Self-Regulatory Organizations; LCH SA; Order Approving Proposed Rule Changes Related to LCH SA's Recovery and Wind Down Plans, 28886-28890 [2018-13300]
Download as PDF
<![CDATA[
28886
Federal Register / Vol. 83, No. 120 / Thursday, June 21, 2018 / Notices
should be submitted on or before July
12, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–13299 Filed 6–20–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83451; File Nos. SR–LCH
SA–2017–012 and SR–LCH SA–2017–013]
Self-Regulatory Organizations; LCH
SA; Order Approving Proposed Rule
Changes Related to LCH SA’s
Recovery and Wind Down Plans
June 15, 2018.
I. Introduction
On November 30, 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
(LCH SA–2017–012) to adopt a recovery
plan (the ‘‘RP’’). The proposed rule
change was published for comment in
the Federal Register on December 19,
2017.3 On December 7, 2017, LCH SA
filed with the Commission a proposed
rule change (LCH SA–2017–013) to
adopt a wind down plan (‘‘WDP’’).4 The
proposed rule change was published for
comment in the Federal Register on
December 19, 2017.5 On January 23,
2018, pursuant to Section 19(b)(2) of the
Act,6 the Commission designated a
longer period for Commission action on
both proposed rule changes.7 On March
19, 2018 the Commission instituted
proceedings under Section 19(b)(2)(B) of
the Act 8 to determine whether to
13 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 34–82316
(Dec. 13, 2017), 82 FR 60246 (Dec. 19, 2017) (SR–
LCH–SA–2017–012) (‘‘Notice 012’’).
4 Capitalized terms used in this order but not
defined herein have the same meanings specified in
LCH SA’s rules.
5 Securities Exchange Act Release No. 34–82317
(Dec. 13, 2017), 82 FR 60238 (Dec. 19, 2017) (SR–
LCH SA–2017–013) (‘‘Notice 013’’).
6 15 U.S.C. 78s(b)(2).
7 Securities Exchange Act Release No. 34–82570
(Jan. 23, 2018), 83 FR 4088 (Jan. 29, 2018) (SR–
LCH–SA–2017–012) and Securities Exchange Act
Release No. 34–82571 (Jan. 23, 2018), 83 FR 4081
(Jan. 29, 2018) (SR–LCH SA–2017–013).
8 15 U.S.C. 78s(b)(2)(B).
amozie on DSK3GDR082PROD with NOTICES1
1 15
VerDate Sep<11>2014
17:22 Jun 20, 2018
Jkt 244001
approve or disapprove the proposed
rule changes.9 To date, the Commission
has not received any comments on the
proposed rule changes. For the reasons
discussed below, the Commission is
approving the proposed rule changes.
II. Description of the Proposed Rule
Changes 10
As a ‘‘covered clearing agency,’’ 11
LCH SA is required to, among other
things, ‘‘establish, implement, maintain
and enforce written policies and
procedures reasonably designed to . . .
maintain a sound risk management
framework for comprehensively
managing legal, credit, liquidity,
operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency, which . . . includes
plans for the recovery and orderly winddown of the covered clearing agency
necessitated by credit losses, liquidity
shortfalls, losses from general business
risk, or any other losses.’’ 12 The
Commission has previously clarified
that it believes that such recovery and
wind-down plans are ‘‘rules’’ within the
meaning of Exchange Act Section 19(b)
and Rule 19b–4 because such plans
would constitute changes to a stated
policy, practice or interpretation of a
covered clearing agency.13 Accordingly,
a covered clearing agency, such as LCH
SA, must file its RP and WDP with the
Commission.
A. The RP (LCH SA–2017–012)
LCH SA’s RP seeks to maintain the
continuity of critical services in times of
extreme stress and to facilitate the
recovery of LCH SA from such stress. In
particular, the RP describes (i) the
scenarios and triggers for initiating
recovery measures; (ii) various recovery
tools used in such recovery; and (iii) the
governance framework for managing the
RP. Each of those aspects of the RP are
discussed in more detail below.
The scenarios that could necessitate
the implementation of the RP include
the default of one or more clearing
members, liquidity shortfalls as a result
of the default of an investment
counterparty of LCH SA or any other
investment losses resulting from
9 Securities Exchange Act Release No. 34–82901
(March 19, 2018), 83 FR 12833 (March 23, 2018)
(SR–LCH SA–2017–012; SR–LCH SA–2017–013).
10 The descriptions of the proposed rule changes
are substantially excerpted from Notice 012 and
Notice 013.
11 The term ‘‘covered clearing agency’’ is defined
in SEC Rule 17Ad–22(a)(5), 17 CFR 240.17Ad–
22(a)(5).
12 17 CFR 240.17Ad–22(e)(3)(ii).
13 Standards for Covered Clearing Agencies,
Securities Exchange Act Release No. 34–78961
(Sep. 28, 2016), 81 FR 70786, 70809 (Oct. 13, 2016).
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
changes in the market value on the
investments, a loss resulting from an
event which impacts the critical
services provided by LCH SA (e.g.,
failure in the provision of service by a
third party), loss of critical contracts
with exchanges, or the operational or
financial failure of a financial market
infrastructure such as an allied clearing
house or trade repository.14
The default management process is
used to re-establish a matched book and
return to business as usual and therefore
LCH SA considers it to be a recovery
tool.15 When pre-funded resources, such
as defaulter’s margin, defaulter’s default
fund contributions, LCH SA’s capital,
and non-defaulters’ default fund
contributions, are no longer available to
meet obligations due to member and
non-member losses, the RP lists various
measures and tools that LCH SA can use
to return to business as usual.16 The RP
is organized to discuss each tool
according to the nature of the loss the
tool is designed to address (e.g., clearing
member default losses, liquidity
shortfalls, operational, business, and
investment risks). The RP also discusses
the sequence in which these tools
would be used and the relative strength
of each.17
When pre-funded resources have been
exhausted after a clearing member
default, LCH SA can call a default fund
assessment up to a cap, request
voluntary payments from all nondefaulting members, and effectuate
service closure.18 In the event such tools
are unavailable, certain other businessas-usual tools, such as default fund
additional margin, may enable LCH SA
to collect additional resources.
In the event of a liquidity shortfall,
LCH SA may use its central bank credit
line to deposit securities received on
behalf of defaulting clearing members
and obtain liquidity.19 Other potential
tools to manage a liquidity stress
situation include limits with respect to
illiquid collateral, the application of
increased haircuts on certain types of
collateral to incentivize the use of more
liquid collateral, and specific liquidity
margins.20 LCH SA also could defer
funding for the settlement platform for
a limited period of time, but views this
as a tool of last resort.21
For most investment, business, and
operational losses, LCH SA can allocate
14 See
Notice 012, 82 FR at 60247.
15 Id.
16 Id.
at 60249.
at 60249–60250.
