Self-Regulatory Organizations; LCH SA; Notice of Filing of Proposed Rule Change Relating to Implementation of Electronic Exercise Platform, 45155-45164 [2018-19147]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 172 (Wednesday, September 5, 2018)]
[Notices]
[Pages 45155-45164]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19147]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83983; File No. SR-LCH SA-2018-004]


Self-Regulatory Organizations; LCH SA; Notice of Filing of 
Proposed Rule Change Relating to Implementation of Electronic Exercise 
Platform

August 29, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on August 24, 2018, Banque Centrale de Compensation, which conducts 
business under the name LCH SA (``LCH SA''), filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change 
described in Items I, II and III below, which Items have been prepared 
primarily by LCH SA. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    Banque Centrale de Compensation, which conducts business under the 
name LCH SA (``LCH SA''), is proposing to amend its (i) CDS Clearing 
Rule Book (``Rule Book''), (ii) CDS Clearing Supplement 
(``Supplement'') and (iii) CDS Clearing Procedures (``Procedures'') to 
incorporate new terms and to make conforming, clarifying and clean-up 
changes to implement a new electronic exercise platform (``EEP'') for 
the exercise of options by Clearing Members and their Clients. The text 
of the proposed rule change has been annexed as Exhibit 5.\3\
---------------------------------------------------------------------------

    \3\ All capitalized terms not defined herein have the same 
definition as the Rule Book, Supplement or Procedures, as 
applicable.
---------------------------------------------------------------------------

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, LCH SA 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. LCH SA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of these statements.

A. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    LCH SA is proposing to create an EEP for credit index options or 
swaptions to capture and support swaption exercise decisions by 
Clearing Members and Clients. Currently, the exercise of swaptions is 
effected through a manual bilateral notification process. The swaption 
exercise decisions are communicated bilaterally via email from the 
swaption buyer to the swaption seller of a matched pair transaction 
created by LCH SA for the purpose of the exercise or abandonment of the 
swaption transaction. The swaption buyer must then inform LCH SA that 
the exercise notice has been successfully delivered. LCH SA then 
manually effects the exercise decisions accordingly and updates its 
risk system.
    The proposed EEP will provide Clearing Members and their Clients 
with an electronic process that will reduce the operational risk caused 
by manual exercise and provide an effective system to monitor and 
manage the exercise of swaptions. The proposed rule change will require 
Clearing Members and Clients to use the EEP system to initiate the 
exercise of swaptions and will enable Clients to directly exercise 
swaptions through delegation by Clearing Members and receive reports. 
The EEP system will capture the exercise decisions in real time and 
notify the relevant swaptions sellers in real time. In addition, the 
EEP system will provide validation checks and exercise decision-making 
assistance and support, and will facilitate and support an anonymous 
exercise decision process

[[Page 45156]]

that the current manual process is not able to achieve.
    In connection with the launch of the EEP, LCH SA proposes to modify 
its Rule Book, Supplement and Procedures to implement the EEP and 
manage the operational risk arising from the EEP while improving the 
clarity of the Rulebook, Supplement and Procedures.
(i) CDS Clearing Rule Book
    The Rule Book will be amended by adding new defined terms and 
provisions to account for the ability of Clients to directly exercise 
swaptions utilizing the EEP through delegation by Clearing Members. The 
details of the mechanism for Clients to exercise swaptions via 
delegation by Clearing Members will be implemented through amendments 
to the Supplement and Procedures as described below. With respect to 
the Rule Book, LCH SA proposes to amend Article 1.2.10.3 with respect 
to the liability of LCH SA to account for the ability of Clients to 
exercise swaptions utilizing the EEP as an Exercise Delegation 
Beneficiary. Article 1.2.10.3 will be amended to add new clause (xxii) 
to the effect that LCH SA will not be liable for any Damage claimed by 
a clearing Member based on the failure of an Exercise Delegation 
Beneficiary to perform its obligations in relation to a delegation by a 
Clearing Member of the power to Exercise or Abandon Exercise Cleared 
Transactions or in connection with or arising from the Exercise or 
Abandonment (or attempt thereof) of an Exercise Cleared Transaction by 
such exercise Delegation Beneficiary. In addition, new clause (xxiii) 
will be added to Article 1.2.10.3 to provide that LCH SA will not be 
liable for any improper use or disclosure by a third party, including a 
Client, of information made available on a Client Portal Account 
further to a defined process of requesting LCH SA to make certain 
information available on the Client Portal Account in accordance with 
the Procedures (such process is referred to as ``Feeding Request'' in 
the Procedures).
    Further, LCH SA proposes to add new provisions to Title V CDS CCM 
Client Clearing Services and Title VI CDS FCM Client Clearing to 
provide for exercise of swaptions by Clients. Article 5.1.1.2(vii) and 
Article 6.1.1.2(vii) will be added to require a CCM or an FCM to ensure 
that a CCM Client or FCM Client, as applicable, has duly created a 
Client Portal Account before granting an Exercise Delegation to such 
CCM Client or FCM Client. Article 5.1.1.3(xx) and 6.1.1.3(xvii) will be 
added to require a CCM or an FCM to delegate sufficient powers to a CCM 
Client or a FCM Client, as applicable, in order for the CCM Client or 
FCM Client, as applicable, to be duly authorized to Exercise or Abandon 
Exercise Cleared Transactions; in addition, a CCM Client or a FCM 
Client, as applicable, delegated and designated by a Clearing Member as 
being entitled to Exercise and Abandon Exercise Cleared Transactions on 
its behalf is required to Exercise or Abandon only through the relevant 
Client Portal Account unless there is an EEP Failure Event (as 
described below).
    In connection with the above, LCH SA also proposes to add new 
provisions to Title I General Provisions & Legal Framework of the Rule 
Book. First, new defined terms ``Abandon'', ``Abandonment'', ``Client 
Portal Account'', ``Delegating Clearing Member'', ``Exercise 
Delegation'', ``Exercise Delegation Beneficiary'', and ``Feeding 
Request'' will be added and cross-reference the meanings given to these 
terms in Part C of the Supplement or Section 5 of the Procedures, as 
applicable.
    The amendments to the CDS Clearing Rule Book also contain 
typographical corrections and similar technical corrections and 
clarifications as well as various conforming references to the new or 
revised defined terms. Finally, corresponding changes to provision 
numbering throughout the CDS Clearing Rule Book have been made as 
necessary.
(ii) CDS Clearing Supplement
    LCH SA also proposes to modify the Supplement to incorporate terms 
for implementing the new EEP, to remove inapplicable provisions after 
implementation of the EEP, and to make certain conforming and clean-up 
changes to improve clarity of the Supplement.
    Section 1 General Provisions of the Supplement will be amended to 
add certain defined terms and new provisions to implement the EEP and 
to make certain clean-up changes. Section 1.2 will be amended by adding 
the following new defined terms.
    The terms ``Abandon'' and ``Abandonment'' will be added to refer to 
the abandonment of an Exercise Cleared Transaction and the delivery of 
a valid Abandonment Notice by a Swaption Buyer (including delivery by a 
Client designated by the related Clearing Member as being entitled to 
Exercise and Abandon Exercise Cleared Transactions on its behalf) in 
respect of the Exercise Cleared Transactions of an Exercise Matched 
Pair.
    The term ``CCM Client Communications Failure Event'' will be added 
to cross reference the definition of CCM Client Communications Failure 
Event set out in the Mandatory Provisions in Appendix VIII to the 
Supplement.
    The term ``Clearing Member Communications Failure Event'' will be 
added to cross reference the definition of Clearing Member 
Communications Failure Event set out at Section 6.10 of the Supplement.
    The existing term ``Clearing Member Notice'' will be amended to 
include a Swaption Clearing Member Notice or a Swaption Restructuring 
Clearing Member Notice.
    The term ``Clearing Member Portal Account'' will be added to refer 
to the account of a Clearing Member established in the LCH Portal for 
the purposes of, among other things, the Exercise and Abandon of 
Exercise Cleared Transactions.
    The term ``Client Portal Account'' and ``Client Portal Account 
Number'' will be added to refer to the account of a Client established 
in the LCH Portal for the purposes of, among other things, the Exercise 
and Abandonment of Exercise Cleared Transactions, and to refer to the 
unique account number assigned by LCH SA to a Client Portal Account.
    The term ``EEP Controls'' will be added to cross reference the 
definition of EEP Controls set out at Section 6.3 of the Supplement.
    The terms ``EEP Failure Event'', ``EEP Failure Event Time'' and 
``EEP Resolution Time'' and ``Electronic Exercise Platform'' or ``EEP'' 
will be added to refer to the occurrence of LCH SA becoming aware that 
the EEP is or will be unavailable for the submission or receipt of 
Option Intents, the time at which the relevant EEP Failure Event 
occurred, the time at which the relevant EEP Failure Event is deemed to 
have been resolved, and the platform made available by LCH SA for the 
Exercise and Abandon of Exercise Cleared Transaction through the 
submission of Option Intents.
    The term ``Exercise'' will be amended by making conforming changes 
to include deemed delivery of a valid Exercise Notice pursuant to new 
Section 6.3 (Exercise and Abandonment by way of EEP) or new Section 6.4 
(Delegation by Clearing Members to Client).
    The term ``Exercise Cleared Transaction'' and ``Swaption 
Restructuring Cleared Transaction'' will be amended by making a clean-
up change to replace the word ``Clause'' with the word ``Section''.
    The term ``Exercise Delegation Beneficiary'' will be added to refer 
to the Client of a Clearing Member designated by such Clearing Member 
as being entitled to Exercise and Abandon

