Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Change, as Amended by Amendment No. 1 Thereto, To Add Rules Related to the Clearing of CDX.NA.HY CDS, 31364-31366 [2017-14239]
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31364
Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices
for’’ their CCLF contribution 87 fails to
account for the fact that the proposal
also requires FICC to conduct its own
due diligence. Specifically, FICC would
confirm that Netting Members have
sufficient information to understand
and manage their liquidity risks and to
meet its commitments to provide
liquidity. Therefore, the Commission
believes that the proposal is consistent
with Rule 17Ad–22(e)(7)(iv).
Finally, Rule 17Ad–22(e)(7)(v) under
the Exchange Act requires policies and
procedures for maintaining and testing
with each liquidity provider, to the
extent practicable, FICC’s procedures
and operational capacity for accessing
its relevant liquid resources. As
described above, under the proposal,
FICC would test its operational
procedures for invoking a CCLF Event
and require Netting Members to
participate in such tests. Therefore, the
Commission believes that the proposal
is consistent with Rule 17Ad–
22(e)(7)(v).
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–
2017–005) to amend LCH SA’s CDS
Margin Framework and CDSClear
Default Fund Methodology in order to
permit LCH SA to clear CDS contracts
on the CDX.NA.HY index. On May 5,
2017, LCH SA filed Amendment No. 1.3
The proposed rule change was
published in the Federal Register on
May 17, 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.
IV. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act,88 that the Commission
DOES NOT OBJECT to advance notice
SR–FICC–2017–802 and that FICC
hereby is AUTHORIZED to implement
the change as of the date of this notice
or the date of an order by the
Commission approving proposed rule
change SR–FICC–2017–002 that reflects
the changes that are consistent with this
Advance Notice, whichever is later.
A. Changes to CDS Margin Framework
With respect to the CDS Margin
Framework, LCH SA proposed to amend
the short charge component of its
margin methodology to provide a
description of the purpose of the short
charge, noting that it is intended to
account for the probability of a credit
event occurring during the period from
the default of a Clearing Member to
liquidation of the defaulting Clearing
Member’s portfolio, as well as to adjust
the method for calculating the short
charge to account for CDX.NA.HY index
contracts. Under its current CDS Margin
Framework, LCH SA calculates the short
charge component by taking the larger
of (1) a ‘‘Global Short Charge,’’ derived
from the Clearing Member’s top net
short exposure with respect to any CDS
contract and its top net short exposure
among the three ‘‘riskiest’’ reference
entities (of any type), i.e. those that are
most likely to default, in the Clearing
Member’s portfolio, and (2) the top two
net short exposures with respect to CDS
contracts on senior financial entities.5
LCH SA believes that high yield entities
are risker than senior financial entities,
and as a result it proposed to introduce
a ‘‘High Yield Short Charge’’ that would
replace the top two net short exposures
to CDS on senior financial entities in its
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2017–14145 Filed 7–5–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81056; File No. SR–LCH
SA–2017–005]
Self-Regulatory Organizations; LCH
SA; Order Approving Proposed Rule
Change, as Amended by Amendment
No. 1 Thereto, To Add Rules Related to
the Clearing of CDX.NA.HY CDS
sradovich on DSK3GMQ082PROD with NOTICES
June 30, 2017.
I. Introduction
On April 28, 2017, Banque Centrale
de Compensation, which conducts
business under the name LCH SA (‘‘LCH
SA’’), filed with the Securities and
Exchange Commission (‘‘Commission’’),
87 Ronin
Letter at 2.
88 12 U.S.C. 5465(e)(1)(I).
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18:13 Jul 05, 2017
Jkt 241001
II. Description of the Proposed Rule
Change
LCH SA has proposed various
changes to its CDS Margin Framework
and CDSClear Default Fund
Methodology for the purpose of
permitting LCH SA to clear CDS
contracts on the CDX.NA.HY index.
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 LCH SA filed Amendment No. 1 to replace the
initial filing in its entirety in order to clarify certain
changes to the CDSClear Margin Framework.
4 Securities Exchange Act Release No. 34–80666
(May 11, 2017), 82 FR 22699 (May 17, 2017) (SR–
LCH SA–2017–005) (‘‘Notice’’).