18 Id. at 60249.
19 Id.
20 Id.
21 Id.
17 Id.
E:\FR\FM\21JNN1.SGM
21JNN1
Federal Register / Vol. 83, No. 120 / Thursday, June 21, 2018 / Notices
its capital surplus against losses.22
Further down the list of preferable
recovery tools for non-clearing member
defaults are the abilities to raise capital
or utilize insurance meant to cover a
specific operational risk event.23 For
any disruption or loss of a key thirdparty service provider, LCH SA would
be able to exercise several contractual
rights and maintains exit plans that are
intended to safeguard the continuity of
services.24
The RP discusses the governance
surrounding its creation, invocation,
and operation.25 LCH SA relies upon its
existing governance forums for both the
creation and on-going monitoring and
operation of the RP. Specifically, the
LCH SA Management Committee is
responsible for the preparation of the RP
and the monitoring and implementation
of the recovery tools set forth in the
RP.26 The LCH SA Risk Committee
reviews and makes a recommendation
to the Board, which ultimately has the
power to approve the RP.27 However,
before submission to the LCH SA Risk
Committee, the RP is reviewed and
validated by the Executive Risk
Committee of LCH SA’s parent
company, LCH Group.28
The Default Management Group is
responsible for the management of
clearing member defaults while all
critical decisions are escalated and
submitted to the LCH SA Default Crisis
Management Team (‘‘DCMT’’).29 The
triggering of recovery measures is
subject to discussion in the DCMT and
approval by the LCH SA CEO.30
The management of non-clearing
member events will vary based on the
nature of the event.31 For example,
investment losses and liquidity
shortfalls are managed by the
departments responsible for controlling
such risks within the parameters set by
the Board.32 Similarly, operational risks
are managed by each business line in
accordance with the operational risk
policy approved by the Board.33
Business risk is managed by individual
business lines, with a second line
challenge performed by the risk and
finance departments to verify if
sufficient capital buffers are available
for the applicable business risks.34
Matters are escalated to the Management
Committee when the RP is triggered and
the LCH SA Board will approve
implementation of the RP.35
B. The WDP (LCH SA–2017–013)
In the event a recovery is not
successful, LCH SA would invoke its
WDP to wind down its operations to full
service closure in an orderly manner,
thereby minimizing the disruption to
clearing members, market participants,
and the broader financial system. The
WDP would be triggered after a
determination by the LCH SA Board that
all the recovery tools have been
exhausted and have failed to return LCH
SA to business as usual.36 A voluntary
wind-down not precipitated by these
extreme events is not considered under
the WDP.37 The WDP would set forth
clear mechanisms for the transfer of
LCH SA’s membership and business,
and would be designed to facilitate
continued access to critical services and
to minimize market impact.38
The decision to wind down would be
taken by the Board and ultimately the
LCH SA shareholders, upon advice of
the Executive Risk Committee and Local
Management Committee (‘‘LMC’’).39 The
LMC or DCMT would monitor the
implementation of the WDP.40 LCH SA
would consult with all relevant
regulatory authorities before making a
decision to wind down and, unless all
clearing services have already been
´
ˆ
closed, the French Autorite de Controle
Prudentiel et de Resolution (‘‘ACPR’’)
would have to approve such a
decision.41 LCH SA would also keep
relevant regulatory authorities regularly
informed of the plan’s
implementation.42 If LCH SA was in
resolution at the time, the relevant
regulatory authority governing the
resolution of LCH SA would need to
make the decision to wind-down.43
The WDP assumes that LCH SA’s
businesses would be wound down until
full closure, including the closure of all
its business lines at the same time.44
This is a worst case assumption,
however, and the WDP acknowledges
that it is likely that in the phases
preceding the decision to wind-down,
22 Id.
34 Id.
24 Id.
amozie on DSK3GDR082PROD with NOTICES1
23 See
Notice 012, 82 FR at 60249.
at 60250.
35 Id.
some business lines will have been
closed, transferred, or scaled down.45
The WDP provides that LCH SA
would publish written notice to the
clearing members that a wind-down
event has occurred and potential dates
by which transactions will no longer be
accepted for clearing.46 In a non-default
situation or in a situation where the
corresponding business line is still
active, LCH SA would attempt to give
clearing members the maximum time
necessary to clear transactions in the
normal course, close-out positions, and
switch to another central
counterparty.47
In line with the RP, the WDP
describes the functions of LCH SA and
distinguishes critical functions that LCH
SA provides to the market (all of LCH
SA’s clearing functions are considered
critical); services that are critical to the
support of LCH SA’s critical functions
(such as IT, risk, operations, and
collateral and risk management); and
non-critical support functions (such as
finance, legal, and human resources).
The WDP then provides detail about the
closure of these functions. For instance,
the treasury function would close once
all clearing services have ceased and
monies are paid by LCH SA and its
members.48 Further, once the WDP is
implemented, LCH SA would deposit
remaining cash in central bank accounts
or invest the cash in instruments with
maturities no longer than same-day
repos.49 LCH SA would keep active any
other supporting operational,
information technology, or risk
functions until all positions are
closed.50 Finally, the WDP describes the
closure of LCH SA’s clearing services
and provides citations to the various
clearing services’ rule book provisions
giving a legal basis for the actions taken
to effectuate the WDP.51
The WDP further notes that LCH SA’s
contractual agreements with third-party
service providers, such as information
technology or venue providers, contain
wind-down provisions that permit LCH
SA to exit the agreements under
particular conditions.52
Separately from the WDP, but in line
with the processes and timeline
described in the WDP, LCH SA
calculates the costs required for a wind
down. These costs encompass staff
salaries, indemnities for staff departure,
25 Id.
36 Notice
26 Id.
37 Id.
45 Id.
27 Id.
38 Id.
46 Id.
28 Id.
29 Id.
30 Id.
31 Id.
32 Id.
33 Id.
VerDate Sep<11>2014
013, 82 FR at 60239.
at 60239–60240.
39 Id. at 60239.
40 Id.
41 Id.
42 Id.
43 Id.
44 Id.
17:22 Jun 20, 2018
Jkt 244001
PO 00000
Frm 00087
Fmt 4703
at 60239–60240.
at 60240
48 Id. at 60240.
49 Id.
50 Id.
51 Id.
52 Id.
47 Id.
Sfmt 4703
28887
E:\FR\FM\21JNN1.SGM
21JNN1
28888
Federal Register / Vol. 83, No. 120 / Thursday, June 21, 2018 / Notices
costs to be paid to suppliers during
notice periods, and all foreseeable costs
that would be due in the event of a
wind-down.53 Based on these
calculations, the WDP concludes that
these costs would be less than the
capital LCH SA holds under EU
regulations (capital equal to the
operating expenses for a six (6) month
period) and that LCH SA would be in a
position to close the company within
six months of the decision to winddown.54
amozie on DSK3GDR082PROD with NOTICES1
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.55 For
the reasons given below, the
Commission finds that the proposed
rule changes are consistent with Section
17A(b)(3)(F) of the Act 56 and Rules
17Ad–22(e)(2)(i), (iii), and (v), 17Ad–
22(e)(3)(ii), and 17Ad–22(e)(15)(i)–(ii)
thereunder.57
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act
requires, among other things, that the
rules of LCH SA be designed to promote
the prompt and accurate clearance and
settlement of securities transactions
and, to the extent applicable, derivative
agreements, contracts, and transactions,
as well as to assure the safeguarding of
securities and funds which are in the
custody or control of LCH SA or for
which it is responsible, and, in general,
to protect investors and the public
interest.58
As described above, the RP would
specify the steps that LCH would take
in recovery and the governance
framework applicable to taking such
steps. It would analyze the anticipated
impact of the recovery tools, the
incentives created by such tools, and the
risks associated with using such tools. It
would also explain how the tools used
in the plan are transparent, measurable,
manageable, and controllable. The
Commission believes that by specifying
the steps LCH SA would take and the
tools it would use to bring about
recovery in the face of losses, the RP
53 Id.
54 Id.
55 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
57 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v);
(e)(3)(ii); (e)(15)(i)–(ii).