[[Page 45157]]

Exercise Cleared Transactions on such Clearing Member's behalf.
    The term ``Force Submission'' will be added to cross reference the 
definition of Force Submission set out at Section 5.19.2 of the 
Procedures.
    The term ``LCH Portal'' will be added to cross reference the 
definition of LCH Portal set out at Section 5.3 of the Procedures.
    The term ``Option Intent'' will be added to refer to the election 
of Matched Buyer (or its Exercise Delegation Beneficiary as applicable) 
in the EEP to Exercise or Abandon an Exercise Cleared Transaction.
    The term ``Protected Exercise Matched Pair Report'' will be added 
to cross reference the definition of Protected Exercise Matched Pair 
Report set out at Section 6.1 of the Supplement.
    The term ``Submission Time'' will be added to cross reference the 
definition of Submission Time set out at Section 6.3 of the Supplement.
    The terms ``Swaption CCM Client Notice'' and ``Swaption CCM Client 
Notice Deadline'' will be added to cross reference the notice and the 
deadline described in Mandatory Provision Section 5.5 regarding the 
duty to deliver a Swaption CCM Client Notice by the Swaption CCM Client 
Notice Deadline.
    The terms ``Swaption Clearing Member Notice'' and ``Swaption 
Clearing Member Notice Deadline'' will be added to cross reference the 
notice and the deadline described in new Section 6.5(c) as a 
consequence of an EEP Failure Event.
    The term ``Swaption Notice'' will be added to refer to either an 
Exercise Notice or an Abandonment Notice.
    The terms ``Swaption Restructuring Clearing Member Notice'' and 
``Swaption Restructuring Clearing member Notice Deadline'' will be 
added to cross reference the notice required to be delivered by a 
Clearing Member to LCH SA with respect to its delivery or receipt of 
any Credit Event Notice or Notice to Exercise Movement Option and the 
deadline described in new Section 5.7.
    Finally, a new paragraph (c) will be added to Section 1.7 to 
provide that, notwithstanding an FCM Clearing Member acting as agent 
for the account of an FCM Client with respect to Index Swaption Cleared 
Transactions, an FCM Clearing member shall designate its FCM Client to 
Exercise or Abandon Exercise Cleared Transactions on its behalf as its 
Exercise Delegation Beneficiary in accordance with the terms of the 
Supplement.
    Section 5 Restructuring will be amended to add new provisions to 
implement the EEP and to make certain clean-up and conforming changes 
that are not related to the implementation of EEP. Specifically, 
Section 5.1 will be amended to provide that if a CEN Triggering Period 
for a Subsequent Restructuring commences prior to the Expiration Date, 
any Swaption Restructuring Matched Pairs in respect of the First 
Restructuring shall also be Swaption Restructuring Matched Pairs in 
respect of the Subsequent Restructuring in order to better clarify this 
concept. Section 5.1(a) will be amended to add the word ``contact'' to 
clarify the term email address.
    New Section 5.6 will be added to reinstate certain provisions that 
will be deleted from Section 8 of the Supplement that provide for the 
requirements of delivery of Credit Event Notices and Notices to 
Exercise Movement Option with respect to Restructuring Cleared 
Transactions in order to group provisions relating to restructuring 
that are unrelated to the implementation of EEP within the same 
section. Specifically, Section 5.6 reinstates that Credit Event Notices 
and Notices to Exercise Movement Option shall be delivered between 
Matched Buyer and Matched Seller of a Swaption Restructuring Matched 
Pair in accordance with the general rules relating to notices in the 
Supplement and the terms of the Swaption Restructuring Cleared 
Transaction. Such notices will be delivered in the delivering party's 
own name and as designee of LCH SA in respect of the other Swaption 
restructuring Cleared Transaction of the Swaption Restructuring Matched 
Pair.
    New Section 5.7 will be added to reinstate certain provisions that 
will be deleted from Section 8 of the Supplement so that provisions 
regarding delivery and receipt of Swaption Restructuring Clearing 
Member Notices are addressed in the section governing restructuring. 
The moved provisions require each Clearing Member to notify LCH SA or 
provide a copy to LCH SA of any notices delivered or received by such 
Clearing Member consisting of a Swaption Restructuring Matched Pair, 
including any Credit Event Notices and Notices to Exercise Movement 
Option by no later than 5 p.m. on the last date on which such notice 
could validly be delivered. Such notices and deadline will be defined 
as ``Swaption Restructuring Clearing Member Notice'' and ``Swaption 
Restructuring Clearing Member Notice Deadline''. If LCH SA does not 
receive a Swaption Restructuring Clearing Member Notice on or prior to 
the relevant Swaption Restructuring Clearing Member Notice Deadline, 
LCH SA will not take any action in respect of the relevant Swaption 
Restructuring Matched Pair in respect of a Credit Event or Exercise 
Movement Option. Notwithstanding the fact that no Credit Event Notice 
or Notice to Exercise Movement Option has been received by LCH SA by 
the relevant Swaption Restructuring Clearing Member Notice Deadline, if 
LCH SA determines in its sole discretion that, such notice was in fact 
delivered or received directly by a Clearing Member and would have been 
effective, LCH SA shall use commercially reasonable efforts to give 
effect to the terms of such Credit Event Notice or Notice to Exercise 
Movement Option, as applicable. If LCH SA determines that it is not 
possible to give effect to the terms of any such Credit Event Notice or 
Notice to Exercise Movement Option, then Section 5.7 provides an amount 
payable between the Clearing Members and how such amount will be 
determined.
    Section 6 Exercise Matched Pairs will be amended to add new 
provisions to implement the EEP and to make certain clean-up and 
conforming changes. Specifically, Section 6.1 will be amended to remove 
the requirement of LCH SA to notify the relevant Matched Buyer and 
Matched Seller comprised within each Exercise Matched Pair of the 
identity of each other; instead, the identity and the contact 
information of the Clearing Members within an Exercise Matched Pair 
will be provided by LCH SA to the relevant Matched Buyer and Matched 
Seller (and any Exercise Delegation Beneficiary thereof) in a report 
(defined as ``Protected Exercise Matched Pair Report''), the access to 
which will be restricted and the Clearing Members within an Exercise 
Matched Pair (and any applicable Exercise Delegation Beneficiaries) 
would be given access to the information in the report only upon 
occurrence of an EEP Failure Event. Section 6.2 will be amended by 
making conforming changes to delete the language regarding notification 
of relevant Clearing Members of Exercise Matched Pairs to account for 
the new process effected by EEP.
    New Section 6.3 entitled Exercise and Abandonment by way of EEP 
will be added to provide for the manner of Exercise or Abandonment of 
Exercise Cleared Transactions. Specifically, Section 6.3 will provide 
that an Option Intent submitted by Matched Buyer (or its Exercise 
Delegation Beneficiary on its behalf, as applicable) through the EEP 
will constitute the delivery of a valid Exercise Notice or Abandonment 
Notice for the purposes of the Exercise Cleared Transactions if (a) the