5 Notice, 82 FR at 22700.
PO 00000
1 15
2 17
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approach to calculating the short
charge.6 Consequently, the short charge
under the proposed rule change would
be the greater of (1) the ‘‘Global Short
Charge,’’ as described above, and (2) a
‘‘High Yield Short Charge,’’ calculated
from a member’s top net short exposure
(with respect to high yield CDS) and its
top two net short exposures among the
three ‘‘riskiest’’ reference entities in the
high yield category in the Clearing
Member’s portfolio.7
LCH SA also proposed to make
certain conforming changes throughout
Section 4.1.1 of the CDS Margin
Framework, which describes the ‘‘net
short exposure’’ calculation, to refer to
CDX.NA.HY contracts, as well as to
clarify that in order to calculate margin
in Euros, all US dollar denominated
variables are converted to Euros
utilizing the current USD/Euro foreign
exchange rate and calibrated haircut
based upon historical data.
Furthermore, LCH SA proposed
conforming changes to Section 4.1.2 of
the CDS Margin Framework, which
describes the ‘‘top exposure’’
component of the short charge and
Section 4.1.3 of the CDS Margin
Framework, which describes the process
by which LCH SA identifies the
‘‘riskiest’’ entities (of any type) in
determining the short charge, to
incorporate terms for CDX.NA.HY index
contracts and to clarify the calculation
as it applies to high yield indices. LCH
SA also proposed clarifying changes to
Section 4.1.4 of the CDS Margin
Framework to summarize the
calculation for the short charge
amount.8
LCH SA proposed to amend the CDS
Margin Framework by deleting Section
4.3 in its entirety because the substance
of that section would be contained in
other sections of the CDS Margin
Framework as a result of the proposed
changes described above.9
In addition, LCH SA also proposed to
amend Section 5.1 of the CDS Margin
Framework, which sets forth the wrong
way risk (‘‘WWR’’) component of LCH
SA’s margin methodology. According to
LCH SA, the current approach leverages
the short charge framework by
calculating the top two net short
exposures of financial entities in a
Clearing Member’s portfolio following
the calculation described above for the
short charge margin. LCH SA then
compares these top two net short
exposures of financial entities to the
Global Short Charge and imposes the
6 Id.
7 Id.
8 Id.
9 Id.
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Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices
sradovich on DSK3GMQ082PROD with NOTICES
greater of those two as the short charge,
which addresses the WWR arising from
the correlation between a Clearing
Member default and the default(s) of the
top two financial entities in the Clearing
Member’s portfolio.10 The proposed rule
change amends Section 5.1 of the CDS
Margin Framework to make the WWR
component more explicit, such that,
when the top two net short exposures in
respect of financial entities exceeds the
short charge margin, as amended to
equal the greater of the Global Short
Charge and the High Yield Short Charge,
LCH SA will charge the incremental
amount that is attributable to the top
two financial entities as part of the
WWR Margin.11
LCH SA further proposed to amend a
heading in Section 3 and a table in
Section 3.1.1 to clarify that the summary
of the margin framework also applies to
CDX HY contracts. Additional
conforming changes in the CDS Margin
Framework were proposed with respect
to Sections 5, 6, 8, 10, and 11 of the CDS
Margin Framework to clarify that the
those sections also apply to high yield
indices.12
B. Changes to CDSClear Default Fund
Methodology
LCH SA also proposed changes to its
CDSClear Default Fund Methodology.
Specifically, LCH SA proposed to
amend Section 2.3 of the CDSClear
Default Fund Methodology to modify
the existing stressed short charge. Under
its current approach, LCH SA calculates
a stressed short charge, which equals
the greater of (1) the top net short
exposure plus the top two net short
exposures among the three entities most
likely to default in the Clearing
Member’s portfolio, and (2) the top two
net short exposures which are senior
financial entities plus the top net short
exposures among the three riskiest
senior financial entities in the Clearing
Member’s portfolio. Under the proposed
rule change, LCH SA will take the
default of high yield entities into
account and add a third prong to the
stressed short charge calculation which
will take the greater of (1) and (2) as
described above in this paragraph, or (3)
