Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change Relating to LCH SA's CDS Margin and Extreme Credit Spread Curves, 26721-26722 [2017-11865]
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Federal Register / Vol. 82, No. 109 / Thursday, June 8, 2017 / Notices
stated in the application. Such terms
and conditions are designed to, among
other things, help prevent any potential
(i) undue influence over an Underlying
Fund that is not in the same ‘‘group of
investment companies’’ as the Fund of
Funds through control or voting power,
or in connection with certain services,
transactions, and underwritings, (ii)
excessive layering of fees, and (iii)
overly complex fund structures, which
are the concerns underlying the limits
in sections 12(d)(1)(A), (B), and (C) of
the Act. Applicants assert that
permitting a Section 12(d)(1)(G) Fund of
Funds to invest in Other Investments as
described in the application would not
raise any of the concerns that section
12(d)(1) of the Act was intended to
address.
4. Section 12(d)(1)(J) of the Act
provides that the Commission may
exempt any person, security, or
transaction, or any class or classes of
persons, securities, or transactions, from
any provision of section 12(d)(1) if the
exemption is consistent with the public
interest and the protection of investors.
Section 17(b) of the Act authorizes the
Commission to grant an order
permitting a transaction otherwise
prohibited by section 17(a) if it finds
that (a) the terms of the proposed
transaction are fair and reasonable and
do not involve overreaching on the part
of any person concerned; (b) the
proposed transaction is consistent with
the policies of each registered
investment company involved; and (c)
the proposed transaction is consistent
with the general purposes of the Act.
Section 6(c) of the Act permits the
Commission to exempt any persons or
transactions from any provision of the
Act if such exemption is necessary or
appropriate in the public interest and
consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
the Act.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Robert W. Errett,
Deputy Secretary.
asabaliauskas on DSKBBXCHB2PROD with NOTICES
[FR Doc. 2017–11924 Filed 6–7–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80849; File No. SR–LCH
SA–2017–004]
Self-Regulatory Organizations; LCH
SA; Order Approving Proposed Rule
Change Relating to LCH SA’s CDS
Margin and Extreme Credit Spread
Curves
June 2, 2017.
I. Introduction
On April 4, 2017, Banque Central 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–004)
to amend its CDS margin framework to
replace an algorithm-based approach to
pricing credit default swaps (‘‘CDS’’) in
the event extreme spread curves cause
the International Swaps and Derivatives
Association Standard Model for pricing
credit default swaps (‘‘ISDA Pricer’’) to
fail with an approximation-based
method.3 The proposed rule change was
published for comment in the Federal
Register on April 19, 2017.4 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
LCH SA has proposed to amend its
CDS margin framework. The proposed
change would alter the approach used
by LCH SA when the ISDA Pricer, used
in pricing CDS, fails as a result of
extreme spread curves. Under its
current CDS margin framework, LCH SA
uses the ISDA Pricer to calibrate credit
spread curves as part of its spread
margin component. According to LCH
SA, the ISDA Pricer cannot be used to
calibrate credit spread curves where
‘‘extreme’’ credit spread curves exist.5
In the event that the ISDA Pricer fails
due to the existence of extreme credit
spread curves, LCH SA has established
a dichotomy-based algorithm that it uses
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 For additional information regarding the ISDA
Standard Model, see www.cdsmodel.com. The
Commission is providing this link solely for
informational purposes.
4 Securities Exchange Act Release No. 34–80451
(April 13, 2017), 82 FR 18515 (April 19, 2017) (SR–
LCH SA–2017–004) (‘‘Notice’’).
5 Notice, 82 FR at 18515.
2 17
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17:24 Jun 07, 2017
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26721
to adjust the inputs and calibrate the
spread curves iteratively until it
identifies the tenor causing the
calibration to fail, and the closest spread
to that tenor that will allow the curve to
appropriately calibrate.6
LCH SA represented that this
dichotomy-based algorithm can
consume significant amounts of time to
process because of the number of
repetitions that may be necessary for the
process to produce the appropriate
results, which could result in delays in
calculating margin requirements.7 To
ameliorate the potential for these delays,
LCH SA has proposed to amend its
approach by replacing the dichotomybased algorithm described above with
an approximation-based approach under
which LCH SA would, in the event that
the ISDA Pricer fails, construct a
piecewise hazard rate curve and a
piecewise constant interest rate curve,
and then apply average hazard and
interest rates for the relevant period to
price the relevant CDS.8
LCH SA represents that it has
performed quantitative analysis, which
indicates that the revised approach to
calculating margin requirements in the
event that the ISDA Pricer fails is a
reliable pricing tool.9 Therefore, this
revised approach is not likely to result
in significant changes to CDS prices and
margin requirements calculated using
LCH SA’s current approach.