58 15 U.S.C. 78q–1(b)(3)(F).
56 15
VerDate Sep<11>2014
17:22 Jun 20, 2018
Jkt 244001
would increase the likelihood that
recovery would be orderly, efficient,
and successful. In increasing the
likelihood that recovery of LCH SA
would be orderly, efficient, and
successful, the Commission believes
that the RP would enhance LCH SA’s
ability to maintain the continuity of its
critical services (including clearance
and settlement services) during,
through, and following periods of
extreme stress giving rise to the need for
recovery, thereby promoting the prompt
and accurate clearance and settlement of
CDS transactions. The Commission also
believes that the RP would help assure
the safeguarding of securities or funds
in the custody or control of LCH SA by
reducing the likelihood of a disorderly
or unsuccessful recovery, which could
otherwise disrupt access to such
securities or funds. For the same reason,
the Commission also believes the RP
would be consistent with the protection
of investors and the public interest.
Similarly, the Commission believes
that the WDP would enhance LCH SA’s
ability to promote the prompt and
accurate clearance and settlement of
securities transactions and to safeguard
securities and funds in its control by
establishing a plan to effectuate an
orderly wind down. Specifically, the
WDP’s governance process and notice
provisions would facilitate the orderly
close-out of positions and potential
transfer of positions to other central
counter parties. Therefore, the
Commission believes that these
provisions would enhance LCH SA’s
ability to maintain and continue the
prompt and accurate clearance and
settlement of CDS transactions by
assuring that such transactions are
closed-out and transferred to other
central counterparties in an orderly and
transparent manner. Moreover, by
specifying in advance the steps LCH SA
would take in a wind down, the WDP
would assure an efficient and orderly
wind down of LCH SA. The
Commission believes that this, in turn,
would assure the safeguarding of
securities or funds in the custody or
control of LCH SA by reducing the
likelihood of an inefficient or disorderly
wind down, which could disrupt access
to such securities or funds. Finally, the
Commission believes that the WDP’s
requirement that LCH SA deposit
remaining cash in central bank accounts
and limit investment options to short
term highly-liquid instruments would
further enhance LCH SA’s ability to
safeguard funds in its control by
reducing the risk of liquidity constraints
and investment losses during a wind
down.
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
Therefore, the Commission finds that
the proposed rule changes would
promote the prompt and accurate
clearance and settlement of securities
transactions, assure the safeguarding of
securities and funds in LCH SA’s
custody and control, and, in general,
protect investors and the public interest,
consistent with the Section 17A(b)(3)(F)
of the Act.59
B. Consistency With Rules 17Ad–
22(e)(2)(i), (iii), and (v)
Rules 17Ad–22(e)(2)(i), (iii), and (v)
require that LCH SA establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to provide for
governance arrangements that are clear
and transparent, that support the public
interest requirements in Section 17A of
the Act applicable to clearing agencies,
and the objectives of owners and
participants, and that specify clear and
direct lines of responsibility.60
The RP would identify clear lines of
responsibility for its preparation and
final approval, the monitoring of its use,
and the functioning of the recovery
tools. The RP would also specify the
process LCH SA would take to receive
input from various parties at LCH SA,
including management committees and
the Board. Further, the RP would
enhance transparency by including
member representatives in the review of
the RP. The Commission believes that
these lines of control and input from
various LCH SA stakeholders can
contribute to establishing,
implementing, maintain and enforcing
clear and transparent governance
arrangements that support the public
interest requirements in Section 17A of
the Act applicable to clearing agencies,
and the objectives of owners and
participants.
The WDP similarly would identify
clear lines of responsibility for the
invocation, monitoring, and approval of
the WDP, and ultimately, a wind down.
It would enhance transparency by
requiring final approval by the LCH SA
shareholders and providing for
communication to clearing members
and other users of LCH SA’s services.
The Commission believes that both of
these features of the WDP would
represent clear and transparent
governance arrangements.
Therefore, the Commission finds that
the proposed rule changes would
establish clear and transport governance
arrangements for the RP and WDP,
59 15
60 17
E:\FR\FM\21JNN1.SGM
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(2)(i), (iii), and (v).
21JNN1
Federal Register / Vol. 83, No. 120 / Thursday, June 21, 2018 / Notices
amozie on DSK3GDR082PROD with NOTICES1
consistent with Rules 17Ad–22(e)(2)(i),
(iii), and (v).61
C. Consistency With Rule 17Ad–
22(e)(3)(ii)
Rule 17Ad–22(e)(3)(ii) requires that
LCH SA establish, implement, maintain
and enforce written policies and
procedures reasonably designed to
maintain a sound risk management
framework for comprehensively
managing legal, credit, liquidity,
operational, general business,
investment, custody, and other risks
that arise in or are borne by LCH SA,
which includes plans for the recovery
and orderly wind-down of LCH SA
necessitated by credit losses, liquidity
shortfalls, losses from general business
risk, or any other losses.62
The Commission believes that the
information the RP would provide about
the steps that LCH SA would take, and
the tools it would use, to effectuate a
recovery of LCH SA would enhance
LCH SA’s ability to recover from credit
losses, liquidity shortfalls, general
business risk losses, or other losses,
consistent with Rule 17Ad–
22(e)(3)(ii).63 Specifically, the
information from the RP would enable
LCH SA to prepare in advance for the
use of such tools and practice the use of
such tools, which would in turn
enhance LCH SA’s ability to use such
tools effectively to carry out a successful
recovery. In addition, by establishing a
single source of information about, and
steps needed to effectuate, a recovery of
LCH SA, the RP would allow LCH SA
personnel to effectuate a recovery in a
consistent and coordinated fashion, and
would thereby increase the likelihood of
a successful recovery. Moreover, by
identifying and assessing available
recovery tools, the Commission believes
that the RP would enhance LCH SA’s
ability to use such tools effectively to
bring about a recovery by identifying in
advance which tools may be most
effective for different situations or
needs, consistent with Rule 17Ad–
22(e)(3)(ii).64
Similarly, in providing detailed
information about the governance
requirements related to triggering and
implementing the WDP discussed in
more detail above, the Commission
believes that the WDP would enhance
LCH SA’s ability to effectuate an orderly
wind-down, consistent with Rule 17Ad–
22(e)(3)(ii).65 Specifically, by setting out
in advance the steps LCH SA would
61 17
CFR 240.17Ad–22(e)(2)(i), (iii), and (v).
62 17 CFR 240.17Ad–22(e)(3)(ii).