[[Page 45158]]

Submission Time for such Option Intent is prior to 4:00 p.m. (London 
time) and (b) LCH SA has completed those steps necessary to make such 
Option Intent available for viewing in the EEP, including validation of 
the EEP Controls. ``Submission Time'' for an Option Intent will be the 
time, as recorded by LCH SA, as of which such Option Intent is 
submitted via the EEP by the relevant matched Buyer (or its Exercise 
Delegation Beneficiary on its behalf, if applicable) and ``EEP 
Controls'' will mean the controls specified in Section 5 of the 
Procedures with respect to the Option Intent. An Option Intent will 
become irrevocable by the Swaption Buyer as from the Submission Time.
    New Section 6.4 entitled Delegation by Clearing Members to Clients 
will be added to provide for delegation of Exercise or Abandonment by 
Clearing Members to their Clients. Specifically, Section 6.4 will 
provide that, with respect to the Exercise and Abandonment of the 
Exercise Cleared Transactions of an Exercise Matched Pair which are 
Client Cleared Transactions, Clearing Members shall designate its 
relevant Client to act on its behalf and such designation will take 
effect as soon as reasonably practicable (but no later than five 
Business Days) following receipt by LCH SA of a duly completed and 
signed Exercise Delegation Form. The Client so designated will be the 
Exercise Delegation Beneficiary. The designation or delegation cannot 
be revoked. Where a Clearing Member designates its Client in accordance 
with new Section 6.4, any Option Intent submitted by the designated 
Client via its Client Portal Account in the EEP prior to 4:00 p.m. 
(London Time) on the Expiration Date will be deemed to constitute the 
delivery by Matched Buyer of a valid Exercise Notice or Abandonment 
Notice. Similarly, any Swaption Notices delivered by a designated 
Client will be interpreted as delivery by a Clearing Member.
    New Section 6.5 entitled EEP failure and resolution will be added 
to address the circumstances where there is an EEP failure and 
subsequent resolution of such failure. Specifically, Section 6.5 will 
require LCH SA to notify Clearing Members and Exercise Delegation 
Beneficiaries of an EEP Failure Event (i.e., the EEP is or will be 
unavailable for the submission or receipt of Option Intents) as soon as 
reasonably practicable and in any case within one hour after the 
occurrence of the EEP Failure Event. Following the occurrence of an EEP 
Failure Event, Clearing Members or their Exercise Delegation 
Beneficiaries, as applicable, will be authorized to access the 
information contained in the Protected Exercise Matched Pair Report in 
order to obtain the identity and contact information of the other 
Clearing Member or its Exercise Delegation Beneficiary within an 
Exercise Matched Pair. If the EEP Failure Event has been resolved and 
is no longer in effect, LCH SA is required to notify Clearing Members 
of such resolution and the time at which the EEP Failure Event is 
deemed to have been resolved (the ``EEP Resolution Time''), so 
submission of Option Intents may resume on the EEP.
    Section 6.5 will further provide that, if an EEP Failure Event has 
occurred and is continuing, delivery of Swaption Notices will fall back 
to the existing manual delivery process and if a Clearing Member that 
is a Matched Buyer has designated its Client as its Exercise Delegation 
Beneficiary, the Client will be entitled to send a Swaption Notice to 
the Matched Seller, using the notices details provided by LCH SA in the 
Protected Exercise Matched Pair Report. Similarly, if a Clearing Member 
that is a Matched Seller has designated its Client as its Exercise 
Delegation Beneficiary, then Swaption Notices will be sent by the 
Matched Buyer (or its Client as its Exercise Delegation Beneficiary, as 
applicable) to the Client of the Clearing Member who is the Matched 
Seller.
    In addition, Section 6.5 will provide for oral, including 
telephonic, delivery of Abandonment Notices, followed by written 
confirmation from the Matched Buyer (or its Exercise Delegation 
Beneficiary, as applicable) to the Matched Seller (or its Exercise 
Delegation Beneficiary, as applicable) within one Transaction Business 
Day. For the avoidance of doubt, Section 6.5 will clarify that, any 
Swaption Notices delivered via the EEP prior the EEP Failure Event Time 
will be valid and not be affected by the EEP Failure Event; and any 
Swaption Notice delivered or purported to be delivered via the EEP at 
or following the EEP Failure Event Time but prior to the EEP Resolution 
Time will not be valid or effective.
    Finally, Section 6.5 will provide that, as the case in today's 
manual exercise process, each Clearing Member is required to notify LCH 
SA or deliver a copy to LCH SA of any Swaption Notices delivered by 
such Clearing Member to another Clearing Member in an Exercise Matched 
Pair during an EEP Failure Event by no later than 5 p.m. (CET) on the 
Expiration Date. Such notice of delivery of such copy to LCH SA will be 
defined as a Swaption Clearing Member Notice. If a Clearing Member has 
designated its Client as its Exercise Delegation Beneficiary, then the 
Client may notify LCH SA or deliver a copy to LCH SA of any Swaption 
Notices delivered by such Client to another Clearing Member (or its 
Exercise Delegation Beneficiary, as applicable) in an Exercise Matched 
Pair while an EEP Failure Event is continuing.
    New Section 6.6 entitled Abandonment of Exercise Cleared 
Transactions will be added to address Abandonment of Exercise Cleared 
Transactions. It will restate the first part of the existing Section 
6.4 of the Supplement with certain adjustment to reflect that 
Abandonment of Exercise Cleared Transaction will not be done on the EEP 
and the Swaption Buyer will not deliver Abandonment Notices bilaterally 
to the Swaption Seller. If, on the Expiration Date, the Swaption Buyer 
elects to abandon the Exercise Cleared Transactions of the Exercise 
matched Pair, each Exercise Cleared Transaction shall be terminated in 
whole.
    New Section 6.7 entitled Termination of Exercise Cleared 
Transactions will be added to address the circumstances under which 
Exercise Cleared Transactions will be terminated taking into account 
implementation of the EEP. Specifically, it will provide that LCH SA 
will terminate the Exercise Cleared Transactions of the relevant 
Exercised Matched Pair if no Option Intent is submitted using the EEP 
or, if there is an EEP Failure Event, LCH SA does not receive a 
Swaption Clearing Member Notice (or Swaption CCM Client Notice) from a 
Clearing Member or its Exercise Delegation Beneficiary on or prior to 
the deadline specified in Section 6.5 described above.
    New Section 6.8 entitled Consequences of no Swaption Clearing 
Member Notice or Swaption CCM Client Notice being received by LCH SA 
will be added to address the consequences of no Swaption Clearing 
Member Notice being received by LCH SA by the Swaption Clearing Member 
Notice Deadline (or, in the case of a CCM Client Cleared Transaction, 
that no Swaption CCM Client Notice has been received by LCH SA in 
respect of an Exercise Notice by the Swaption CCM Client Notice 
Deadline). If there is an EEP Failure Event and such event is 
continuing, if LCH SA determines in its sole discretion that an 
Exercise Notice was in fact delivered by a Clearing Member (or its 
Client as the Exercise Delegation Beneficiary, as applicable) and would 
have been effective for the purposes of the Supplement, then LCH SA 
will use commercially reasonable efforts to give effect to the terms of 
the Exercise Notice