the top two net short exposures which
are high yield entities plus the top two
net short exposures among the three
high yield entities most likely to default
in the Clearing Member’s portfolio.13
Finally, LCH SA also proposed to
amend Section 3.8 of the CDSClear
Default Fund Methodology, which
10 Id.
11 Id.
12 Id.
13 Id.
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18:13 Jul 05, 2017
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describes the correlation between index
families and series, to reflect that
additional data will be used.14
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act 15
directs the Commission to approve a
proposed rule of a self-regulatory
organization if the Commission finds
that such proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to such
organization. Section 17A(b)(3)(F) of the
Act 16 requires, in relevant part, 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. Rule 17Ad–
22(b)(2) 17 requires, in relevant part, a
registered clearing agency that performs
central counterparty services to
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 and use risk-based
models and parameters to set margin
requirements. Rule 17Ad–22(b)(3) 18
requires, in relevant part, a registered
clearing agency that performs central
counterparty services to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to maintain
additional financial resources sufficient
to withstand, at a minimum, a default
by the two participant families to which
it has the largest exposures in extreme
but plausible market conditions where
such registered clearing agency acts as
a central counterparty for security-based
swaps. Rule 17Ad–22(e)(4)(i) and (ii) 19
require a covered clearing agency to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to maintain
sufficient financial resources to cover its
credit exposure to each participant fully
with a high degree of confidence, and
for a covered clearing agency involved
in activities with a more complex risk
profile,20 maintaining additional
14 Id.
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
17 17 CFR 240.17Ad–22(b)(2).
18 17 CFR 240.17Ad–22(b)(3).
19 17 CFR 240.17Ad–22(e)(4)(i) and (ii).
20 Rule 17Ad–22(a)(4)(i) defines a covered
clearing agency involved in activities with a more
complex risk profile as a clearing agency registered
with the Commission under Section 17A of the Act
that provides central counterparty services for
security-based swaps. See 17 CFR 240.17Ad–
22(a)(4)(i).
PO 00000
15 15
16 15
Frm 00083
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31365
financial resources at the minimum to
enable it to cover a wide range of
foreseeable stress scenarios that include,
but are not limited to, the default of the
two participant families that would
potentially cause the largest aggregate
credit exposure for the covered clearing
agency in extreme but plausible market
conditions. Finally, Rule 17Ad–
22(e)(6)(i) 21 requires a covered clearing
agency that provides central
counterparty services to 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 considers, and
produces margin levels commensurate
with, the risks and particular attributes
of each relevant product, portfolio and
market.
The Commission finds that the
proposed rule change, which amends
LCH SA’s CDS Margin Framework and
CDSClear Default Fund Methodology to
permit LCH SA to clear CDS contracts
on the CDX.NA.HY index, is consistent
with Section 17A of the Act and the
applicable provisions of Rule 17Ad–22
thereunder. By amending its CDS
Margin Framework, LCH SA amends the
approach to its short charge component
of its margin methodology to consider
the specific risks associated with, and
incorporate parameters addressing the
risks, associated with clearing contracts
on the CDX.NA.HY index, and as a
result, LCH SA will be able to calculate
margin requirements to cover its
exposures associated with clearing
contracts on the CDX.NA.HY index.
Therefore, the Commission finds that
the proposed rule changes are consistent
with Rule 17Ad–22(b)(2), 17Ad–
22(e)(4)(i), and 17Ad–22(e)(6)(i).
Additionally, by amending its
CDSClear Default Fund Methodology to
change the manner in which it
calculates its short charge to consider
the risks introduced by clearing
contracts on the CDX.NA.HY index, the
Commission believes that LCH SA will
be able to more appropriately calculate
and maintain the financial resources
necessary to cover the default of by the
two participant families to which it has
the largest exposures in extreme but
plausible market conditions. Therefore,
the Commission finds that the proposed
rule change is consistent with the
requirements of Rule 17Ad–22(b)(3) and
Rule 17Ad–22(e)(4)(ii).
Because the proposed rule change
amends LCH SA’s CDS Margin
Framework and CDSClear Default Fund
Methodology in such a manner as to
21 17
E:\FR\FM\06JYN1.SGM
CFR 240.17Ad–22(e)(6)(i).
06JYN1
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Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices
allow LCH SA to more appropriately
take into consideration the risks
associated with clearing contracts on the
CDX.NA.HY index, and to collect
margin and other financial resources
that reflect such risks, the Commission
believes that the proposed changes are
designed to promote the prompt and
accurate clearance and settlement of
such contracts. As a result, the
Commission finds that the proposed
rule changes are consistent with Section
17A(b)(3)(F) of the Act.