63 Id.
64 Id.
65 Id.
VerDate Sep<11>2014
17:22 Jun 20, 2018
Jkt 244001
take to trigger and effectuate a winddown, the WDP would enable LCH SA
to prepare in advance for a wind-down,
and practice the steps needed to
effectuate a wind-down, which the
Commission believes would enhance
LCH SA’s ability to use the WDP
effectively to carry-out an orderly winddown. In addition, by establishing a
single source of information about, and
steps needed to effectuate, a wind-down
of LCH SA, the Commission believes the
WDP would allow LCH SA personnel to
effectuate a wind-down in a consistent
and coordinated fashion, and would
thereby increase the likelihood of an
orderly wind-down. Finally, the WDP
would identify the legal basis for LCH’s
actions with respect to a potential winddown, including relevant citations to
provisions of the rule books of its
various clearing services and
contractual agreements, which the
Commission believes would further
facilitate a well-reasoned, legal, and
orderly wind-down process by
providing LCH SA with a single source
of information and steps needed for a
wind-down, consistent with Rule 17Ad–
22(e)(3)(ii).66
Therefore, the Commission finds that
the proposed rule changes would be
plans for the orderly recovery and wind
down of LCH SA, consistent Rule
17Ad–22(e)(3)(ii).67
D. Consistency With Rules 17Ad–
22(e)(15)(i)–(ii)
Rules 17Ad–22(e)(15)(i)–(ii) require
LCH SA to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
identify, monitor, and manage its
general business risk and hold sufficient
liquid net assets funded by equity to
cover potential general business losses
so that LCH SA can continue operations
and services as a going concern if those
losses materialize, including by (i)
determining the amount of liquid net
assets funded by equity based upon its
general business risk profile and the
length of time required to achieve a
recovery or orderly wind-down, as
appropriate, of its critical operations
and services if such action is taken and
(ii) holding liquid net assets funded by
equity equal to the greater of either (x)
six months of the LCH SA’s current
operating expenses, or (y) the amount
determined by the board of directors to
be sufficient to ensure a recovery or
orderly wind-down of critical
operations and services.68
66 Id.
67 Id.
68 17
PO 00000
CFR 240.17Ad–22(e)(15)(i)–(ii).
Frm 00089
Fmt 4703
Sfmt 4703
28889
LCH SA’s RP would include a
quantitative assessment of the situations
that could necessitate a recovery and
related recovery tools. This quantitative
assessment would consider the potential
impact to LCH SA’s liquid net assets
funded by equity, including its surplus
capital. It would also include an
assessment of the time to implement the
various recovery tools. Thus, the
Commission finds that the RP would
indicate the potential cost and length of
recovery, consistent with Rules 17Ad–
22(e)(15)(i)–(ii).69
Similarly, LCH SA’s WDP would
calculate costs related to a wind down.
These costs would include staffing,
technological, facilities, legal, and other
resources necessary during the actual
wind-down period. Further, the WDP
concludes, based on recently audited
amounts, that LCH SA would hold
highly liquid resources corresponding to
six months of operating expenses and
that this amount would exceed the
estimated costs of conducting a winddown. The WDP also concludes that the
length of time it would take LCH SA to
wind-down and close clearing services
would be six months from the decision
to wind-down. Thus, the Commission
finds that the WDP would indicate LCH
SA’s ability to effectuate a wind down
within six months of the decision to
wind-down at a lower cost than the
amount of its liquid resources,
consistent with Rules 17Ad–
22(e)(15)(i)–(ii).70
Therefore, the Commission finds that
the proposed rule changes would
determine the length of time required to
achieve a recovery or orderly winddown of LCH SA and the associated
costs and would further ensure that LCH
SA holds liquid net assets greater than
these costs, consistent with Rules
17Ad–22(e)(15)(i)–(ii).71
III. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule changes are consistent with the
requirements of the Act, and in
particular, Section 17A(b)(3)(F) of the
Act 72 and Rules 17Ad–22(e)(2)(i), (iii),
and (v), 17Ad–22(e)(3)(ii), 17Ad–
22(e)(15)(i)–(ii) thereunder.73
It is therefore ordered pursuant to
Section 19(b)(2) of the Act that the
proposed rule change (SR–LCH SA–
69 17
CFR 240.17Ad–22(e)(15)(i)–(ii).
CFR 240.17Ad–22(e)(15)(i)–(ii).
71 17 CFR 240.17Ad–22(e)(15)(i)–(ii).
72 15 U.S.C. 78q–1(b)(3)(F).
73 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v);
(e)(3)(ii); (e)(15)(i)–(ii).
70 17
E:\FR\FM\21JNN1.SGM
21JNN1
28890
Federal Register / Vol. 83, No. 120 / Thursday, June 21, 2018 / Notices
2017–012) be, and hereby is,
approved.74
It is therefore ordered pursuant to
Section 19(b)(2) of the Act that the
proposed rule change (SR–LCH SA–
2017–013) be, and hereby is,
approved.75
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.76
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–13300 Filed 6–20–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83449; File No. SR–
CboeEDGA–2018–010]
Self-Regulatory Organizations; Cboe
EDGA Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change Related to
Physical Port Fees for EDGA
June 15, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 1,
2018, Cboe EDGA Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGA’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the Exchange. The Exchange has
designated the proposed rule change as
one establishing or changing a member
due, fee, or other charge imposed by the
Exchange under Section 19(b)(3)(A)(ii)
of the Act 3 and Rule 19b–4(f)(2)
thereunder,4 which renders the
proposed rule change effective upon
filing with the Commission. 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 Substance of
the Proposed Rule Change
amozie on DSK3GDR082PROD with NOTICES1
The Exchange filed a proposal to
amend its fees and rebates applicable to
74 In approving the proposed rule change, the
Commission considered the proposal’s impacts on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
75 In approving the proposed rule change, the
Commission considered the proposal’s impacts on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
76 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
VerDate Sep<11>2014
17:22 Jun 20, 2018
Jkt 244001
Members 5 and non-Members of the
Exchange pursuant to EDGA Rule
15.1(a) and (c) to modify its fees for
physical ports.
The text of the proposed rule change
is available at the Exchange’s website at
www.markets.cboe.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
Exchange 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. 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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to implement
proposed changes to its fee schedule
relating to physical connectivity fees,
effective June 1, 2018. By way of
background, a physical port is utilized
by a Member or non-Member to connect
to the Exchange at the data centers
where the Exchange’s servers are
located. The Exchange currently
maintains a presence in two third-party
data centers: (i) The primary data center
where the Exchange’s business is
primarily conducted on a daily basis,
and (ii) a secondary data center, which
is predominantly maintained for
business continuity purposes. The
Exchange currently assesses the
following physical connectivity fees for
Members and non-Members on a
monthly basis: $2,000 per physical port
for a 1 gigabyte circuit and $7,000 per
physical port for a 10 gigabyte circuit.
The Exchange proposes to increase the
fees per physical ports from (i) $2,000
to $2,500 per month, per port for a 1
gigabyte circuit and (ii) $7,000 to $7,500
per month, per port for a 10 gigabyte
circuit. The Exchange notes the
proposed fees enable it to continue to
maintain and improve its market
technology and services and also notes
that the proposed fee changes are in line
5 The term ‘‘Member’’ is defined as ‘‘any
registered broker or dealer that has been admitted
to membership in the Exchange.’’ See Exchange
Rule 1.5(n).