[[Page 45159]]

and the effect would be as though LCH SA had received a Swaption 
Clearing Member Notice by the Swaption Clearing Member Notice Deadline 
(or, in the case of a CCM Client Cleared Transaction, as though a 
Swaption CCM Client Notice has been received by LCH SA in respect of an 
Exercise Notice by the Swaption CCM Client Notice Deadline). If LCH SA 
determines that it is not possible to give effect to the terms of any 
such Exercise Notice, then the relevant Clearing Members (or their 
Exercise Delegation Beneficiaries, as applicable) will have rights 
against each other for settlement payment due two Transaction Business 
Days following the delivery of a notice that such amount is due and 
payable, as though they were a party to a bilateral credit default swap 
transaction on the terms of the relevant Underlying Index Transaction. 
LCH SA will not have any liability for any payment in respect of the 
Exercise Clearing Transactions or the ensuing bilateral credit default 
swap transaction.
    New Section 6.10 entitled Clearing Member Communications Failure 
Event and CCM Client Communications Failure Event will be added to 
address Clearing Member and CCM Client communications failures. 
Specifically, new Section 6.10 will provide that, if a Clearing member 
or its Exercise Delegation Beneficiary experiences significant 
communications or information technology failure resulting in it being 
impossible or impracticable to use EEP (a ``Clearing Member 
Communications Failure Event''), such Clearing Member or its Exercise 
Delegation Beneficiary shall use the existing manual exercise process 
to delivery or receive any Exercise Notice or Abandonment Notice to and 
from LCH SA in accordance with the general provision regarding delivery 
of notices in Section 8 of the Supplement and not through the EEP. 
Similarly, if a CCM Client experiences a significant communications or 
information technology failure resulting in it being impossible or 
impracticable to use EEP (a ``CCM Client Communications Failure 
Event''), such CCM Client will, under Mandatory Provision 5.7, have the 
right to use the existing manual exercise process to deliver or receive 
any Exercise Notice or Abandonment Notice to and from LCH SA in 
accordance with the general provision regarding delivery of notices in 
Section 8 of the Supplement and not through the EEP.
    If the Clearing Member (or Exercise Delegation Beneficiary, as 
applicable) affected by a Clearing Member Communications Failure Event 
is a Matched Buyer, upon receipt of a Swaption Notice delivered by such 
Clearing Member or its Exercise Delegation Beneficiary, as applicable, 
LCH SA shall submit an Option Intent in the EEP system on behalf of 
such Clearing Member or its Exercise Delegation Beneficiary. Provided 
that (a) the Submission Time for such Option Intent is prior to 4:00 
p.m. (London time) and (b) LCH SA has completed those steps necessary 
to make such Option Intent available for viewing in the EEP, including 
validation of the EEP Controls, then such Option Intent shall be deemed 
to constitute the delivery of a valid Exercise Notice or Abandonment 
Notice. With respect to a Swaption Notice delivered pursuant to the 
preceding paragraph (or, in the case of a CCM Client Cleared 
Transaction pursuant to Mandatory Provision 5.7), LCH SA may determine 
in its sole discretion that it is not able to submit the relevant 
Option Intent in the system prior to the exercise deadline, in which 
case the affected Clearing Member or Exercise Delegation Beneficiary 
will be deemed not to have submitted an Option Intent and the relevant 
Exercise Cleared Transactions will be terminated. LCH SA may, in its 
sole discretion, elect to register the Exercise or Abandonment of an 
Exercise Cleared Transaction in an alternative internal system of LCH 
SA. If the Clearing Member (or Exercise Delegation Beneficiary, as 
applicable) affected by a Clearing Member Communications Failure Event 
or CCM Client Communications Failure Event is a Matched Seller, so long 
as such Clearing Member or Exercise Delegation Beneficiary notified LCH 
SA of occurrence of a Clearing Member Communications Failure Event or a 
CCM Client Communications Failure Event, then any Swaption Notices 
shall be delivered by LCH SA to such Clearing Member or Exercise 
Delegation Beneficiary (or, in respect of a CCM Client Cleared 
Transaction a Swaption Notice delivered by a CCM Client in accordance 
with Mandatory Provision 5.7), as soon as reasonably practicable in 
accordance with the general notice provision in Section 8 of the 
Supplement.
    New Section 6.10 will further require a Clearing Member or Exercise 
Delegation Beneficiary affected by a Clearing Member Communications 
Failure Event (or, in respect of a CCM Client as Exercise Delegation 
Beneficiary, a CCM Client Communications Failure Event) to notify LCH 
SA of the occurrence of such event in the form set out in the Appendix 
of the Supplement and LCH SA will notify all Clearing Members and 
Exercise Delegation Beneficiaries accordingly. Similarly, a Clearing 
Member affected by a Clearing Member Communications Failure Event (or, 
in respect of a CCM Client as Exercise Delegation Beneficiary, a CCM 
Client Communications Failure Event) will be required to notify LCH SA 
as soon as reasonably practicable upon its ceasing to be subject to the 
Clearing Member Communications Failure Event (or, in respect of a CCM 
Client as Exercise Delegation Beneficiary, a CCM Client Communications 
Failure Event). After the notice of ceasing to be subject to a Clearing 
Member Communications Failure Event (or with respect to a CCM Client, a 
CCM Client Communications Failure Event), the requirement to effect 
Exercise or Abandonment through EEP will resume and apply and any 
Swaption Notice delivered or purported to be delivered thereafter by 
such Clearing Member or its Exercise Delegation Beneficiary (or CCM 
Client, as applicable) not via the EEP will not be valid or effective.
    Finally, new Section 6.10(e) will require a Clearing Member subject 
to a Clearing Member Communications Failure Event (or, in respect of a 
CCM Client as Exercise Delegation Beneficiary, a CCM Client 
Communications Failure Event in accordance with Mandatory Provision 
5.7) to use reasonable efforts to mitigate the operational impact on 
other Clearing Members and LCH SA of any Clearing Member Communications 
Failure Event (or, in respect of a CCM Client as Exercise Delegation 
Beneficiary, a CCM Client Communications Failure Event) and to cure 
such Clearing Member Communications Failure Event (or, in respect of a 
CCM Client as Exercise Delegation Beneficiary, a CCM Client 
Communications Failure Event) as soon as reasonably practicable and 
ensure that the circumstances giving rise to the relevant Clearing 
Member Communications Failure Event do not recur.
    Section 7 Settlement will be amended to make certain clean-up and 
conforming changes in order to ensure consistency. Specifically, 
Section 7.2 will be amended to change the term ``Auction Settlement 
Date'' to ``Auction Final Price Determination Date'' in order to 
correct an inaccurate reference in the current version of the 
Supplement. The Auction Final Price Determination Date refers to the 
date on which the Auction is held to determine the Auction Final Price 
used to compute the Auction Settlement in respect of an Initial Single 
Name Cleared Transaction and is defined in the 2014 ISDA Credit 
Derivatives Definitions, which are incorporated by reference pursuant 
to

