, No. 109 / Thursday, June 8, 2017 / Notices III. Discussion and Commission Findings Section 19(b)(2)(C) of the Act directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization.8 Section 17A(b)(3)(F) of the Act requires,9 among other things, that the rules of a registered clearing agency be designed 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. Rule 17Ad–22(b)(2) requires that a registered clearing agency that performs central counterparty services shall establish, implement, maintain, and enforce written policies and procedures reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions.10 Rule 17Ad– 22(e)(6) requires that a covered clearing agency 11 shall establish, implement, maintain, and enforce written policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that, at a minimum, calculates margin sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default and uses an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products.12 Rule 17Ad–22(e)(1) requires that a covered clearing agency shall establish, implement, maintain, and enforce written policies and procedures reasonably designed to provide for a well-founded, clear, transparent, and enforceable legal basis for each aspect of its activities in all relevant jurisdictions.13 The Commission finds that the proposed rule change is consistent with Section 17A of the Act and Rule 17Ad– 22 thereunder. In particular, the Commission finds that the elimination of recovery rate risk charges is consistent with market convention for pricing index CDS, as represented by LCH SA and discussed above. Moreover, the Commission notes that the 8 15 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 10 17 CFR 240.17Ad–22(b)(2). 11 See 17 CFR 240.17Ad–22(a)(5) (defining ‘‘covered clearing agency’’). 12 See 17 CFR 240.17Ad–22(e)(6)(iii), (e)(6)(v). 1317 CFR 240.17Ad–22(e)(1). 9 15 VerDate Sep<11>2014 17:24 Jun 07, 2017 Jkt 241001 elimination of this component of LCH SA’s margin is expected to have only a minor impact on the total amount of margin LCH SA collects with respect to index CDS. Furthermore, the Commission notes that LCH SA will continue to consider and address recovery rate risk on index CDS in its stress scenarios used to size its default fund. Based on these findings and considerations, the Commission believes that the proposed rule change is reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions, calculate margin sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default and use an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products, consistent with Section 17A(b)(3)(F) of the Exchange Act,14 and Rules 17Ad–22(b)(2), (e)(6)(iii), and (e)(6)(v) thereunder.15 With respect to the portion of the proposed rule change that revises the Reference Guide to (i) correct a hyperlink and (ii) add a cross reference and hyperlink to the general inputs considered by LCH SA in constructing the CDS pricing for European and U.S. dollar denominated contracts, the Commission believes that correcting an erroneous hyperlink and providing an additional cross-reference and hyperlink would make the Reference Guide more clear to those who use it, consistent with Rule 17Ad–22(e)(1).16 IV. Conclusion It is therefore ordered pursuant to Section 19(b)(2) of the Act that the proposed rule change (SR–LCH SA– 2017–003) be, and hereby is, approved.17 For the Commission by the Division of Trading and Markets, pursuant to delegated authority.18 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–11864 Filed 6–7–17; 8:45 am] BILLING CODE 8011–01–P 14 15 U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(b)(2), (e)(6)(iii), and (e)(6)(v). 16 17 CFR 240.17Ad–22(e)(1). 17 In approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 18 17 CFR 200.30–3(a)(12). 15 17 PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 26729 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80850; File No. SR– NYSEMKT–2017–33] Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Extend the Pilot Period for the Exchange’s Retail Liquidity Program Until December 31, 2017 June 2, 2017. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that on May 23, 2017, NYSE MKT LLC (the ‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to extend the pilot period for the Exchange’s Retail Liquidity Program (the ‘‘Retail Liquidity Program’’ or the ‘‘Program’’), which is currently scheduled to expire on June 30, 2017, until December 31, 2017. The proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization 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 those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. 1 15 U.S.C.78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 E:\FR\FM\08JNN1.SGM 08JNN1

Agencies

[Federal Register Volume 82, Number 109 (Thursday, June 8, 2017)]
[Notices]
[Pages 26728-26729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11864]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80848; File No. SR-LCH SA-2017-003]


Self-Regulatory Organizations; LCH SA; Order Approving Proposed 
Rule Change Relating to Recovery Risk Margin

June 2, 2017.

I. Introduction

    On April 4, 2017, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), 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 (SR-LCH SA-2017-003) to revise 
its margin methodology with respect to credit default swaps (``CDS'') 
in the Reference Guide: CDS Margin Framework (``Reference Guide''). The 
proposed rule change was published for comment in the Federal Register 
on April 19, 2017.\3\ The Commission received no comment letters 
regarding the proposed change. For the reasons discussed below, the 
Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-80450 (April 13, 
2017), 82 FR 18488 (April 19, 2017) (SR-LCH SA-2017-003) (the 
``Notice'').
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II. Description of the Proposed Rule Change

    The proposed rule change seeks to amend the Reference Guide by 
eliminating the recovery rate risk charge as a component of the margin 
methodology, as it applies to index CDS. LCH SA, however, does not 
propose to alter the recovery rate risk charge as a component of the 
margin methodology, as it applies to single name CDS. The proposed rule 
change also seeks to make minor updates and clarifications to the 
Reference Guide.\4\
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    \4\ LCH SA has proposed changes to the Reference Guide to (i) 
correct a hyperlink and (ii) add a cross reference and hyperlink to 
the general inputs considered by LCH SA in constructing the CDS 
pricing for European and U.S. dollar denominated contracts. See 
Notice, 82 FR at 18489.
---------------------------------------------------------------------------