PO 00000
Frm 00090
Fmt 4703
Sfmt 4703
with the amounts assessed by other
exchanges for similar connections.6
The Exchange also proposes to adopt
separate physical port fees for
connection to its secondary data center,
which is predominantly maintained for
business continuity purposes (‘‘Disaster
Recovery Systems’’). Particularly, the
Disaster Recovery Systems can be
accessed via physical ports in Chicago.
Members and Non-Members may
maintain physical ports in order to be
able to connect to the Disaster Recovery
Systems in case of a disaster. Currently,
physical ports that are used to connect
to the Disaster Recovery Systems are
assessed the same fees as physical ports
used to connect to the Exchange’s
trading system. The Exchange proposes
to establish separate pricing for physical
ports that are used to connect to the
Disaster Recovery Systems (‘‘Disaster
Recovery Physical Ports’’). Specifically,
the Exchange proposes to assess a
monthly fee of $2,000 per 1 gigabyte
Disaster Recovery Physical Port and a
monthly fee of $6,000 per 10 gigabyte
Disaster Recovery Physical Port. This
amount will continue to enable the
Exchange to maintain the Disaster
Recovery Physical Ports in case they
become necessary. The Exchange notes
that the Disaster Recovery Physical
Ports may also be used to access the
Disaster Recovery Systems for the
following affiliate exchanges Cboe BZX
Exchange, Inc., Cboe EDGX Exchange,
Inc., Cboe BYX Exchange, Inc., Cboe C2
Exchange, Inc., Cboe Exchange, Inc. and
Cboe Futures Exchange, LLC as well.
The Exchange proposes to provide that
market participants will only be
assessed a single fee for any Disaster
Recovery Physical Port that also
accesses the Disaster Recover Systems
for these exchanges.7
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the objectives of Section 6 of the Act,8
in general, and furthers the objectives of
Section 6(b)(4),9 in particular, as it is
designed to provide for the equitable
allocation of reasonable dues, fees and
other charges among its Members and
other persons using its facilities. The
Exchange also notes that it operates in
6 See e.g., NYSE Arca Equities Fees and Charges,
NYSE Arca Marketplace: Other Fees and Charges,
Connectivity Fees. See also, Nasdaq Phlx LLC
Pricing Schedule, Section XI, Direct Connectivity to
Phlx.
7 For example, if a market participant uses a 1
gigabyte Disaster Recovery Physical Port to connect
to the Disaster Recovery Systems for both EDGA
and EDGX, the market participant would only be
assessed one monthly fee of $2,000.
8 15 U.S.C. 78f.
9 15 U.S.C. 78f(b)(4).
E:\FR\FM\21JNN1.SGM
21JNN1
]]>Agencies
[Federal Register Volume 83, Number 120 (Thursday, June 21, 2018)]
[Notices]
[Pages 28886-28890]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-13300]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83451; File Nos. SR-LCH SA-2017-012 and SR-LCH SA-2017-
013]
Self-Regulatory Organizations; LCH SA; Order Approving Proposed
Rule Changes Related to LCH SA's Recovery and Wind Down Plans
June 15, 2018.
I. Introduction
On November 30, 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 (LCH SA-2017-012)
to adopt a recovery plan (the ``RP''). The proposed rule change was
published for comment in the Federal Register on December 19, 2017.\3\
On December 7, 2017, LCH SA filed with the Commission a proposed rule
change (LCH SA-2017-013) to adopt a wind down plan (``WDP'').\4\ The
proposed rule change was published for comment in the Federal Register
on December 19, 2017.\5\ On January 23, 2018, pursuant to Section
19(b)(2) of the Act,\6\ the Commission designated a longer period for
Commission action on both proposed rule changes.\7\ On March 19, 2018
the Commission instituted proceedings under Section 19(b)(2)(B) of the
Act \8\ to determine whether to approve or disapprove the proposed rule
changes.\9\ To date, the Commission has not received any comments on
the proposed rule changes. For the reasons discussed below, the
Commission is approving the proposed rule changes.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-82316 (Dec. 13,
2017), 82 FR 60246 (Dec. 19, 2017) (SR-LCH-SA-2017-012) (``Notice
012'').
\4\ Capitalized terms used in this order but not defined herein
have the same meanings specified in LCH SA's rules.
\5\ Securities Exchange Act Release No. 34-82317 (Dec. 13,
2017), 82 FR 60238 (Dec. 19, 2017) (SR-LCH SA-2017-013) (``Notice
013'').
\6\ 15 U.S.C. 78s(b)(2).
\7\ Securities Exchange Act Release No. 34-82570 (Jan. 23,
2018), 83 FR 4088 (Jan. 29, 2018) (SR-LCH-SA-2017-012) and
Securities Exchange Act Release No. 34-82571 (Jan. 23, 2018), 83 FR
4081 (Jan. 29, 2018) (SR-LCH SA-2017-013).
\8\ 15 U.S.C. 78s(b)(2)(B).
\9\ Securities Exchange Act Release No. 34-82901 (March 19,
2018), 83 FR 12833 (March 23, 2018) (SR-LCH SA-2017-012; SR-LCH SA-
2017-013).
---------------------------------------------------------------------------
II. Description of the Proposed Rule Changes 10
---------------------------------------------------------------------------
\10\ The descriptions of the proposed rule changes are
substantially excerpted from Notice 012 and Notice 013.
---------------------------------------------------------------------------
As a ``covered clearing agency,'' \11\ LCH SA is required to, among
other things, ``establish, implement, maintain and enforce written
policies and procedures reasonably designed to . . . maintain a sound
risk management framework for comprehensively managing legal, credit,
liquidity, operational, general business, investment, custody, and
other risks that arise in or are borne by the covered clearing agency,
which . . . includes plans for the recovery and orderly wind-down of
the covered clearing agency necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses.''
\12\ The Commission has previously clarified that it believes that such
recovery and wind-down plans are ``rules'' within the meaning of
Exchange Act Section 19(b) and Rule 19b-4 because such plans would
constitute changes to a stated policy, practice or interpretation of a
covered clearing agency.\13\ Accordingly, a covered clearing agency,
such as LCH SA, must file its RP and WDP with the Commission.
---------------------------------------------------------------------------
\11\ The term ``covered clearing agency'' is defined in SEC Rule
17Ad-22(a)(5), 17 CFR 240.17Ad-22(a)(5).
\12\ 17 CFR 240.17Ad-22(e)(3)(ii).
\13\ Standards for Covered Clearing Agencies, Securities
Exchange Act Release No. 34-78961 (Sep. 28, 2016), 81 FR 70786,
70809 (Oct. 13, 2016).
---------------------------------------------------------------------------
A. The RP (LCH SA-2017-012)
LCH SA's RP seeks to maintain the continuity of critical services
in times of extreme stress and to facilitate the recovery of LCH SA
from such stress. In particular, the RP describes (i) the scenarios and
triggers for initiating recovery measures; (ii) various recovery tools
used in such recovery; and (iii) the governance framework for managing
the RP. Each of those aspects of the RP are discussed in more detail
below.
The scenarios that could necessitate the implementation of the RP
include the default of one or more clearing members, liquidity
shortfalls as a result of the default of an investment counterparty of
LCH SA or any other investment losses resulting from changes in the
market value on the investments, a loss resulting from an event which
impacts the critical services provided by LCH SA (e.g., failure in the
provision of service by a third party), loss of critical contracts with
exchanges, or the operational or financial failure of a financial
market infrastructure such as an allied clearing house or trade
repository.\14\
---------------------------------------------------------------------------
\14\ See Notice 012, 82 FR at 60247.