[[Page 45160]]

Section 1.1 of the Supplement. Since Section 7.2 is designed to provide 
for creation of an Initial Single Named Cleared Transactions for 
settlement purposes in respect of a Credit Event other than an M(M)R 
Restructuring in circumstances where the ISDA would have held the 
Auction to determine the Auction Final Price prior to the Expiration 
Date, therefore the initial reference to ``Auction Settlement Date'' 
should have been ``Auction Final Price Determination Date''. 
Additionally, Section 7.2(b)(ii) will be amended to state that the 
Auction Settlement Date in respect of an Initial Single Name Cleared 
Transaction shall be the later of (a) the Auction Settlement Date that 
would be determined in accordance with Section 6.3 of the 2014 ISDA 
Credit Derivatives Definitions and (b) the first Transaction Business 
Day following the Expiration Date. Additionally, Section 7.3(b)(ii) 
will be amended to clarify that a valid Credit Event Notice must be 
delivered or deemed to be delivered in respect of a Restructuring 
Cleared Transaction for subsections (x) and (y) of Section 7.3(b)(ii) 
to apply. Finally, changes will be made in Sections 7.3 and 7.4(a) to 
correct typographical errors without affecting the meanings of Sections 
7.3 and 7.4.
    Section 8 Delivery of Notices will be amended to add new provisions 
to implement the EEP, to remove inapplicable provisions, and to make 
certain clean-up and conforming changes. Specifically, Section 8.1(a) 
will be amended to conform to other new provisions added to Section 6 
to account for the implementation of EEP, specifically, to specify the 
time at which a communication in respect of any Cleared Transaction 
will be recorded and deemed effective in EEP. Section 8.1(b) will be 
amended to implement certain conforming changes regarding notices from 
or to LCH SA in EEP including with respect to the occurrence of an EEP 
Failure Event. Section 8.1(c) will be amended to account for electronic 
notification through EEP between Clearing Members or their respective 
Exercise Delegation Beneficiaries.
    Further, certain subsections of Section 8 will be deleted, amended 
and/or renumbered. The existing Section 8.2, Oral Notices, will be 
moved and renumbered as a new Section 8.3 and the existing Section 8.3, 
Delivery of Exercise Notices, Abandonment Notices, Credit Event Notices 
and Notices to Exercise Movement Options, and the existing Section 8.4, 
Clearing Member Notices, will each be removed as these sections will no 
longer be applicable after the implementation of EEP. The existing 
Section 8.5 will be renumbered as a new Section 8.2 and certain 
conforming changes will be made in this Section to account for the 
delivery of the Protected Exercise Matched Pair Report and to describe 
the procedure with respect to a failure to notify Matched Pairs based 
on the occurrence of an EEP Failure Event. If LCH SA does not notify 
the relevant Clearing Members of Swaption Restructuring Matched Pairs 
and related information by the SRMP Notification Deadline or provide 
the Protected Exercise Matched Pair Report by the EMP Notification 
Deadline as a result of the occurrence of an EEP Failure, then the 
relevant Clearing Members or Exercise Delegation Beneficiary may 
deliver Swaption Notices to LCH SA and vice versa. The existing Section 
8.6 will be renumbered as a new Section 8.4 and certain section 
references will be updated.
    Section 9, Matched Pair Designations, will be amended to update 
certain section references based on changes made to other sections of 
the Supplement. Specifically, in Section 9.1(e)(i) and (ii), the 
references to Section 8.1 will be updated to Section 9.1 and the 
reference to Section 7.7(a) in Section 9.6 will be updated to reference 
Section 5.7(a) and Section 6.5(c). Additionally, Sections 9.1(c) and 
(d) will be deleted to remove the requirement that, to the extent 
possible, each Swaption Restructuring Matched Pair and each Exercise 
Matched Pair will have an aggregate applicable Matched Pair amount 
which is an integral multiple of Euro 1,000,000 subject to a maximum of 
Euro 100,000,000. This change, which is unrelated to the implementation 
of EEP, is made to reflect that this condition with respect to the 
aggregate applicable Matched Pair amount is no longer required by LCH 
SA.
    Section 10, Mandatory Provisions for CCM Client Transactions, will 
be amended to replace the reference to Appendix VI with a reference to 
Appendix VIII based on changes to the numbering of the appendices to 
the Supplement.
    Section 12, Forms of Notices, will be amended to replace the 
reference to Section 7.11 with a reference to Section 8.4.
    Section 13 Exclusion of Liability will be amended to add a new 
Section 13(b) which will provide that LCH SA will have no liability to 
a Clearing Member which has delegated to an Exercise Delegation 
Beneficiary its power to Exercise or Abandon Exercise Cleared 
Transactions for any loss, cost or expense arising out of any failure 
of such Exercise Delegation beneficiary to perform its obligations in 
relation with such delegation or in connection with or arising from the 
Exercise or Abandonment of an Exercise Cleared Transaction by the 
Exercise Delegation Beneficiary of the Clearing Member. Additionally, 
Section 13(d) will be amended to provide that LCH SA will have no 
responsibility to verify the contents of any notice received by it from 
any Clearing Member or from an Exercise Delegation Beneficiary of a 
Clearing Member under the terms of any Cleared Transaction.
    Appendix V: Form of Notice of Dispute Relating to Any Swaption 
Restructuring/Exercise Matched Pair will be amended to update each 
current reference to Section 7.11 to Section 8.4.
    A new Appendix VI: Form of Notice of Clearing Member Communications 
Failure Event Pursuant to Section 6.10 (Clearing Member Communications 
Failure Event) or CCM Client Communications Failure Event Pursuant to 
Mandatory Provision 5.7 (CCM Client Communications Failure Event) will 
be added after existing Appendix V which will serve as the form to be 
used by a Clearing Member to notify LCH SA of a Clearing Member 
Communications Failure Event if required by Section 6.10 of the 
Supplement or a CCM Client to notify LCH SA of a CCM Client 
Communications Failure Event in accordance with Mandatory Provision 
5.7(b).
    A new Appendix VII: Form of Notice for Ceasing to be Subject to a 
Clearing Member Communications Failure Event Pursuant to Section 6.10 
(Clearing Member Communications Failure Event) or CCM Client 
Communications Failure Event Pursuant to Mandatory Provision 5.7 (CCM 
Client Communications Failure Event) will be added after the new 
Appendix VI described in the preceding paragraph which will serve as 
the form to be used by a Clearing Member to notify LCH SA that such 
Clearing Member is no longer subject to a Clearing Member 
Communications Failure Event or for a CCM Client to notify LCH SA that 
such CCM Client is no longer subject to a CCM Client Communications 
Failure Event.
    The current Appendix VI: CCM Client Transaction Requirements will 
be renumbered to create a new Appendix VIII. Certain section references 
within such new Appendix VIII will be updated to conform with changes 
to the body of the Supplement and correct certain section references. 
Additionally, a new Section 5 to Appendix VIII entitled Designation of 
CCM Client by CCM for Exercise or Abandonment of