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act directs
the Commission to approve a propose
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.10
Section 17A(b)(3)(F) of the Act requires,
among other things, that the rules of a
registered clearing agency be designed
to promote the prompt and accurate
clearance and settlement of securities
transactions and, to the extent
applicable, derivative agreements,
contracts, and transactions.11 Rule
17Ad–22(e)(17) requires, in relevant
part, that each covered clearing agency
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to manage a
covered clearing agency’s operational
risk by identifying the plausible sources
6 Id.
7 Id.
8 Id.
9 Notice,
82 FR at 18516.
U.S.C. 78s(b)(2)(C).
11 15 U.S.C. 78q–1(b)(3)(F).
10 15
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08JNN1
asabaliauskas on DSKBBXCHB2PROD with NOTICES
26722
Federal Register / Vol. 82, No. 109 / Thursday, June 8, 2017 / Notices
of operational risk, both internal and
external, and mitigating their impact
through the use of appropriate systems,
policies, procedures and controls, as
well as to ensure that systems have a
high degree of security, resiliency,
operational reliability, and adequate,
scalable capacity.12 Rule 17Ad–22(b)(1)
requires, in relevant part, a registered
clearing agency that performs central
counterparty services to establish,
implement, maintain and enforce
written policies and procedures that are
reasonably designed to measure the
registered clearing agency’s credit
exposures to its participants at least
once daily and limit its exposures to
potential losses from participant
defaults under normal market
conditions.13 Rule 17Ad–22(b)(2)
requires, in relevant part, a registered
clearing agency that performs central
counterparty services to establish,
implement, maintain and enforce
written policies and procedures that are
reasonably designed to use margin
requirements to limit its credit
exposures to participants under normal
market conditions and use risk-based
models and parameters to set margin
requirements.14 Rule 17Ad–22(e)(6)
requires, in relevant part, a covered
clearing agency that provides central
counterparty services to cover its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, considers and
produces margin levels commensurate
with the risks and particular attributes
of each relevant product, portfolio and
market, and marks participant positions
to market and collects margin, including
variation margin or equivalent charges if
relevant, at least daily.15
The Commission finds that the
proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act and the
relevant provisions of Rule 17Ad–22
thereunder. The Commission believes
that the proposed rule change will
reduce the risk that the process for
determining spread margin
requirements will require excessive time
to process in the event that extreme
spread curves cause the ISDA Pricer to
fail; the proposed rule change thereby
will improve LCH SA’s operational
ability to calculate its margin
requirements promptly without
sacrificing accuracy. Because it will
facilitate the calculation of margin
requirements in a timely fashion, the
proposed rule change is consistent with
the prompt and accurate clearance and
12 17
CFR 240.17Ad–22(e)(17).
CFR 240.17Ad–22(b)(1).
14 17 CFR 240.17Ad–22(b)(2).
15 17 CFR 240.17Ad–22(e)(6)(i) and (ii).
13 17
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17:24 Jun 07, 2017
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settlement requirement of Section
17A(b)(3)(F) of the Act and with
operational risk requirements of Rule
17Ad–22(e)(17).
The Commission also believes that the
proposed rule change provides for an
approach that takes into consideration
relevant risks (including hazard rates
and interest rates) in order to provide
for appropriate method for calculating
CDS prices, and consequently the
measurement of LCH SA’s credit
exposures and margin requirements, in
the event that the ISDA Pricer fails. As
a result, the proposed rule change is
consistent with requirements of Rules
17Ad–22(b)(1) and (2), and Rule 17Ad–
22(e)(6).