---------------------------------------------------------------------------
The default management process is used to re-establish a matched
book and return to business as usual and therefore LCH SA considers it
to be a recovery tool.\15\ When pre-funded resources, such as
defaulter's margin, defaulter's default fund contributions, LCH SA's
capital, and non-defaulters' default fund contributions, are no longer
available to meet obligations due to member and non-member losses, the
RP lists various measures and tools that LCH SA can use to return to
business as usual.\16\ The RP is organized to discuss each tool
according to the nature of the loss the tool is designed to address
(e.g., clearing member default losses, liquidity shortfalls,
operational, business, and investment risks). The RP also discusses the
sequence in which these tools would be used and the relative strength
of each.\17\
---------------------------------------------------------------------------
\15\ Id.
\16\ Id. at 60249.
\17\ Id. at 60249-60250.
---------------------------------------------------------------------------
When pre-funded resources have been exhausted after a clearing
member default, LCH SA can call a default fund assessment up to a cap,
request voluntary payments from all non-defaulting members, and
effectuate service closure.\18\ In the event such tools are
unavailable, certain other business-as-usual tools, such as default
fund additional margin, may enable LCH SA to collect additional
resources.
---------------------------------------------------------------------------
\18\ Id. at 60249.
---------------------------------------------------------------------------
In the event of a liquidity shortfall, LCH SA may use its central
bank credit line to deposit securities received on behalf of defaulting
clearing members and obtain liquidity.\19\ Other potential tools to
manage a liquidity stress situation include limits with respect to
illiquid collateral, the application of increased haircuts on certain
types of collateral to incentivize the use of more liquid collateral,
and specific liquidity margins.\20\ LCH SA also could defer funding for
the settlement platform for a limited period of time, but views this as
a tool of last resort.\21\
---------------------------------------------------------------------------
\19\ Id.
\20\ Id.
\21\ Id.
---------------------------------------------------------------------------
For most investment, business, and operational losses, LCH SA can
allocate
[[Page 28887]]
its capital surplus against losses.\22\ Further down the list of
preferable recovery tools for non-clearing member defaults are the
abilities to raise capital or utilize insurance meant to cover a
specific operational risk event.\23\ For any disruption or loss of a
key third-party service provider, LCH SA would be able to exercise
several contractual rights and maintains exit plans that are intended
to safeguard the continuity of services.\24\
---------------------------------------------------------------------------
\22\ Id.
\23\ See Notice 012, 82 FR at 60249.
\24\ Id. at 60250.
---------------------------------------------------------------------------
The RP discusses the governance surrounding its creation,
invocation, and operation.\25\ LCH SA relies upon its existing
governance forums for both the creation and on-going monitoring and
operation of the RP. Specifically, the LCH SA Management Committee is
responsible for the preparation of the RP and the monitoring and
implementation of the recovery tools set forth in the RP.\26\ The LCH
SA Risk Committee reviews and makes a recommendation to the Board,
which ultimately has the power to approve the RP.\27\ However, before
submission to the LCH SA Risk Committee, the RP is reviewed and
validated by the Executive Risk Committee of LCH SA's parent company,
LCH Group.\28\
---------------------------------------------------------------------------
\25\ Id.
\26\ Id.
\27\ Id.
\28\ Id.
---------------------------------------------------------------------------
The Default Management Group is responsible for the management of
clearing member defaults while all critical decisions are escalated and
submitted to the LCH SA Default Crisis Management Team (``DCMT'').\29\
The triggering of recovery measures is subject to discussion in the
DCMT and approval by the LCH SA CEO.\30\
---------------------------------------------------------------------------
\29\ Id.
\30\ Id.
---------------------------------------------------------------------------
The management of non-clearing member events will vary based on the
nature of the event.\31\ For example, investment losses and liquidity
shortfalls are managed by the departments responsible for controlling
such risks within the parameters set by the Board.\32\ Similarly,
operational risks are managed by each business line in accordance with
the operational risk policy approved by the Board.\33\ Business risk is
managed by individual business lines, with a second line challenge
performed by the risk and finance departments to verify if sufficient
capital buffers are available for the applicable business risks.\34\
Matters are escalated to the Management Committee when the RP is
triggered and the LCH SA Board will approve implementation of the
RP.\35\
---------------------------------------------------------------------------
\31\ Id.
\32\ Id.
\33\ Id.
\34\ Id.
\35\ Id.
---------------------------------------------------------------------------
B. The WDP (LCH SA-2017-013)
In the event a recovery is not successful, LCH SA would invoke its
WDP to wind down its operations to full service closure in an orderly
manner, thereby minimizing the disruption to clearing members, market
participants, and the broader financial system. The WDP would be
triggered after a determination by the LCH SA Board that all the
recovery tools have been exhausted and have failed to return LCH SA to
business as usual.\36\ A voluntary wind-down not precipitated by these
extreme events is not considered under the WDP.\37\ The WDP would set
forth clear mechanisms for the transfer of LCH SA's membership and
business, and would be designed to facilitate continued access to
critical services and to minimize market impact.\38\
---------------------------------------------------------------------------
\36\ Notice 013, 82 FR at 60239.
\37\ Id.
\38\ Id. at 60239-60240.
---------------------------------------------------------------------------
The decision to wind down would be taken by the Board and
ultimately the LCH SA shareholders, upon advice of the Executive Risk
Committee and Local Management Committee (``LMC'').\39\ The LMC or DCMT
would monitor the implementation of the WDP.\40\ LCH SA would consult
with all relevant regulatory authorities before making a decision to
wind down and, unless all clearing services have already been closed,
the French Autorit[eacute] de Contr[ocirc]le Prudentiel et de
Resolution (``ACPR'') would have to approve such a decision.\41\ LCH SA
would also keep relevant regulatory authorities regularly informed of
the plan's implementation.\42\ If LCH SA was in resolution at the time,
the relevant regulatory authority governing the resolution of LCH SA
would need to make the decision to wind-down.\43\
---------------------------------------------------------------------------
\39\ Id. at 60239.
\40\ Id.
\41\ Id.
\42\ Id.
\43\ Id.
---------------------------------------------------------------------------
The WDP assumes that LCH SA's businesses would be wound down until
full closure, including the closure of all its business lines at the
same time.\44\ This is a worst case assumption, however, and the WDP
acknowledges that it is likely that in the phases preceding the
decision to wind-down, some business lines will have been closed,
transferred, or scaled down.\45\
---------------------------------------------------------------------------
\44\ Id.
\45\ Id.
---------------------------------------------------------------------------
The WDP provides that LCH SA would publish written notice to the
clearing members that a wind-down event has occurred and potential
dates by which transactions will no longer be accepted for
clearing.\46\ In a non-default situation or in a situation where the
corresponding business line is still active, LCH SA would attempt to
give clearing members the maximum time necessary to clear transactions
in the normal course, close-out positions, and switch to another
central counterparty.\47\
---------------------------------------------------------------------------
\46\ Id. at 60239-60240.