    With respect to the portion of the proposed rule change that 
eliminates the recovery rate risk charge as a margin component for 
index CDS positions, LCH SA believes that recovery rate risk is 
irrelevant to index CDS in normal market conditions and it therefore 
should not need to charge margin to address it. In support, LCH SA 
represents that ``[the] market convention is to assume a pre-defined 
recovery rate for pricing an index CDS, such as a CDS on iTraxx 
indices.'' \5\ Therefore, according to LCH SA, there is no need to 
charge margin for an adverse recovery rate movement for an index CDS 
position because, pursuant to market convention for pricing an index 
CDS in normal market conditions, the rate will not move. Moreover, LCH 
SA characterizes any drop in the recovery rate for index CDS as a 
stress loss, and states that applying a margin charge to address this 
risk ``would be trying to capture a stress loss incurred in a Clearing 
Member's portfolio should the pre-defined recovery rate for these index 
CDS change, which is not consistent with market convention in normal 
market conditions.'' \6\ Furthermore, while LCH SA does expect 
deviations from this market convention in extreme market conditions, 
LCH SA believes that these deviations--and any resultant recovery rate 
risk on the affected index CDS positions--should not be addressed 
through its margin framework but rather ``would be captured by LCH SA's 
stress scenarios used to size the Default Fund.'' \7\ Therefore, LCH SA 
maintains that elimination of recovery rate risk charge from its margin 
framework is appropriate and consistent with applicable provisions of 
the Exchange Act and Commission Rules promulgated thereunder.
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    \5\ Id.
    \6\ Id.
    \7\ Id.

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[[Page 26729]]

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\8\ Section 17A(b)(3)(F) of the Act requires,\9\ among 
other things, that the rules of a registered clearing agency be 
designed 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. Rule 17Ad-22(b)(2) requires that a registered clearing 
agency that performs central counterparty services shall establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to use margin requirements to limit its credit 
exposures to participants under normal market conditions.\10\ Rule 
17Ad-22(e)(6) requires that a covered clearing agency \11\ shall 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, calculates margin sufficient to cover its potential future 
exposure to participants in the interval between the last margin 
collection and the close out of positions following a participant 
default and uses an appropriate method for measuring credit exposure 
that accounts for relevant product risk factors and portfolio effects 
across products.\12\ Rule 17Ad-22(e)(1) requires that a covered 
clearing agency shall establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide for a 
well-founded, clear, transparent, and enforceable legal basis for each 
aspect of its activities in all relevant jurisdictions.\13\
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    \8\ 15 U.S.C. 78s(b)(2)(C).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 17 CFR 240.17Ad-22(b)(2).
    \11\ See 17 CFR 240.17Ad-22(a)(5) (defining ``covered clearing 
agency'').
    \12\ See 17 CFR 240.17Ad-22(e)(6)(iii), (e)(6)(v).
    \13\17 CFR 240.17Ad-22(e)(1).
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    The Commission finds that the proposed rule change is consistent 
with Section 17A of the Act and Rule 17Ad-22 thereunder. In particular, 
the Commission finds that the elimination of recovery rate risk charges 
is consistent with market convention for pricing index CDS, as 
represented by LCH SA and discussed above. Moreover, the Commission 
notes that the elimination of this component of LCH SA's margin is 
expected to have only a minor impact on the total amount of margin LCH 
SA collects with respect to index CDS. Furthermore, the Commission 
notes that LCH SA will continue to consider and address recovery rate 
risk on index CDS in its stress scenarios used to size its default 
fund. Based on these findings and considerations, the Commission 
believes that the proposed rule change is reasonably designed to use 
margin requirements to limit its credit exposures to participants under 
normal market conditions, calculate margin sufficient to cover its 
potential future exposure to participants in the interval between the 
last margin collection and the close out of positions following a 
participant default and use an appropriate method for measuring credit 
exposure that accounts for relevant product risk factors and portfolio 
effects across products, consistent with Section 17A(b)(3)(F) of the 
Exchange Act,\14\ and Rules 17Ad-22(b)(2), (e)(6)(iii), and (e)(6)(v) 
thereunder.\15\
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ 17 CFR 240.17Ad-22(b)(2), (e)(6)(iii), and (e)(6)(v).
---------------------------------------------------------------------------

    With respect to the portion of the proposed rule change that 
revises the Reference Guide to (i) correct a hyperlink and (ii) add a 
cross reference and hyperlink to the general inputs considered by LCH 
SA in constructing the CDS pricing for European and U.S. dollar 
denominated contracts, the Commission believes that correcting an 
erroneous hyperlink and providing an additional cross-reference and 
hyperlink would make the Reference Guide more clear to those who use 
it, consistent with Rule 17Ad-22(e)(1).\16\
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    \16\ 17 CFR 240.17Ad-22(e)(1).
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IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-LCH SA-2017-003) be, and hereby is, 
approved.\17\
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    \17\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11864 Filed 6-7-17; 8:45 am]
 BILLING CODE 8011-01-P