IV. Conclusion
It is therefore ordered pursuant to
Section 19(b)(2) of the Act that the
proposed rule change (SR–LCH SA–
2017–005), as amended by Amendment
No. 1, be, and hereby is, approved.22
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.23
Brent J. Fields,
Secretary.
[FR Doc. 2017–14239 Filed 7–5–17; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–81053; File No. SR–FINRA–
2017–020]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Adopt
FINRA Rule 6898 (Consolidated Audit
Trail—Fee Dispute Resolution)
sradovich on DSK3GMQ082PROD with NOTICES
June 29, 2017.
Pursuant to the provisions of Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’ or the ‘‘Exchange Act’’) 1
and Rule 19b-4 thereunder,2 notice is
hereby given that, on June 19, 2017,
Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by FINRA. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
22 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).
23 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
18:13 Jul 05, 2017
Jkt 241001
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
VerDate Sep<11>2014
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to adopt FINRA
Rule 6898 (Consolidated Audit Trail—
Fee Dispute Resolution) to establish the
procedures for resolving potential
disputes related to CAT Fees charged to
Industry Members.3
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA, and at the
Commission’s Public Reference Room.
1. Purpose
Bats BYX Exchange, Inc., Bats BZX
Exchange, Inc., Bats EDGA Exchange,
Inc., Bats EDGX Exchange, Inc., BOX
Options Exchange LLC, C2 Options
Exchange, Incorporated, Chicago Board
Options Exchange, Incorporated,
Chicago Stock Exchange, Inc., FINRA,
Investors’ Exchange LLC, Miami
International Securities Exchange, LLC,
MIAX PEARL, LLC, NASDAQ BX, Inc.,
Nasdaq GEMX, LLC, Nasdaq ISE, LLC,
Nasdaq MRX, LLC,4 NASDAQ PHLX
LLC, The NASDAQ Stock Market LLC,
New York Stock Exchange LLC, NYSE
MKT LLC, NYSE Arca, Inc. and NYSE
National, Inc.5 (collectively, the
3 Unless otherwise specified, capitalized terms
used in this rule filing are defined as set forth
herein or in the Consolidated Audit Trail Funding
Fees Rule, the CAT Compliance Rule Series or in
the CAT NMS Plan.
4 ISE Gemini, LLC, ISE Mercury, LLC and
International Securities Exchange, LLC have been
renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC,
and Nasdaq ISE, LLC, respectively. See Securities
Exchange Act Release No. 80248 (March 15, 2017),
82 FR 14547 (March 21, 2017); Securities Exchange
Act Release No. 80326 (March 29, 2017), 82 FR
16460 (April 4, 2017); and Securities Exchange Act
Release No. 80325 (March 29, 2017), 82 FR 16445
(April 4, 2017).
5 National Stock Exchange, Inc. has been renamed
NYSE National, Inc. See Securities Exchange Act
Release No. 79902 (January 30, 2017), 82 FR 9258
(February 3, 2017).
PO 00000
Frm 00084
Fmt 4703
Sfmt 4703
‘‘Participants’’) filed with the
Commission, pursuant to Section 11A of
the Exchange Act 6 and Rule 608 of
Regulation NMS thereunder,7 the
National Market System Plan Governing
the Consolidated Audit Trail (the ‘‘CAT
NMS Plan’’ or ‘‘Plan’’).8 The
Participants filed the Plan to comply
with Rule 613 of Regulation NMS under
the Exchange Act.9 The Plan was
published for comment in the Federal
Register on May 17, 2016,10 and
approved by the Commission, as
modified, on November 15, 2016.11 The
Plan is designed to create, implement
and maintain a consolidated audit trail
(‘‘CAT’’) that would capture customer
and order event information for orders
in NMS Securities and OTC Equity
Securities, across all markets, from the
time of order inception through routing,
cancellation, modification, or execution
in a single consolidated data source.