IV. Conclusion
It is therefore ordered pursuant to
Section 19(b)(2) of the Act that the
proposed rule change (SR–LCH SA–
2017–004) be, and hereby is,
approved.16
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.17
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–11865 Filed 6–7–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80851; File No. SR–
NYSEARCA–2017–63]
Self-Regulatory Organizations; NYSE
Arca, Inc.; 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 Arca, Inc. (the ‘‘Exchange’’
or ‘‘NYSE Arca’’) 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
16 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).
17 17 CFR 200.30–3(a)(12).
1 15 U.S.C.78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
PO 00000
Frm 00066
Fmt 4703
Sfmt 4703
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.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this filing is to extend
the pilot period of the Retail Liquidity
Program, currently scheduled to expire
on June 30, 2017,4 until December 31,
2017.
Background
In December 2013, the Commission
approved the Retail Liquidity Program
on a pilot basis.5 The Program is
designed to attract retail order flow to
the Exchange, and allows such order
flow to receive potential price
improvement. The Program is currently
limited to trades occurring at prices
equal to or greater than $1.00 per share.
Under the Program, Retail Liquidity
Providers (‘‘RLPs’’) are able to provide
potential price improvement in the form
of a non-displayed order that is priced
better than the Exchange’s best
protected bid or offer (‘‘PBBO’’), called
4 See Securities Exchange Act Release No. 79495
(December 7, 2016), 81 FR 90033 (December 13,
2016) (SR–NYSEArca–2016–157).
5 See Securities Exchange Act Release No. 71176
(December 23, 2013), 78 FR 79524 (December 30,
2013) (SR–NYSEArca–2013–107) (‘‘RLP Approval
Order’’).
E:\FR\FM\08JNN1.SGM
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]]>Agencies
[Federal Register Volume 82, Number 109 (Thursday, June 8, 2017)]
[Notices]
[Pages 26721-26722]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11865]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80849; File No. SR-LCH SA-2017-004]
Self-Regulatory Organizations; LCH SA; Order Approving Proposed
Rule Change Relating to LCH SA's CDS Margin and Extreme Credit Spread
Curves
June 2, 2017.
I. Introduction
On April 4, 2017, Banque Central 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-004) to amend its CDS
margin framework to replace an algorithm-based approach to pricing
credit default swaps (``CDS'') in the event extreme spread curves cause
the International Swaps and Derivatives Association Standard Model for
pricing credit default swaps (``ISDA Pricer'') to fail with an
approximation-based method.\3\ The proposed rule change was published
for comment in the Federal Register on April 19, 2017.\4\ The
Commission received no comment letters regarding the proposed change.
For the reasons discussed below, the Commission is approving the
proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ For additional information regarding the ISDA Standard
Model, see www.cdsmodel.com. The Commission is providing this link
solely for informational purposes.
\4\ Securities Exchange Act Release No. 34-80451 (April 13,
2017), 82 FR 18515 (April 19, 2017) (SR-LCH SA-2017-004)
(``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
LCH SA has proposed to amend its CDS margin framework. The proposed
change would alter the approach used by LCH SA when the ISDA Pricer,
used in pricing CDS, fails as a result of extreme spread curves. Under
its current CDS margin framework, LCH SA uses the ISDA Pricer to
calibrate credit spread curves as part of its spread margin component.
According to LCH SA, the ISDA Pricer cannot be used to calibrate credit
spread curves where ``extreme'' credit spread curves exist.\5\ In the
event that the ISDA Pricer fails due to the existence of extreme credit
spread curves, LCH SA has established a dichotomy-based algorithm that
it uses to adjust the inputs and calibrate the spread curves
iteratively until it identifies the tenor causing the calibration to
fail, and the closest spread to that tenor that will allow the curve to
appropriately calibrate.\6\
---------------------------------------------------------------------------
\5\ Notice, 82 FR at 18515.
\6\ Id.
---------------------------------------------------------------------------
LCH SA represented that this dichotomy-based algorithm can consume
significant amounts of time to process because of the number of
repetitions that may be necessary for the process to produce the
appropriate results, which could result in delays in calculating margin
requirements.\7\ To ameliorate the potential for these delays, LCH SA
has proposed to amend its approach by replacing the dichotomy-based
algorithm described above with an approximation-based approach under
which LCH SA would, in the event that the ISDA Pricer fails, construct
a piecewise hazard rate curve and a piecewise constant interest rate
curve, and then apply average hazard and interest rates for the
relevant period to price the relevant CDS.\8\
---------------------------------------------------------------------------
\7\ Id.