[[Page 45161]]

Exercise Cleared Transactions will be added after the current Section 
4, Validity of Notices, to address the procedures for the Exercise or 
Abandonment of Exercise Cleared Transactions in the EEP.
    A new Section 5 to Appendix VIII entitled Designation of CCM Client 
by CCM for Exercise or Abandonment of Exercise Cleared Transactions 
will be added to address the procedures for designation by a CCM of the 
right to Exercise or Abandon an Exercise Cleared Transaction to a CCM 
Client. A new Section 5.1 entitled Designation by CCM will be added 
providing that CCM and CCM Client will agree that a CCM may designate 
the CCM Client as its Exercise Delegation Beneficiary with respect to a 
specific CCM Client Cleared Transaction for purposes of the Exercise or 
Abandonment of the CCM Client Cleared Transactions and receipt of 
Swaption Notices on its behalf.
    A new Section 5.2 to Appendix VIII entitled Exercise Notices and 
Abandonment Notices delivered in respect of CCM Client Cleared 
Transaction will be added which will provide that neither CCM nor CCM 
Client may deliver Swaption Notices in relation to the CCM Client 
Transaction corresponding to a CCM Client Cleared Transaction in 
respect of which CCM Client has been designated by CCM as its Exercise 
Delegation Beneficiary. Instead, if CCM Client as Exercise Delegation 
Beneficiary of the CCM delivers or receives a valid Swaption Notice in 
respect of the CCM Client Cleared Transaction corresponding to such CCM 
Client Transaction, such notice will also be deemed to be a valid 
Swaption Notice for the purposes of such CCM Client Transaction.
    A new Section 5.3 to Appendix VIII entitled Exercise and 
Abandonment by way of EEP will be added which will provide that any 
submission of an Option Intent by a CCM Client in respect of a CCM 
Client Cleared Transaction in respect of which such CCM Client has been 
designated as Exercise Delegation Beneficiary will be made via its 
Client Portal Account in the EEP. If (a) the CCM Client submits an 
Option Intent via its Client Portal Account, (b) the Option Intent is 
submitted by a CCM Client prior to 4.00 p.m. (London time) on the 
Expiration Date and (c) LCH SA has completed those steps necessary to 
make such Option Intent available for viewing in the EEP, such 
submission will be deemed to constitute delivery by the CCM of a valid 
Exercise Notice or Abandonment Notice in respect of the CCM Client 
Cleared Transactions. The deemed time of delivery of such Swaption 
Notice will be the time specified by the EEP and the registration will 
be irrevocable.
    A new Section 5.4 to Appendix VIII entitled Consequences of EEP 
Failure will be added to address the procedures in the event that an 
EEP Failure Event occurs from (and including) the EEP Failure Event 
Time to (but excluding) the EEP Resolution Time. A new Section 5.4(a) 
will be added to provide that a CCM Client will deliver Swaption 
Notices directly to the matched Seller or its relevant Exercise 
Delegation Beneficiary (with a copy to the Matched Seller) using the 
notice details provided by LCH SA instead of delivering the Swaption 
Notice via EEP. A new Section 5.4(b) will be added to specify that, if 
LCH SA does not provide the Protected Exercise Matched Pair Report by 
the EMP Notification Deadline or, where an EEP Failure Event occurs 
after the EMP Notification Deadline, from the time of such EEP Failure 
Event until such time as LCH provides the Protected Exercise Matched 
Pair Report, CCM Client will deliver Swaption Notices to LCH SA on 
behalf of the CCM instead of to the Matched Seller (or its Exercise 
Delegation Beneficiary). A new Section 5.4(c) will be added which will 
provide that any notice delivered via the EEP prior to the EEP Failure 
Event Time will be valid and will not be affected by such EEP Failure 
Event. Finally, a new Section 5.4(d) will be added to specify that any 
notice delivered or purported to be delivered via the EEP at or 
following the EEP Failure Event Time but prior to the EEP Resolution 
Time will not be valid and effective.
    A new Section 5.5 to Appendix VIII entitled Duty to Deliver 
Swaption CCM Client Notice will be added to specify that the CCM Client 
must notify LCH SA and its CCM of any Swaption Notice delivered by it 
in accordance with new Section 5.4 which such CCM Client asserts was 
effective by no later than 5.00 p.m. on the Expiration Date (the 
``Swaption CCM Client Notice Deadline''). If no such notice is 
delivered by CCM Client or the CCM prior to the Swaption CCM Client 
Notice Deadline, any Exercise Notice sent by CCM Client pursuant to new 
Section 5.4 will be deemed to be invalid. However, if LCH SA elects to 
give effect to an Exercise Notice in respect of a Swaption CCM Client 
Notice that it determines has been delivered pursuant to Section 6.8 of 
the Supplement, then such provisions shall apply as if LCH SA had 
received a Swaption CCM Client Notice in respect of the relevant 
Exercise Notice by the Swaption CCM Client Notice Deadline, and, if LCH 
SA determines that it is not possible to give effect to the terms of 
any such Exercise Notice then the relevant Clearing Members or their 
Exercise Delegation Beneficiaries will acquire rights as against each 
other as though party to a bilateral credit default swap transaction on 
the terms of the Underlying Index Transaction. The Settlement Payment 
will be due and payable two Transaction Business Days following the 
giving of a notice that such amount is due and payable and the relevant 
Clearing Members or their Exercise Delegation Beneficiaries will have 
enforcement rights as against each other pursuant to the Contracts 
(Rights of Third Parties) Act 1999 in respect of any resulting payments 
and deliveries; LCH SA shall have no liability in respect thereof.
    A new Section 5.6 to Appendix VIII entitled Delivery of Notices to 
and from LCH SA in Case of EEP Failure Event will be added to specify 
that upon the occurrence of an EEP Failure Event, notices and 
communications given by LCH SA to the CCM Client or vice versa will be 
given to the address or number provided by the CCM Client to LCH SA and 
vice versa upon registration or any other address or number duly 
notified thereafter.
    A new Section 5.7 to Appendix VIII entitled Communications Failure 
Event will be added to address the procedure for notifying LCH SA of a 
Communications Failure Event, the procedures for delivery of Notices 
following such Communications Failure Event and the procedures for 
notifying LCH SA of a resolution of such Communications Failure Event. 
Subsection (a) of new Section 5.7 will permit a CCM Client affected by 
a Communications Failure Event to deliver Swaption Notices manually 
with a Submission Time prior to 4:00 p.m. (London time). However, LCH 
SA may determine in its sole discretion that it is not able to submit 
the relevant Option Intent in the relevant system with a Submission 
Time prior to 4:00 p.m. (London time) on the Expiration Date in which 
case LCH SA will inform the CCM Client and, subject to Mandatory 
Provision 5.5, such CCM Client will be deemed not to have submitted an 
Option Intent in respect of the relevant Exercise Cleared Transaction. 
Subsection (b) of new Section 5.7 will require the CCM Client to 
provide written notice (or notice by telephone if CCM Client is unable 
to deliver written notice) to LCH SA certifying that it is affected by 
a Communications Failure Event. Subsection (c) of new Section 5.7 will 
require CCM Client to notify LCH SA upon the resolution of any 
Communications Failure Event.