The Plan accomplishes this by creating
CAT NMS, LLC (the ‘‘Company’’), of
which each Participant is a member, to
operate the CAT.12 Under the CAT NMS
Plan, the Operating Committee of the
Company (‘‘Operating Committee’’) has
discretion to establish funding for the
Company to operate the CAT, including
establishing fees that the Participants
will pay, and establishing fees for
Industry Members that will be
implemented by the Participants (‘‘CAT
Fees’’).13 The Participants are required
to file with the SEC under Section 19(b)
of the Exchange Act any such CAT Fees
applicable to Industry Members that the
Operating Committee approves.14
Accordingly, FINRA has filed a
proposed rule change with the SEC to
adopt the Consolidated Audit Trail
Funding Fees, which will require
Industry Members that are FINRA
members to pay the CAT Fees
determined by the Operating
Committee.15 FINRA submits this
6 15
U.S.C. 78k–1.
CFR 242.608.
8 See Letter from the Participants to Brent J.
Fields, Secretary, Commission, dated September 30,
2014; and Letter from Participants to Brent J. Fields,
Secretary, Commission, dated February 27, 2015.
On December 23, 2015, the Participants submitted
an amendment to the CAT NMS Plan. See Letter
from Participants to Brent J. Fields, Secretary,
Commission, dated December 23, 2015.
9 17 CFR 242.613.
10 Securities Exchange Act Release No. 77724
(April 27, 2016), 81 FR 30614 (May 17, 2016).
11 Securities Exchange Act Release No. 79318
(November 15, 2016), 81 FR 84696 (November 23,
2016) (‘‘Approval Order’’).
12 The Plan also serves as the limited liability
company agreement for the Company.
13 Section 11.1(b) of the CAT NMS Plan.
14 See supra note 12 [sic].
15 See Securities Exchange Act Release No. 80710
(May 17, 2017), 82 FR 23629 [sic] (May 23, 2017)
(SR–FINRA–2017–011).
7 17
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]]>Agencies
[Federal Register Volume 82, Number 128 (Thursday, July 6, 2017)]
[Notices]
[Pages 31364-31366]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14239]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81056; File No. SR-LCH SA-2017-005]
Self-Regulatory Organizations; LCH SA; Order Approving Proposed
Rule Change, as Amended by Amendment No. 1 Thereto, To Add Rules
Related to the Clearing of CDX.NA.HY CDS
June 30, 2017.
I. Introduction
On April 28, 2017, Banque Centrale de Compensation, which conducts
business under the name LCH SA (``LCH SA''), filed with the Securities
and Exchange Commission (``Commission''), 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-2017-005) to amend LCH
SA's CDS Margin Framework and CDSClear Default Fund Methodology in
order to permit LCH SA to clear CDS contracts on the CDX.NA.HY index.
On May 5, 2017, LCH SA filed Amendment No. 1.\3\ The proposed rule
change was published in the Federal Register on May 17, 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\ LCH SA filed Amendment No. 1 to replace the initial filing
in its entirety in order to clarify certain changes to the CDSClear
Margin Framework.
\4\ Securities Exchange Act Release No. 34-80666 (May 11, 2017),
82 FR 22699 (May 17, 2017) (SR-LCH SA-2017-005) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
LCH SA has proposed various changes to its CDS Margin Framework and
CDSClear Default Fund Methodology for the purpose of permitting LCH SA
to clear CDS contracts on the CDX.NA.HY index.
A. Changes to CDS Margin Framework
With respect to the CDS Margin Framework, LCH SA proposed to amend
the short charge component of its margin methodology to provide a
description of the purpose of the short charge, noting that it is
intended to account for the probability of a credit event occurring
during the period from the default of a Clearing Member to liquidation
of the defaulting Clearing Member's portfolio, as well as to adjust the
method for calculating the short charge to account for CDX.NA.HY index
contracts. Under its current CDS Margin Framework, LCH SA calculates
the short charge component by taking the larger of (1) a ``Global Short
Charge,'' derived from the Clearing Member's top net short exposure
with respect to any CDS contract and its top net short exposure among
the three ``riskiest'' reference entities (of any type), i.e. those
that are most likely to default, in the Clearing Member's portfolio,
and (2) the top two net short exposures with respect to CDS contracts
on senior financial entities.\5\ LCH SA believes that high yield
entities are risker than senior financial entities, and as a result it
proposed to introduce a ``High Yield Short Charge'' that would replace
the top two net short exposures to CDS on senior financial entities in
its approach to calculating the short charge.\6\ Consequently, the
short charge under the proposed rule change would be the greater of (1)
the ``Global Short Charge,'' as described above, and (2) a ``High Yield
Short Charge,'' calculated from a member's top net short exposure (with
respect to high yield CDS) and its top two net short exposures among
the three ``riskiest'' reference entities in the high yield category in
the Clearing Member's portfolio.\7\
---------------------------------------------------------------------------
\5\ Notice, 82 FR at 22700.