\47\ Id. at 60240
---------------------------------------------------------------------------
In line with the RP, the WDP describes the functions of LCH SA and
distinguishes critical functions that LCH SA provides to the market
(all of LCH SA's clearing functions are considered critical); services
that are critical to the support of LCH SA's critical functions (such
as IT, risk, operations, and collateral and risk management); and non-
critical support functions (such as finance, legal, and human
resources). The WDP then provides detail about the closure of these
functions. For instance, the treasury function would close once all
clearing services have ceased and monies are paid by LCH SA and its
members.\48\ Further, once the WDP is implemented, LCH SA would deposit
remaining cash in central bank accounts or invest the cash in
instruments with maturities no longer than same-day repos.\49\ LCH SA
would keep active any other supporting operational, information
technology, or risk functions until all positions are closed.\50\
Finally, the WDP describes the closure of LCH SA's clearing services
and provides citations to the various clearing services' rule book
provisions giving a legal basis for the actions taken to effectuate the
WDP.\51\
---------------------------------------------------------------------------
\48\ Id. at 60240.
\49\ Id.
\50\ Id.
\51\ Id.
---------------------------------------------------------------------------
The WDP further notes that LCH SA's contractual agreements with
third-party service providers, such as information technology or venue
providers, contain wind-down provisions that permit LCH SA to exit the
agreements under particular conditions.\52\
---------------------------------------------------------------------------
\52\ Id.
---------------------------------------------------------------------------
Separately from the WDP, but in line with the processes and
timeline described in the WDP, LCH SA calculates the costs required for
a wind down. These costs encompass staff salaries, indemnities for
staff departure,
[[Page 28888]]
costs to be paid to suppliers during notice periods, and all
foreseeable costs that would be due in the event of a wind-down.\53\
Based on these calculations, the WDP concludes that these costs would
be less than the capital LCH SA holds under EU regulations (capital
equal to the operating expenses for a six (6) month period) and that
LCH SA would be in a position to close the company within six months of
the decision to wind-down.\54\
---------------------------------------------------------------------------
\53\ Id.
\54\ Id.
---------------------------------------------------------------------------
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.\55\ For the reasons given below, the Commission finds
that the proposed rule changes are consistent with Section 17A(b)(3)(F)
of the Act \56\ and Rules 17Ad-22(e)(2)(i), (iii), and (v), 17Ad-
22(e)(3)(ii), and 17Ad-22(e)(15)(i)-(ii) thereunder.\57\
---------------------------------------------------------------------------
\55\ 15 U.S.C. 78s(b)(2)(C).
\56\ 15 U.S.C. 78q-1(b)(3)(F).
\57\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v); (e)(3)(ii);
(e)(15)(i)-(ii).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of LCH SA be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, as well
as to assure the safeguarding of securities and funds which are in the
custody or control of LCH SA or for which it is responsible, and, in
general, to protect investors and the public interest.\58\
---------------------------------------------------------------------------
\58\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above, the RP would specify the steps that LCH would
take in recovery and the governance framework applicable to taking such
steps. It would analyze the anticipated impact of the recovery tools,
the incentives created by such tools, and the risks associated with
using such tools. It would also explain how the tools used in the plan
are transparent, measurable, manageable, and controllable. The
Commission believes that by specifying the steps LCH SA would take and
the tools it would use to bring about recovery in the face of losses,
the RP would increase the likelihood that recovery would be orderly,
efficient, and successful. In increasing the likelihood that recovery
of LCH SA would be orderly, efficient, and successful, the Commission
believes that the RP would enhance LCH SA's ability to maintain the
continuity of its critical services (including clearance and settlement
services) during, through, and following periods of extreme stress
giving rise to the need for recovery, thereby promoting the prompt and
accurate clearance and settlement of CDS transactions. The Commission
also believes that the RP would help assure the safeguarding of
securities or funds in the custody or control of LCH SA by reducing the
likelihood of a disorderly or unsuccessful recovery, which could
otherwise disrupt access to such securities or funds. For the same
reason, the Commission also believes the RP would be consistent with
the protection of investors and the public interest.
Similarly, the Commission believes that the WDP would enhance LCH
SA's ability to promote the prompt and accurate clearance and
settlement of securities transactions and to safeguard securities and
funds in its control by establishing a plan to effectuate an orderly
wind down. Specifically, the WDP's governance process and notice
provisions would facilitate the orderly close-out of positions and
potential transfer of positions to other central counter parties.
Therefore, the Commission believes that these provisions would enhance
LCH SA's ability to maintain and continue the prompt and accurate
clearance and settlement of CDS transactions by assuring that such
transactions are closed-out and transferred to other central
counterparties in an orderly and transparent manner. Moreover, by
specifying in advance the steps LCH SA would take in a wind down, the
WDP would assure an efficient and orderly wind down of LCH SA. The
Commission believes that this, in turn, would assure the safeguarding
of securities or funds in the custody or control of LCH SA by reducing
the likelihood of an inefficient or disorderly wind down, which could
disrupt access to such securities or funds. Finally, the Commission
believes that the WDP's requirement that LCH SA deposit remaining cash
in central bank accounts and limit investment options to short term
highly-liquid instruments would further enhance LCH SA's ability to
safeguard funds in its control by reducing the risk of liquidity
constraints and investment losses during a wind down.
Therefore, the Commission finds that the proposed rule changes
would promote the prompt and accurate clearance and settlement of
securities transactions, assure the safeguarding of securities and
funds in LCH SA's custody and control, and, in general, protect
investors and the public interest, consistent with the Section
17A(b)(3)(F) of the Act.\59\
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rules 17Ad-22(e)(2)(i), (iii), and (v)
Rules 17Ad-22(e)(2)(i), (iii), and (v) require that LCH SA
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to provide for governance arrangements
that are clear and transparent, that support the public interest
requirements in Section 17A of the Act applicable to clearing agencies,
and the objectives of owners and participants, and that specify clear
and direct lines of responsibility.\60\
---------------------------------------------------------------------------
\60\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
---------------------------------------------------------------------------
The RP would identify clear lines of responsibility for its
preparation and final approval, the monitoring of its use, and the
functioning of the recovery tools. The RP would also specify the
process LCH SA would take to receive input from various parties at LCH
SA, including management committees and the Board. Further, the RP
would enhance transparency by including member representatives in the
review of the RP. The Commission believes that these lines of control
and input from various LCH SA stakeholders can contribute to
establishing, implementing, maintain and enforcing clear and
transparent governance arrangements that support the public interest
requirements in Section 17A of the Act applicable to clearing agencies,
and the objectives of owners and participants.
The WDP similarly would identify clear lines of responsibility for
the invocation, monitoring, and approval of the WDP, and ultimately, a
wind down. It would enhance transparency by requiring final approval by
the LCH SA shareholders and providing for communication to clearing
members and other users of LCH SA's services. The Commission believes
that both of these features of the WDP would represent clear and
transparent governance arrangements.