[[Page 45162]]

Additionally, pursuant to subsection (d) of new Section 5.7, the CCM 
Client that is subject to a Communications Failure Event must use 
reasonable endeavors to mitigate the operational impact of any 
Communications Failure Event, to cure such Communications Failure Event 
as soon as reasonably practicable and to ensure that the events giving 
rise thereto do not recur.
    A new Section 5.8 to Appendix VIII entitled Confidentiality Waiver 
will be added stating that the CCM Client consents to the disclosure of 
its address, fax number, telephone number, contact email address (and 
any other applicable notice details provided by it) by CCM to LCH SA 
and by LCH SA in any Protected Exercise Matched Pair Report.
    The current Section 5, Determination of Credit Events and 
Succession Events, will be renumbered as a new Section 6.
    The current Section 6, Timings for the Delivery of Notices for CCM 
Client Transactions, will be renumbered as a new Section 7. The current 
Section 7, Timings for the Delivery of Exercise Notices for CCM Client 
Transactions, will be deleted as it has been replaced with the new 
Section 5 described in the preceding paragraphs.
    The amendments to the CDS Clearing Supplement also contain 
typographical corrections and similar technical corrections and 
clarifications as well as various conforming references to the new or 
revised defined terms. Finally, corresponding changes to provision 
numbering throughout the CDS Clearing Supplement have been made as 
necessary.
(iii) CDS Clearing Procedures
    LCH SA also proposes to modify Section 5 of the Procedures to 
incorporate terms for implementing the new EEP, to remove inapplicable 
provisions after implementation of the EEP, and to make certain 
conforming and clean-up changes to improve clarity of the Supplement.
    Specifically, a definition of ``LCH Portal'' will be added to 
Section 5.3(f) to define the LCH Portal as a single sign-on solution 
for various LCH SA applications to which Clearing Members may have 
access over secured internet. Further Section 5.16 will be revised to 
add a new paragraph entitling a Clearing Member to request that all or 
part of the reports provided under Section 5.16 be made available on 
the Client Portal Account. This new paragraph will additionally define 
the Client Portal Account as the account created by a Client on the LCH 
Portal. Section 5.16(a)(i)(J) will be amended to replace all references 
to ``Cleared Transaction Exercise Report'' with ``Protected Exercise 
Matched Pairs Report'' to reflect the new reporting structure in EEP, 
and to specify that the timing for the Protected Exercise Matched Pairs 
Report to be prepared will be three Business Days prior to the Exercise 
Date and such report will only be made accessible following the 
occurrence of an EEP Failure Event. The current Section 5.16(c)(ii), 
Open Interest Report, will be deleted as it no longer applies. Current 
Section 5.16(c)(iii) will be renumbered as a new Section 5.16(c)(ii) 
and current Section 5.16(c)(iv) will be renumbered as a new Section 
5.16(c)(iii).
    A new Section 5.19 entitled Delegation of Exercise of Exercise 
Cleared Transactions and Electronic Exercise Platform will be added 
after the current Section 5.18 to address the procedures for delegation 
of the Exercise or Abandonment of Index Swaption Cleared Transactions 
and the Electronic Exercise Platform. A new Section 5.19.1 entitled 
Delegation of Exercise or Abandonment of Exercise Cleared Transactions 
will be added to provide that any Clearing Member which has delegated 
to a Client the power to Exercise and/or Abandon all or part of its 
Exercise Cleared Transactions will notify such delegation to LCH SA by 
sending a completed and signed notification form to LCH SA via email. 
Upon receipt, LCH SA will ensure that only such delegate is authorized 
to Exercise or Abandon the Exercise Cleared Transactions identified in 
such form. Any withdraw of an exercise Delegation shall be notified to 
LCH SA by sending a copy of an updated and signed Exercise Delegation 
form by email to LCH SA. LCH SA will process Exercise Delegations and 
Exercise Delegation Withdrawals as soon as reasonably practicable.
    A new Section 5.19.2 entitled Electronic Exercise of Exercise 
Cleared Transactions will be added to describe the process for the 
electronic Exercise of Exercise Cleared Transactions. Upon a submission 
of an Option Intent in the EEP, LCH SA will carry out logicality 
controls in respect of such Option Intent in order to help Clearing 
Members and Exercise Delegation Beneficiaries identify an Option Intent 
which could have been submitted in the EEP in error based on the 
relative position or the price of Exercise compared to reference prices 
provided in the EEP. Any Option Intent which does not pass such 
logicality controls will not be registered in the EEP and LCH SA will 
inform the applicable Clearing Member. The Clearing Member and its 
Exercise Beneficiaries may elect to bypass the logicality controls by 
specifying ``Confirm'' or ``Force'' in relation to the Option Intent 
when submitting such Option Intent (``Force Submission''). LCH SA will 
inform the applicable Clearing Member or Exercise Delegation 
Beneficiary if an Option Intent is deemed illogical and the Clearing 
Member or Exercise Delegation Beneficiary may then choose to re-submit 
such Option Intent and Force Submission. LCH SA will not carry out 
logicality controls on such Option Intent. Before registering any 
Option Intent LCH SA will ensure that such Option Intent (i) is 
submitted by a user who (a) is connected with the proper user ID and 
password and (b) based on such ID and password, is duly authorized to 
Exercise or Abandon, as applicable, the relevant Exercise Cleared 
Transactions; (ii) has not already been submitted in the EEP in respect 
of the relevant Exercise Cleared Transaction (other than a partial 
Exercise); and (iii) passes the logicality controls or the relevant 
Clearing Member or Exercise Delegation Beneficiary has Forced 
Submission as described earlier in this new Section 5.19.2. LCH SA will 
not be required to carry out any further control.
    The amendments to the CDS Clearing Procedures also contain 
typographical corrections and similar technical corrections and 
clarifications as well as various conforming references to the new or 
revised defined terms. Finally, corresponding changes to provision 
numbering throughout the CDS Clearing Procedures have been made as 
necessary.
2. Statutory Basis
    LCH SA believes that the proposed rule change in connection with 
the launch of EEP is consistent with the requirements of Section 17A of 
the Securities Exchange Act of 1934 \4\ (the ``Act'') and the 
regulations thereunder, including the standards under Rule 17Ad-22.\5\ 
Section 17(A)(b)(3)(F) \6\ of the Act requires, among other things, 
that the rules of a clearing agency be designed to promote the prompt 
and accurate clearance and settlement of securities transactions and 
derivative agreements, contracts, and transactions and to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible. As noted 
above, the proposed rule change is designed to implement an automated 
electronic platform to facilitate the transmission and execution of 
exercise decisions by Clearing Members and

[[Page 45163]]

their Clients, which will replace the existing manual notification 
process and reduce operational risk arising from the current process. 
Specifically, the EEP will enable Clearing Members and Clients to 
capture in real time their option exercise decisions, and EEP will 
notify the relevant option sellers in real time, thereby promoting 
prompt and accurate option exercise process including the clearing and 
settlement of the ensuing index credit default swap transactions and 
the termination of the index option transactions.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78q-1.
    \5\ 17 CFR 240.17Ad-22.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Further, LCH SA believes that the proposed changes to the Rule 
Book, Supplement and Procedures are consistent with requirements of 
Rule 17Ad-22(e)(17).\7\ Rule 17Ad-22(e)(17) requires a covered clearing 
agency to manage operational risks by (i) identifying the plausible 
sources of operational risk, both internal and external, and mitigating 
their impact through the use of appropriate systems, policies, 
procedures, and controls; (ii) ensuring that systems have a high degree 
of security, resiliency, operational reliability, and adequate, 
scalable capacity; and (iii) establishing and maintaining a business 
continuity plan that addresses events posing a significant risk of 
disrupting operations.\8\
---------------------------------------------------------------------------