\6\ Id.
\7\ Id.
---------------------------------------------------------------------------
LCH SA also proposed to make certain conforming changes throughout
Section 4.1.1 of the CDS Margin Framework, which describes the ``net
short exposure'' calculation, to refer to CDX.NA.HY contracts, as well
as to clarify that in order to calculate margin in Euros, all US dollar
denominated variables are converted to Euros utilizing the current USD/
Euro foreign exchange rate and calibrated haircut based upon historical
data. Furthermore, LCH SA proposed conforming changes to Section 4.1.2
of the CDS Margin Framework, which describes the ``top exposure''
component of the short charge and Section 4.1.3 of the CDS Margin
Framework, which describes the process by which LCH SA identifies the
``riskiest'' entities (of any type) in determining the short charge, to
incorporate terms for CDX.NA.HY index contracts and to clarify the
calculation as it applies to high yield indices. LCH SA also proposed
clarifying changes to Section 4.1.4 of the CDS Margin Framework to
summarize the calculation for the short charge amount.\8\
---------------------------------------------------------------------------
\8\ Id.
---------------------------------------------------------------------------
LCH SA proposed to amend the CDS Margin Framework by deleting
Section 4.3 in its entirety because the substance of that section would
be contained in other sections of the CDS Margin Framework as a result
of the proposed changes described above.\9\
---------------------------------------------------------------------------
\9\ Id.
---------------------------------------------------------------------------
In addition, LCH SA also proposed to amend Section 5.1 of the CDS
Margin Framework, which sets forth the wrong way risk (``WWR'')
component of LCH SA's margin methodology. According to LCH SA, the
current approach leverages the short charge framework by calculating
the top two net short exposures of financial entities in a Clearing
Member's portfolio following the calculation described above for the
short charge margin. LCH SA then compares these top two net short
exposures of financial entities to the Global Short Charge and imposes
the
[[Page 31365]]
greater of those two as the short charge, which addresses the WWR
arising from the correlation between a Clearing Member default and the
default(s) of the top two financial entities in the Clearing Member's
portfolio.\10\ The proposed rule change amends Section 5.1 of the CDS
Margin Framework to make the WWR component more explicit, such that,
when the top two net short exposures in respect of financial entities
exceeds the short charge margin, as amended to equal the greater of the
Global Short Charge and the High Yield Short Charge, LCH SA will charge
the incremental amount that is attributable to the top two financial
entities as part of the WWR Margin.\11\
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\10\ Id.
\11\ Id.
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LCH SA further proposed to amend a heading in Section 3 and a table
in Section 3.1.1 to clarify that the summary of the margin framework
also applies to CDX HY contracts. Additional conforming changes in the
CDS Margin Framework were proposed with respect to Sections 5, 6, 8,
10, and 11 of the CDS Margin Framework to clarify that the those
sections also apply to high yield indices.\12\
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\12\ Id.
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B. Changes to CDSClear Default Fund Methodology
LCH SA also proposed changes to its CDSClear Default Fund
Methodology. Specifically, LCH SA proposed to amend Section 2.3 of the
CDSClear Default Fund Methodology to modify the existing stressed short
charge. Under its current approach, LCH SA calculates a stressed short
charge, which equals the greater of (1) the top net short exposure plus
the top two net short exposures among the three entities most likely to
default in the Clearing Member's portfolio, and (2) the top two net
short exposures which are senior financial entities plus the top net
short exposures among the three riskiest senior financial entities in
the Clearing Member's portfolio. Under the proposed rule change, LCH SA
will take the default of high yield entities into account and add a
third prong to the stressed short charge calculation which will take
the greater of (1) and (2) as described above in this paragraph, or (3)
the top two net short exposures which are high yield entities plus the
top two net short exposures among the three high yield entities most
likely to default in the Clearing Member's portfolio.\13\
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\13\ Id.