\8\ Id.
---------------------------------------------------------------------------
LCH SA represents that it has performed quantitative analysis,
which indicates that the revised approach to calculating margin
requirements in the event that the ISDA Pricer fails is a reliable
pricing tool.\9\ Therefore, this revised approach is not likely to
result in significant changes to CDS prices and margin requirements
calculated using LCH SA's current approach.
---------------------------------------------------------------------------
\9\ Notice, 82 FR at 18516.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
propose 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.\10\ Section 17A(b)(3)(F) of the Act requires, among other
things, that the rules of a registered clearing agency be designed to
promote the prompt and accurate clearance and settlement of securities
transactions and, to the extent applicable, derivative agreements,
contracts, and transactions.\11\ Rule 17Ad-22(e)(17) requires, in
relevant part, that each covered clearing agency establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to manage a covered clearing agency's operational risk by
identifying the plausible sources
[[Page 26722]]
of operational risk, both internal and external, and mitigating their
impact through the use of appropriate systems, policies, procedures and
controls, as well as to ensure that systems have a high degree of
security, resiliency, operational reliability, and adequate, scalable
capacity.\12\ Rule 17Ad-22(b)(1) requires, in relevant part, a
registered clearing agency that performs central counterparty services
to establish, implement, maintain and enforce written policies and
procedures that are reasonably designed to measure the registered
clearing agency's credit exposures to its participants at least once
daily and limit its exposures to potential losses from participant
defaults under normal market conditions.\13\ Rule 17Ad-22(b)(2)
requires, in relevant part, a registered clearing agency that performs
central counterparty services to establish, implement, maintain and
enforce written policies and procedures that are reasonably designed to
use margin requirements to limit its credit exposures to participants
under normal market conditions and use risk-based models and parameters
to set margin requirements.\14\ Rule 17Ad-22(e)(6) requires, in
relevant part, a covered clearing agency that provides central
counterparty services to cover its credit exposures to its participants
by establishing a risk-based margin system that, at a minimum,
considers and produces margin levels commensurate with the risks and
particular attributes of each relevant product, portfolio and market,
and marks participant positions to market and collects margin,
including variation margin or equivalent charges if relevant, at least
daily.\15\
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78s(b)(2)(C).
\11\ 15 U.S.C. 78q-1(b)(3)(F).
\12\ 17 CFR 240.17Ad-22(e)(17).
\13\ 17 CFR 240.17Ad-22(b)(1).
\14\ 17 CFR 240.17Ad-22(b)(2).
\15\ 17 CFR 240.17Ad-22(e)(6)(i) and (ii).
---------------------------------------------------------------------------
The Commission finds that the proposed rule change is consistent
with Section 17A(b)(3)(F) of the Act and the relevant provisions of
Rule 17Ad-22 thereunder. The Commission believes that the proposed rule
change will reduce the risk that the process for determining spread
margin requirements will require excessive time to process in the event
that extreme spread curves cause the ISDA Pricer to fail; the proposed
rule change thereby will improve LCH SA's operational ability to
calculate its margin requirements promptly without sacrificing
accuracy. Because it will facilitate the calculation of margin
requirements in a timely fashion, the proposed rule change is
consistent with the prompt and accurate clearance and settlement
requirement of Section 17A(b)(3)(F) of the Act and with operational
risk requirements of Rule 17Ad-22(e)(17).
The Commission also believes that the proposed rule change provides
for an approach that takes into consideration relevant risks (including
hazard rates and interest rates) in order to provide for appropriate
method for calculating CDS prices, and consequently the measurement of
LCH SA's credit exposures and margin requirements, in the event that
the ISDA Pricer fails. As a result, the proposed rule change is
consistent with requirements of Rules 17Ad-22(b)(1) and (2), and Rule
17Ad-22(e)(6).
IV. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the Act
that the proposed rule change (SR-LCH SA-2017-004) be, and hereby is,
approved.\16\
---------------------------------------------------------------------------
\16\ 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).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------
\17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11865 Filed 6-7-17; 8:45 am]
BILLING CODE 8011-01-P