    \7\ 17 CFR 240.17Ad-22(e)(17).
    \8\ 17 CFR 240.17Ad-22(e)(17).
---------------------------------------------------------------------------

    As described above, the proposed rule change will enable LCH SA to 
more effectively manage the operational risks associated with the 
option exercise process by providing a safe, secure and resilient 
technological solution. Specifically, the current manual bilateral 
notification process creates plausible operational risks if LCH SA is 
not notified or provided a copy of the notification. To address the 
limitations of the manual bilateral notification process, the proposed 
rule change is designed to implement the EEP which captures option 
exercise decisions in real time while ensuring that LCH SA is not 
exposed to any principal risk upon the transmission of an exercise 
intent decision, or upon a related technical failure. As described 
above, acceptance of timely Option Intent from an option buyer will be 
conditioned within the EEP upon EEP's successful validation checks. If 
the Option Intent did not pass the validation checks, the EEP will 
reject the initial Option Intent submitted by the option buyer on a 
timely basis so the option buyer will be able to either resubmit the 
option exercise intent through EEP or rely on the existing manual 
exercise process, thereby ensuring that the option buyer can exercise 
its trade in time. On the other hand, if the Option Intent is delivered 
before the exercise deadline and passes the EEP validation checks, the 
swaption notice will be deemed legally delivered by LCH SA to the 
option seller on a real time basis with respect to the seller side of 
the transaction. Therefore, in no event would LCH SA be deemed as not 
having exercised the option with the Matched Seller if the Matched 
Buyer timely delivers its Option Intent and such Option Intent is 
validated by the EEP. This structural design and workflow mirrors what 
currently exists regarding the delivery of restructuring credit event 
notices. Further, as described above, LCH SA will implement validation 
checks on received Option Intents, including illogical intent checks to 
limit 'fat-finger' errors, before applying and registering the intents 
in the system. The new option exercise process using EEP will preserve 
the counterparty anonymity. In addition, recognizing the criticality of 
the exercise/expiry process, LCH SA will have well defined contingency 
procedures in place to address any EEP failure or any Clearing Member 
technological issues resulting in Clearing Members' communications 
failures. The existing manual process remains a fallback in the event 
of an EEP failure or a Clearing Member communications failure in order 
to ensure that the entire option exercise systems have a high degree of 
security, resiliency, operational reliability, and adequate, scalable 
capacity.
    Finally, the EEP will be an integral part of the clearing systems 
with respect to swaptions cleared by LCH SA and therefore, an SCI 
system within the meaning of Regulation SCI.\9\ Rule 1001(a) requires 
an SCI entity, which includes a registered clearing agency, to 
establish, maintain, and enforce written policies and procedures 
reasonably designed to ensure that its SCI systems and, for purposes of 
security standards, indirect SCI systems, have levels of capacity, 
integrity, resiliency, availability, and security, adequate to maintain 
the SCI entity's operational capability and promote the maintenance of 
fair and orderly markets.\10\ Rule 1001(b) require an SCI entity, which 
includes a registered clearing agency, to establish, maintain, and 
enforce written policies and procedures reasonably designed to ensure 
that its SCI systems operate in a manner that complies with the Act and 
the rules and regulations thereunder and the SCI entity's rules and 
governing documents, as applicable.\11\
---------------------------------------------------------------------------

    \9\ 17 CFR 242.1000-1007.
    \10\ 17 CFR 242.1001(a).
    \11\ 17 CFR 242.1001(b).
---------------------------------------------------------------------------

    LCH SA believes that the proposed rule change is consistent with 
the requirements of Regulation SCI. First, the proposed rule change 
does not amend the existing policies and procedures reasonably designed 
to comply with the Regulation SCI requirements, including the 
requirements in Rule 1001(a) and (b).\12\ LCH SA will include the EEP 
in its SCI systems and administer the EEP in accordance with and 
consistent with the existing policies and procedures designed to comply 
with Regulation SCI. For example, LCH SA currently has its Business 
Continuity Management program in place to enable CDSClear to provide 
continuity and timely recovery of business operations in the event of a 
major incident or crisis, which impacts or has the potential to impact 
business functions. The proposed rule change does not amend any details 
of LCH SA's ability to recover its technical infrastructure in its 
Disaster Recovery Plan. However, recognizing the use of EEP as the 
principal form of option exercise mechanism, the proposed rule change, 
as described above, will include fallback processes in the event of an 
EEP Failure Event or a Clearing Member Communications Failure Event and 
will clearly specify when such failure ceases to exist and the 
requirement to resume the usage of EEP. As detailed above, in the event 
of the EEP failing, the option exercise process would revert to the 
existing bilateral notification process via email or messaging. 
Accordingly, LCH SA believes that the proposed rule change, when 
implemented with the existing policies and procedures designed to 
comply with Regulation SCI, is appropriately designed to ensure the EEP 
will have levels of capacity, integrity, resiliency, availability, and 
security, adequate to maintain CDSClear's operational capability for 
option exercise and to ensure that the EEP will operate in a manner 
that complies with the Act and the rules and regulations thereunder, as 
well as LCH SA's rules and governing documents.
---------------------------------------------------------------------------

    \12\ 17 CFR 242.1001(a)-(b).
---------------------------------------------------------------------------

    For the reasons stated above, LCH SA believes that the proposed 
rule change with respect to the Rule Book, Supplement and Procedures in 
connection with the launch of the EEP are consistent with the 
requirements of prompt and accurate clearance and settlement of 
securities transactions in Section 17(A)(b)(3)(F) \13\ of the Act, the

[[Page 45164]]

requirements of operational risk management in Rule 17Ad-22(e)(17) \14\ 
and the requirements of Regulation SCI.\15\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 17 CFR 240.17Ad-22(e)(17).
    \15\ 17 CFR 242.1000-1007.
---------------------------------------------------------------------------

B. Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\16\ LCH SA does 
not believe that the proposed rule change would impose burdens on 
competition that are not necessary or appropriate in furtherance of the 
purposes of the Act. Specifically, the proposed changes to the Rule 
Book, Supplement and Procedures would apply equally to all Clearing 
Members and their Clients are Matched Buyers and Matched Sellers. All 
Clearing Members and their designated Clients who are Exercise 
Delegation Beneficiaries will be required to use EEP to exercise 
Exercise Cleared Transactions. The proposed rule change and 
implementation of EEP will require Clearing Members and their Clients 
to connect to LCH SA's systems through opening a portal account and 
therefore, may impose burdens on Clearing Members and their Clients but 
such burdens would be necessary and appropriate to manage LCH SA's 
operational risks and to implement an automated electronic system to 
capture all exercises of Option Intents. Therefore, LCH SA does not 
believe that the proposed rule change would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

C. Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received from Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. LCH SA will notify the Commission of any written 
comments received by LCH SA.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-LCH SA-2018-004 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-LCH SA-2018-004. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of LCH SA and on LCH SA's website 
at: https://www.lch.com/resources/rules-and-regulations/proposed-rule-changes-0. All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-LCH SA-2018-004 and should 
be submitted on or before September 26, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-19147 Filed 9-4-18; 8:45 am]
 BILLING CODE 8011-01-P