Therefore, the Commission finds that the proposed rule changes
would establish clear and transport governance arrangements for the RP
and WDP,
[[Page 28889]]
consistent with Rules 17Ad-22(e)(2)(i), (iii), and (v).\61\
---------------------------------------------------------------------------
\61\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(3)(ii)
Rule 17Ad-22(e)(3)(ii) requires that LCH SA establish, implement,
maintain and enforce written policies and procedures reasonably
designed to maintain a sound risk management framework for
comprehensively managing legal, credit, liquidity, operational, general
business, investment, custody, and other risks that arise in or are
borne by LCH SA, which includes plans for the recovery and orderly
wind-down of LCH SA necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses.\62\
---------------------------------------------------------------------------
\62\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
The Commission believes that the information the RP would provide
about the steps that LCH SA would take, and the tools it would use, to
effectuate a recovery of LCH SA would enhance LCH SA's ability to
recover from credit losses, liquidity shortfalls, general business risk
losses, or other losses, consistent with Rule 17Ad-22(e)(3)(ii).\63\
Specifically, the information from the RP would enable LCH SA to
prepare in advance for the use of such tools and practice the use of
such tools, which would in turn enhance LCH SA's ability to use such
tools effectively to carry out a successful recovery. In addition, by
establishing a single source of information about, and steps needed to
effectuate, a recovery of LCH SA, the RP would allow LCH SA personnel
to effectuate a recovery in a consistent and coordinated fashion, and
would thereby increase the likelihood of a successful recovery.
Moreover, by identifying and assessing available recovery tools, the
Commission believes that the RP would enhance LCH SA's ability to use
such tools effectively to bring about a recovery by identifying in
advance which tools may be most effective for different situations or
needs, consistent with Rule 17Ad-22(e)(3)(ii).\64\
---------------------------------------------------------------------------
\63\ Id.
\64\ Id.
---------------------------------------------------------------------------
Similarly, in providing detailed information about the governance
requirements related to triggering and implementing the WDP discussed
in more detail above, the Commission believes that the WDP would
enhance LCH SA's ability to effectuate an orderly wind-down, consistent
with Rule 17Ad-22(e)(3)(ii).\65\ Specifically, by setting out in
advance the steps LCH SA would take to trigger and effectuate a wind-
down, the WDP would enable LCH SA to prepare in advance for a wind-
down, and practice the steps needed to effectuate a wind-down, which
the Commission believes would enhance LCH SA's ability to use the WDP
effectively to carry-out an orderly wind-down. In addition, by
establishing a single source of information about, and steps needed to
effectuate, a wind-down of LCH SA, the Commission believes the WDP
would allow LCH SA personnel to effectuate a wind-down in a consistent
and coordinated fashion, and would thereby increase the likelihood of
an orderly wind-down. Finally, the WDP would identify the legal basis
for LCH's actions with respect to a potential wind-down, including
relevant citations to provisions of the rule books of its various
clearing services and contractual agreements, which the Commission
believes would further facilitate a well-reasoned, legal, and orderly
wind-down process by providing LCH SA with a single source of
information and steps needed for a wind-down, consistent with Rule
17Ad-22(e)(3)(ii).\66\
---------------------------------------------------------------------------
\65\ Id.
\66\ Id.
---------------------------------------------------------------------------
Therefore, the Commission finds that the proposed rule changes
would be plans for the orderly recovery and wind down of LCH SA,
consistent Rule 17Ad-22(e)(3)(ii).\67\
---------------------------------------------------------------------------
\67\ Id.
---------------------------------------------------------------------------
D. Consistency With Rules 17Ad-22(e)(15)(i)-(ii)
Rules 17Ad-22(e)(15)(i)-(ii) require LCH SA to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to identify, monitor, and manage its general
business risk and hold sufficient liquid net assets funded by equity to
cover potential general business losses so that LCH SA can continue
operations and services as a going concern if those losses materialize,
including by (i) determining the amount of liquid net assets funded by
equity based upon its general business risk profile and the length of
time required to achieve a recovery or orderly wind-down, as
appropriate, of its critical operations and services if such action is
taken and (ii) holding liquid net assets funded by equity equal to the
greater of either (x) six months of the LCH SA's current operating
expenses, or (y) the amount determined by the board of directors to be
sufficient to ensure a recovery or orderly wind-down of critical
operations and services.\68\
---------------------------------------------------------------------------
\68\ 17 CFR 240.17Ad-22(e)(15)(i)-(ii).
---------------------------------------------------------------------------
LCH SA's RP would include a quantitative assessment of the
situations that could necessitate a recovery and related recovery
tools. This quantitative assessment would consider the potential impact
to LCH SA's liquid net assets funded by equity, including its surplus
capital. It would also include an assessment of the time to implement
the various recovery tools. Thus, the Commission finds that the RP
would indicate the potential cost and length of recovery, consistent
with Rules 17Ad-22(e)(15)(i)-(ii).\69\
---------------------------------------------------------------------------
\69\ 17 CFR 240.17Ad-22(e)(15)(i)-(ii).
---------------------------------------------------------------------------
Similarly, LCH SA's WDP would calculate costs related to a wind
down. These costs would include staffing, technological, facilities,
legal, and other resources necessary during the actual wind-down
period. Further, the WDP concludes, based on recently audited amounts,
that LCH SA would hold highly liquid resources corresponding to six
months of operating expenses and that this amount would exceed the
estimated costs of conducting a wind-down. The WDP also concludes that
the length of time it would take LCH SA to wind-down and close clearing
services would be six months from the decision to wind-down. Thus, the
Commission finds that the WDP would indicate LCH SA's ability to
effectuate a wind down within six months of the decision to wind-down
at a lower cost than the amount of its liquid resources, consistent
with Rules 17Ad-22(e)(15)(i)-(ii).\70\
---------------------------------------------------------------------------
\70\ 17 CFR 240.17Ad-22(e)(15)(i)-(ii).
---------------------------------------------------------------------------
Therefore, the Commission finds that the proposed rule changes
would determine the length of time required to achieve a recovery or
orderly wind-down of LCH SA and the associated costs and would further
ensure that LCH SA holds liquid net assets greater than these costs,
consistent with Rules 17Ad-22(e)(15)(i)-(ii).\71\
---------------------------------------------------------------------------
\71\ 17 CFR 240.17Ad-22(e)(15)(i)-(ii).
---------------------------------------------------------------------------
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule changes are consistent with the requirements of the Act,
and in particular, Section 17A(b)(3)(F) of the Act \72\ and Rules 17Ad-
22(e)(2)(i), (iii), and (v), 17Ad-22(e)(3)(ii), 17Ad-22(e)(15)(i)-(ii)
thereunder.\73\
---------------------------------------------------------------------------
\72\ 15 U.S.C. 78q-1(b)(3)(F).
\73\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v); (e)(3)(ii);
(e)(15)(i)-(ii).
---------------------------------------------------------------------------
It is therefore ordered pursuant to Section 19(b)(2) of the Act
that the proposed rule change (SR-LCH SA-
[[Page 28890]]
2017-012) be, and hereby is, approved.\74\
---------------------------------------------------------------------------
\74\ In approving the proposed rule change, the Commission
considered the proposal's impacts on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
It is therefore ordered pursuant to Section 19(b)(2) of the Act
that the proposed rule change (SR-LCH SA-2017-013) be, and hereby is,
approved.\75\
---------------------------------------------------------------------------
\75\ In approving the proposed rule change, the Commission
considered the proposal's impacts 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.\76\
---------------------------------------------------------------------------
\76\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-13300 Filed 6-20-18; 8:45 am]
BILLING CODE 8011-01-P