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Finally, LCH SA also proposed to amend Section 3.8 of the CDSClear
Default Fund Methodology, which describes the correlation between index
families and series, to reflect that additional data will be used.\14\
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\14\ Id.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \15\ directs the Commission to
approve a proposed rule of a self-regulatory organization if the
Commission finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such organization. Section 17A(b)(3)(F) of the Act \16\
requires, in relevant part, 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. Rule 17Ad-22(b)(2)
\17\ requires, in relevant part, a registered clearing agency that
performs central counterparty services to 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 and use risk-based models
and parameters to set margin requirements. Rule 17Ad-22(b)(3) \18\
requires, in relevant part, a registered clearing agency that performs
central counterparty services to establish, implement, maintain and
enforce written policies and procedures reasonably designed to maintain
additional financial resources sufficient to withstand, at a minimum, a
default by the two participant families to which it has the largest
exposures in extreme but plausible market conditions where such
registered clearing agency acts as a central counterparty for security-
based swaps. Rule 17Ad-22(e)(4)(i) and (ii) \19\ require a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to maintain sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence, and for a covered clearing
agency involved in activities with a more complex risk profile,\20\
maintaining additional financial resources at the minimum to enable it
to cover a wide range of foreseeable stress scenarios that include, but
are not limited to, the default of the two participant families that
would potentially cause the largest aggregate credit exposure for the
covered clearing agency in extreme but plausible market conditions.
Finally, Rule 17Ad-22(e)(6)(i) \21\ requires a covered clearing agency
that provides central counterparty services to 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 considers,
and produces margin levels commensurate with, the risks and particular
attributes of each relevant product, portfolio and market.
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\15\ 15 U.S.C. 78s(b)(2)(C).
\16\ 15 U.S.C. 78q-1(b)(3)(F).
\17\ 17 CFR 240.17Ad-22(b)(2).
\18\ 17 CFR 240.17Ad-22(b)(3).
\19\ 17 CFR 240.17Ad-22(e)(4)(i) and (ii).
\20\ Rule 17Ad-22(a)(4)(i) defines a covered clearing agency
involved in activities with a more complex risk profile as a
clearing agency registered with the Commission under Section 17A of
the Act that provides central counterparty services for security-
based swaps. See 17 CFR 240.17Ad-22(a)(4)(i).
\21\ 17 CFR 240.17Ad-22(e)(6)(i).
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The Commission finds that the proposed rule change, which amends
LCH SA's CDS Margin Framework and CDSClear Default Fund Methodology to
permit LCH SA to clear CDS contracts on the CDX.NA.HY index, is
consistent with Section 17A of the Act and the applicable provisions of
Rule 17Ad-22 thereunder. By amending its CDS Margin Framework, LCH SA
amends the approach to its short charge component of its margin
methodology to consider the specific risks associated with, and
incorporate parameters addressing the risks, associated with clearing
contracts on the CDX.NA.HY index, and as a result, LCH SA will be able
to calculate margin requirements to cover its exposures associated with
clearing contracts on the CDX.NA.HY index. Therefore, the Commission
finds that the proposed rule changes are consistent with Rule 17Ad-
22(b)(2), 17Ad-22(e)(4)(i), and 17Ad-22(e)(6)(i).
Additionally, by amending its CDSClear Default Fund Methodology to
change the manner in which it calculates its short charge to consider
the risks introduced by clearing contracts on the CDX.NA.HY index, the
Commission believes that LCH SA will be able to more appropriately
calculate and maintain the financial resources necessary to cover the
default of by the two participant families to which it has the largest
exposures in extreme but plausible market conditions. Therefore, the
Commission finds that the proposed rule change is consistent with the
requirements of Rule 17Ad-22(b)(3) and Rule 17Ad-22(e)(4)(ii).
Because the proposed rule change amends LCH SA's CDS Margin
Framework and CDSClear Default Fund Methodology in such a manner as to
[[Page 31366]]
allow LCH SA to more appropriately take into consideration the risks
associated with clearing contracts on the CDX.NA.HY index, and to
collect margin and other financial resources that reflect such risks,
the Commission believes that the proposed changes are designed to
promote the prompt and accurate clearance and settlement of such
contracts. As a result, the Commission finds that the proposed rule
changes are consistent with Section 17A(b)(3)(F) of the Act.
IV. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the Act
that the proposed rule change (SR-LCH SA-2017-005), as amended by
Amendment No. 1, be, and hereby is, approved.\22\
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\22\ 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.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2017-14239 Filed 7-5-17; 8:45 am]
BILLING CODE 8011-01-P
